By Kenneth R. Rosenfield, CPA
I have worked closely on hundreds of automobile dealership transactions since 1983. In all that time, the first question that is always asked by either the Buyer or the Seller is “What is the Multiple?”
A number of sources publish periodic newsletters about the multiples for various franchises, and although fairly accurate for the limited number of transactions that they are involved in, there are myriad other ways to look at the pricing of dealerships in today’s very robust market.
Indeed, for under-performing stores in non-major metro markets, a multiple approach may prove to be a deal killer. Many dealer groups are looking into these markets to grow their business, expand their markets, make a defensive play, or diversify their product base.
In these situations, it may be beneficial to view the transaction from a payback period approach, while overlaying the buyer’s operating methods and systems into the planning potential of the market area.
These buyers may have a proven system and track record of acquiring under-performing dealerships, then utilizing their economies of scale and methods of advertising vehicle and service sales. In these situations, the due diligence may involve looking at the market demographics provided by the manufacturer rather than looking at a dealership’s net income.
The buyer will look at peer group reports for data including pump in from competitors, units in operation, and the seller’s penetration percentage to see if there is a potential sales lift. If the buyer is a great used vehicle sales leader, it will be prudent to look at that data as well. We have actually seen dealership pricing based on Units in Operation for potential sales lifts by the buyer. Many dealerships in the Northeast Quadrant of the U.S. have been priced this way.
Sophisticated buyers will most often look at a payback period and, ignoring much of the multiple method of pricing dealerships, instead analyze sales data, pump in and pump out statistics, and the manufacturer’s expectations. They will overlay their operating characteristics and expense structure, then include a ramp up period to obtain their desired results. For multi-point franchises, the payback period method is much more accurate than just applying a multiple to each franchise.
The units in operation method is particularly useful for determining blue sky for new open points or poorly performing points. Computing blue sky by units in operation is somewhat problematic as it is best to perform an analysis using a payback computation method first.
Prior to this, it would be necessary to perform an analysis of potential service absorption, and the ability to deepen the customer base with service and parts sales. An additional step of analyzing vehicle sales would also be necessary to incorporate planning volume into the equation. Although somewhat cumbersome, this method may produce an interesting, meaningful, and usable figure for blue sky.
But in the end, the same question still pops up every time…”What is the Multiple?”
Ken Rosenfield is the managing partner of Rosenfield and Company PLLC, an Eastern Seaboard Regional CPA firm with one of the nation’s largest Automotive Retail Practices. The firm serves many of the Top 100 Dealership Groups across the Country. It is one of the first CPA firms to serve dealership clients in Mainland China.
The firm currently has offices in Orlando, Florida, Florham Park, NJ and in Manhattan. Ken can be reached at ken@rosenfieldandco.com
