By Kenneth R. Rosenfield, CPA
Almost all our dealership clients are making good money in challenging economic times. But what parts and inner workings of earning a healthy bottom line need to be looked at to add value to the dealerships?
Most dealerships today rely on their Service Department to cover a substantial portion of their fixed costs. Service absorption (or fixed coverage) is one factor we analyze in valuing dealerships. But what is behind that figure?
Customer loyalty is one factor. If customer pay sales are as high as they should be, that means the technicians are billing out at the highest rate to the happiest customers — which creates continued customer loyalty, an annuity stream of income, and value to a dealership. In valuing a dealership, we would look at current repeat customer sales to Units in Operation. If that factor is higher than in a typical dealership, then you can expect the loyalty factor among the dealership client’s customers to be high.
Many dealerships have Collision Centers as an integral part of their operations. In reviewing the impact of a Collision Center on the bottom line and the dealership’s value, we look to see how many insurance companies the Center is a pro shop for.
The number of quality insurance companies that they are writing for indicates the quality of the shop in general and Customer satisfaction that is derived from their excellent work. Catering to a higher number of high-quality insurance companies is a direct line to more value for the dealership overall.
We also look to see if the Collision Center is catering to more brands than just those the mother dealership sells. This would also tend to indicate that the Center is of high quality and has repeat customers from referrals from the insurance and perhaps the towing companies.
One factor that may have a negative impact on value would be a high level of wholesale parts sales. Although some dealers may pride themselves on their extensive network of parts customers, it could be an indication that there is a potential loss of retail customers.
In those cases, we would run a wholesales parts customer list by zip code and review those that are within a 10 to 15-mile radius of the service department. It could be that they are selling parts at a discount to their competitors and therefore losing valuable business! Although a dealership may be making money, even good money in this endeavor, they could actually be losing value!
Another factor is repeat customer history in vehicle sales, both new and used. This should be a higher than industry norm ratio and can even add higher value in brands that are currently losing market share. This could indicate that even though the product may be losing ground nationally, the dealership is still maintaining a loyal customer base over and above what the brand does on its own.
As expected, a dealership with this type of results most likely has a very high CSI score. This is a factor that also should be looked at for a group of dealerships on a geographic basis.
An obscure factor can also be boutique sales. That is not just a factor for exotics such as Porsche, Ferrari and Aston Martin. How about Jeep, and Ford pickups? High volume boutique sales for cult brands and popular vehicles such as the Ford F150 and Jeep products can tell of a high customer satisfaction level with the product and the dealer.
In many instances, dealers with higher than average boutique item sales are typically involved with their customers and sponsor rallies and many driver-participation events. This can add a significant factor to goodwill value as well.
These are areas that even a dealership making good money can look to for ways to beyond traditional measures to boost dealership value.
Ken Rosenfield is the managing partner of Rosenfield and Company PLLC, a CPA firm with offices in Orlando, Florida, and Manhattan. The firm has one of the largest automotive practices in the country, with a nationwide client base. He can be reached at firstname.lastname@example.org and 407-849-6400