Know your worth: how to value an auto dealership business

February 27, 2020

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The automotive retail sector is changing rapidly, as increased consolidation, new technology, changing consumer preferences, and other economic factors put pressure on an industry that has already been experiencing significant change on a global basis. While some owners and principals are re-strategizing to respond to steady changes in the market, others are making plans to exit or sell the business to avoid potential risk.

Obtaining a pricing analysis is an important first step, whether your strategy involves business expansion, sale, or an exit. Understanding the true worth of the dealership can help you assess overall business performance, identify opportunities for improvement, and drive additional value. Equally as important, it can help ensure you receive an optimal price when selling the business.

What are the key factors in pricing an auto dealership?

Forming an accurate, credible pricing analysis can be a complex process. A chartered business valuator (CBV) can help you assess the various market conditions and unique business factors that comprise the overall worth of your dealership business.

Below are some of the key valuation factors that dealership owners should consider.

Market trends and conditions - Market multiples, market cost of capital (e.g., rates and quantum of debt versus equity financing), GDP fluctuations, interest rates, inflation, tariffs, commodity prices, and other economic factors often have an impact on the auto industry as a whole, including the retail side. Current economic conditions and the dealership’s ability to weather changes can raise or lower the business’s value.

Consolidation is an important market trend for the auto retail sector. The pace of consolidation has been considerably high, driving EBITDA multiples up, but a time will eventually come when deal activity slows—which could affect pricing.

Sales mix - Sales mix is important as it can significantly impact profitability. For example, used vehicle sales may have higher margins than new vehicle sales, but new vehicle sales can help generate future maintenance, service and parts sales, which are recurring in nature and more attractive to buyers.

Inventory - In addition to the cash value of the vehicles, inventory management and turnover rates can affect the worth of your business. A dealership that can move cars off the lot quickly is a major differentiator for a buyer, since it can mean a smaller net working capital investment on their part.

Brand portfolio - Consider the vehicle type and performance of the brands you’re selling. How do they relate to consumer preferences and the local market in which a dealership operates? Do you have a diverse mix of brands on the lot? Does your OEM portfolio align with current and future buying trends?

A diverse brand portfolio can help to improve revenue, reduce risk through diversification of sales, broaden the knowledge and experience of your employees, and introduce operational efficiencies for the business.

Real estate - With the strength of the real estate market in Canada, the property you own or lease could be one of your most valuable assets. In some cases, it may be worth more than the dealership business itself. A professional advisor can help you understand what your land or lease is worth and offer strategies to realize its full potential, as well as potential risks.

Location - Urban dealerships can often command a higher multiple, as they typically offer a greater market size and access to a larger pool of potential employees. While suburban markets are not as high in demand, continued consolidation could cause buyers to shift their attention as they look to expand their business and extend their geographic reach. Having multiple locations also tends to increase the overall multiple of the group, given that it diversifies geographic coverage and can reduce risk.

Workforce - A dealership’s human capital—the management team, sales representatives, service department, and administrative employees—is a critical factor when assessing the worth of the business. An experienced, agile team that can see the dealership through an ownership transition and help grow the business is a major value driver. An experienced team can also help drive deal strategy and planned efficiencies, making the dealership more attractive to buyers.

Absorption rate - Improving the dealership’s absorption rate can mean greater profitability, but it can also be a key indicator of the overall strength of the business. The absorption rate can act as a measurement of the customer experience as well as how your teams perform and collaborate.

Technology - Up-to-date systems and digital capabilities can help dealership owners improve operational efficiency and reach new customers. Consider technology from all aspects of your business, including digital marketing, mobile capabilities, CRM software, data analytics, lead generation, benchmarking and CPM tools, and cybersecurity.

The buyer perspective

Getting into the mindset of a buyer can be a helpful exercise for dealership owners and principals who are thinking about selling the business. Here are a few questions potential buyers may ask themselves:

  • Have revenues and margins met or exceeded expectations over the last few years?
  • Can the management team support a smooth transition on sale or exit to help meet future growth targets?
  • Will there be resistance from the OEM?
  • Do factors such as location or brand align with the buyer’s business strategy?
  • Is the dealership a good fit from a cultural standpoint?
  • Are there opportunities for operational synergies or efficiencies?
  • Is there a short-term need for capital expenditures (e.g., leaseholds improvements or technology enhancements)?

What should dealership owners do next?

Dealership owners need to be proactive when it comes to understanding the value of their business, rather than reactive. Doing so will afford making better business decisions strategically.

Consider the following next steps:

1. Define your goals – Are you planning to sell the dealership or make a strategic acquisition? Do you need funding for business expansion or upgrades? To help guide the valuation process, identify your goals and your ideal timeline for achieving them.

2. Work on your value drivers – Find out what’s really driving business growth within your dealership and what’s slowing it down. Focus on the areas that will improve revenue, margins, and bottom-line profit.

3. Engage a professional valuator – Relying on anecdotal market information to determine the worth of your dealership can lead to a major deal breakdown or money left on the table. An experienced valuator can help you assess the business and provide market intelligence and comparable industry information, for the most accurate pricing possible.

For dealership owners who are not quite ready to sell their business, getting a formal pricing analysis every two or three years can help you stay aligned with the pace of change in the auto industry and help identify areas of improvement to create or enhance value. Our team of professionals can help drive this process until the eventual sale or exit.

How BDO can help

BDO has extensive experience in the automotive retail sector, helping dealership owners across Canada to optimize their business structure and identify strategies for growth. In addition to assessing the worth of your dealership and helping identify opportunities to create or enhance value, our Corporate Finance and Valuations teams can provide real-time market information and help you navigate the process of selling your business.