Valuation is now at the forefront of many conversations in the automotive retail industry. As a result, there is no better time to review some of the key factors you need to consider when considering a sale of your dealership.
Market Trends
The average Canadian dealer principal is now in their 60s. In fact, according to an industry survey published by DesRosiers Automotive Consultants Inc., 75 percent of dealership owners plan to retire in the next decade. That, combined with the fact that about half of all dealerships in Canada are owned and operated by a principal who owns just a single store, has created a unique market primed for consolidation.
Age, succession issues, expensive facilities investments required by original equipment manufacturers (OEMs), and increased competition: all these factors are causing dealer principals to sell. Combine this with the fact that dealer groups are eager to expand through acquisitions – which provide them better access to financing, an enhanced ability to attract human capital, the creation of operational synergies, as well as brand and geographical diversification – and it creates a market with increasing valuation multiples.
Multiples
As market leaders in the automotive retail space, we have seen many transactions over the last few years. We are seeing upward trends in valuation multiples.
As consolidation in the industry continues, buyer groups are competing for attractive assets to add to their dealership portfolios, driving up multiples. Factors affecting the multiples include, but are not limited to, size, earnings, location and brand.
Blue Sky
When dealing with valuation, it is important to first distinguish a dealership's “blue sky” from its enterprise value, as we have seen these terms confused with one another.
Simply stated, enterprise value is the value of the normalized maintainable cash flows of the business, capitalized at a carefully selected multiple. Blue sky, or goodwill, is the amount by which this enterprise value exceeds the tangible asset backing of the company (the net operating assets on the balance sheet). To the extent that a dealership's value is above and beyond its net tangible asset value, the excess is often referred to as blue sky.
Blue sky inherently refers to the “intangible” assets of the dealership, which includes items such as location, assembled workforce, customer relationships and the OEM agreement.
Real Estate
Many dealer principals also own the real estate on which their dealership operates, so we will briefly touch on some guidelines to help give you an idea of what your property may be worth.1
Most of the time, dealerships operate on a “triple net lease,” where the tenant – in this case the dealership – is responsible for all the operating costs, including realty taxes, insurance and maintenance). As a result, it is possible to apply a capitalization rate to the rental income to determine a property's value. Capitalization rates usually hover around 7 percent, compressing closer to 6 (+/- 50 bps) percent in the prime markets of Vancouver and Toronto.
We are also seeing sale prices ranging from $370 to $580 per square foot in the Greater Toronto Area and Greater Vancouver Area, and anywhere from $220 to $535 per square foot in secondary markets.
BDO Canada LLP is a market leader in retail automotive, providing professional services for over 20% of the dealership network in Canada. For more information on how BDO's Transaction Advisory Team can help you manage the valuation, succession or transaction process for your automobile dealership, contact us.
Michael Taylor, CPA, CA, CBV, CFF
Manager, Financial Advisory Services
1) We are not real estate appraisers. Any information provided above is set to serve merely as a guideline for market prices we have seen in recent engagements, and should not be construed as appraisal advice. Every situation is different, and a real estate appraiser should be consulted.