Currently, if you own a dealership, while it is possible to be marginally profitable or losing money, it is highly unlikely. Because of the recent profits, a growing number of dealers have decided to cash out of their dealerships while a like number of cash-flush investors are looking at dealerships as investments that provide the potential for excellent returns.
This “perfect storm” of the low supply of new vehicles coupled with high demand from consumers has created an unprecedented surge in values. The question many dealers are considering is “Is this the time to cash out, expand our footprint, or ride this current cycle until it reverts to a more “normal” level of activity?”
Some items for consideration in weighing your options follow:
Not all franchises are created equal. The specific franchise you have or are considering will be a major value driver. Whether it is luxury, import, or domestic, specific franchises command a higher price than others. Franchises that are in high demand now will typically continue to be. Those franchises that are not as desirable will more likely than not, continue to be less desirable.
The status of your facilities will also impact the value. If your facilities are compliant with the manufacturer’s current requirements, the impact is neutral. If your facilities are outdated and/or non-compliant, the manufacturer will typically require the buyer to update them. These refreshes typically do not add significant value to the real estate and are incorporated into the purchase price as a reduction of either the real estate value or goodwill.
The current economic performance of your dealership is one of the key factors in determining the goodwill value of the transaction. Most buyers consider the income currently generated by the dealership as an indication of its future performance. There is a limit to the amount of reliance that will be placed on current (2020-2022) performance in determining what the purchase price will be since the current supply shortage will eventually become less of a factor for consumers. In addition, the demographics of your market and customer base will be impacted by rising interest rates, affordability, and inflation.
If you are a buyer, you need to consider these factors when estimating future cash flows and determining your offer to purchase.
If you are a seller there is no better time to market your dealership than now. Values are high and buyers currently have the cash to invest.
If you are “on the fence,” you should consider the future cash flow your store will provide you and your family. In addition, there are several non-cash benefits that you currently enjoy that will no longer be available if you sell. Finally, your time horizon of how long you wish to remain active and if you have a viable succession plan should be considered. There will always be a market for desirable franchises in good locations.
Leon M. (Lonnie) Rogers, CPA/ABV/CFF is the managing member of Tetrick & Bartlett, PLLC, and has been providing accounting, tax, valuation, and consulting services to automobile dealers since 1977. Tetrick & Bartlett, PLLC currently serves over 50 dealers in West Virginia, Virginia, Ohio, and Pennsylvania and is a member of the AutoCPA Group, a nationwide organization made up of 25 CPA firms specializing in services to automobile dealers. Lonnie can be reached at lrogers@tb.cpa or 304-624-5564.
