In valuing auto dealerships, a common method is to look at pretax earnings for the total dealership and then adjust for the two key variables—compensation and rents—for any amounts that are either above or below market, according to Poonam Vaidya, who led the recent NACVA/CTI webinar New Developments & Trends in Dealership Valuation. “Then we apply a blue sky multiple,” she explained.
Until recently, however, new vehicles have not been contributing much to an auto dealership’s overall operating profits. Do these circumstances change the methodology? “For example,” Vaidya said, “if we are valuing a Toyota dealership and [new sales] didn’t contribute a single dollar to the profits, should we apply some multiple to adjusted earnings before tax to develop blue sky?” Or should the blue sky multiple apply only to the new vehicle department’s adjusted pretax earnings?
The answer: In most cases, BV appraisers should not have to change their valuation methodology to reflect new industry dynamics, Vaidya said. “We continue to apply our blue sky multiples to total profits,” particularly where the facts support doing so. For instance, in her example of the Toyota dealership, the parts and services department and used car departments continued to drive customer traffic—and profit—due to the franchisee’s continuing relationship with the manufacturer.
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