Blue-Sky Method in Valuing a Car Dealer—Redux

Buckley v. Carlock, 2022 Tenn. App. LEXIS 75; 2022 WL 593549

In the April 20, 2022, issue of the BVWire (Issue 235-3) as well as in a recent BVLaw Alert, we published a short piece about a shareholder dissent/oppression appellate decision in Tennessee regarding the valuation of a “high-end” car dealership. Our headline noted, “Court Tweaks Blue-Sky Method in Valuing a Car Dealer.” We received a question from a reader asking whether the rule of thumb blue-sky method was explained in the case.

The case recited a short but less than adequate explanation, as follows: “[Buckley’s expert] described the method as using a blue-sky multiple to account for all intangible value of the dealership, including goodwill and, more importantly, ‘franchise value.’” 

The reader’s question presents an opportunity for a discussion on both the rule of thumb issue and the blue-sky method as it applies to car dealers. As to the rule of thumb, it is discussed  in the AICPA VS100, Statement on Standards for Valuation Services, Paragraph 39, which reads as follows:

Rules of Thumb. Although technically not a valuation method, some valuation analysts use rules of thumb or industry benchmark indicators (hereinafter, collectively referred to as rules of thumb) in a valuation engagement. A rule of thumb is typically a reasonableness check against other methods used and should generally not be used as the only method to estimate the value of the subject interest.

The standard notably does not prohibit the use of a rule of thumb as a primary method but does indicate that is usually not the case. Such an unusual case is the use of a rule of thumb, the blue-sky method, in the case of determining the value of a car dealership.

I reached out to Carl Woodward, a CPA in Bloomington, Ill. Carl’s practice focuses almost exclusively on providing accounting and consulting services, including valuation services, to car dealers. I have worked on cases with Carl and can attest to his great expertise in this area. Woodward has his own formula for determining the blue sky, but many valuators determine the blue-sky value of a car dealership by applying a multiple of pretax earnings. The blue-sky value measures the entire intangible value of the dealership, including goodwill as well as the franchise value. To that value is added the value of the dealership’s tangible assets to arrive at the enterprise value.

Woodward’s method also utilizes a measure of a multiple of earnings but also includes a recognition of working capital needs. To his blue-sky value he also adds back the value of the tangible assets but notes that leaseholds are not given any value.

The American Society of Appraisers' (ASA) Business Valuation Standards also discusses rules of thumb. Notably, however, the ASA standard requires that, in order to be given substantial weight, a rule of thumb method should meet two tests, i.e., “unless they are supported by other valuation methods and it can be established that knowledgeable buyers and sellers place substantial reliance on them.” (emphasis added)

In the Buckley case, the appellate court affirmed the valued determined by the trial court, which adopted its own method. Since one appraiser included the value of all of the tangible assets and the other did not, the court split the baby and added back one-half of the tangible asset value. The important point to note is that the court decided to use the blue-sky method since it is approved by the financial community, according to trial testimony. This is more in line with the approach taken in the AICPA standards.