What’s an auto dealership worth? Explore the four primary value drivers
From a business valuation perspective, automobile dealerships are different from other commercial businesses. For instance, you typically don’t go into your local McDonald’s and negotiate the price of your hamburger (though you could always try). In fact, the unique nature of the car buying experience is only one of many unique aspects that make it tough for owners to answer the common question, “what is my car dealership worth?”
To provide a road map for owners who may be considering selling their dealership and for the business appraisers tasked with valuing them, BVR asked Todd Berko, managing director of Bel Air Partners, and Adam Lawyer, of the dealer services group at Dixon Hughes Goodman, to identify the top factors that impact the value of new car dealerships.
What are the key value drivers of a new car dealership?
According to Berko and Lawyer, the four primary value drivers are, in order of importance:
- Franchise;
- Real estate and the quality of facilities;
- Employees; and
- Recent economic performance.
1. Franchise
The value of a dollar of earnings is dramatically affected by the franchise that is generating those earnings. For example, $1 of earnings Mercedes-Benz, BMW, or Lexus generates is more highly valued than $1 of earnings a Big-Three U.S. franchise generates. The dealerships that represent luxury brands generate a higher return on tangible assets and enjoy a less volatile, and still rising, earnings stream as compared to their U.S. competitors. The strongest franchises tend to be the luxury imports, provided the market is large enough and wealthy enough to support a decent level of volume. After Mercedes-Benz, BMW, and Lexis, Toyota and Honda are next in the value line.
2. Real estate and the quality of facilities
Acquisitions and sales of dealerships are subject to factory approval. Buyers look at a dealership’s total investment, both real estate and operations. If an auto dealer is selling his or her business and the facility is in disrepair when he or she sells it, the factory can require the acquiring dealer to invest, upgrade, and/or expand the facility. If a buyer’s investment in facilities is greater than expected and he or she does not see a sufficient return on that investment, he or she might look to recoup some of that money in the form of a lower purchase price. Also, land with environmental issues faces a reduced value because of the cost required to clean the property.
The attractiveness of a specific location and the costs associated with that location are also an important part of the equation. Areas with expanding populations and strong demographics support higher valuations, as do dealerships with highway locations. Distance between similar franchise dealers is very important as well because, as the distance between dealerships shrinks, the level of competition may increase and profitability may decline.
3. Employees
A strong management team can be the difference between profit and loss. The average dealership generates pretax profit, as a percentage of sales, equal to 2.2%. Costs don’t have to veer off course too badly before losses start. Since competition among dealerships is intense, employees who make customers feel more comfortable or service their vehicles right the first time generate customer satisfaction and loyalty. Larger dealerships and those with more popular franchises may find it easier to attract qualified employees because they have the economics to better compensate those employees. In rural areas, there are fewer automobile retailing jobs, but a successful dealership has the economics to draw valued employees to them.
4. Recent economic performance
According to Lawyer, to reliably evaluate what an auto dealership is worth, a trained valuation analyst must take the current market into account and understand the specifics of reported transactions and the relative strengths and weaknesses of the dealership they are valuing compared to the market.
These four factors represent some of the more significant value drivers for automobile dealerships, but, as you can imagine, there are many other considerations unique to dealerships that buyers, sellers, and appraisers should be aware of. Get up to speed on auto industry trends and read more useful tips for evaluating dealerships with BVR's comprehensive resources on the topic, including an in-depth special report, What It's Worth: Automobile Dealership Value.
