by Ken Rosenfield, CPA, Managing Partner
The past year has seen a tremendous increase in the sale and acquisition of dealerships. Prices for most franchises are at an all-time high. For buyers, be aware that we are currently in a “Seller’s Market” as the list of buyers is larger than that of sellers. With the cost of capital being so low, we have literally seen bidding wars for dealerships of all brands, locations and sizes.
For sellers to command the highest price for Blue Sky, it is best to position your dealership for sale first, just as you would your personal residence. The better shape your financial records are in, the easier the exchange of information will be. Other items to have in check are Essential Tools Inventory Compliance, Technician Proficiency Compliance and a good read on where you stand with your DMS contract. Recently, we have seen the DMS providers holding fast to early termination fees, especially where the incoming system will not be their own. They have been somewhat negotiable, and there are tricks to getting a reduction, but be aware that termination fees could be a significant figure. Additionally, you will need to get your leases and other commitments together such as oil and paint contracts where you have equipment or advances tied to them. If those obligations are not taken over by the buyer, they could also come back to haunt you.
Many sellers are reluctant to let their employees know that the dealership may be sold in the near future, and this is understandable. We advise against sharing the news too soon. Once the word is out, the vultures come and the assembled workforce may not be able to stay perfectly intact. Discretion is the word and some of the worst culprits can be the manufacturer representatives.
The big item is always, the “Blue Sky” amount. All too often, we hear “What is the Multiple?”, the traditional valuation method of dealerships. This figure on your dealership worth can vary greatly depending on market size, location, market effectiveness and facility compliance. Just because one of the published multiples by various brokers states one figure, this does not necessarily mean that will be the ultimate figure. They can be a good starting point, but keep in mind, the published figures are from a limited amount of data, typically from large institutional buyers in major metropolitan markets. In many cases, a single point dealership is not being sold and can be part of a bundled transaction. To support a higher “Blue Sky” figure, it is imperative you obtain data early such as market effectiveness, pump in/pump out data, units in operation, customer loyalty and CSI and your peer group reports from the manufacturers that you represent. It is time well spent to put together some type of offering memorandum for a prospective buyer which reports accurate financial data and cash flow returns as well as all the data that would be relevant to a buyer. Just as important as your information is to a buyer, they should be prepared to have information on themselves to support that they have the financial ability to acquire your dealership.
From a buyer’s perspective, the amount to be paid for “Blue Sky” is key, as the buyer wants to obtain the best deal possible. With the competition of qualified buyers, the relatively low cost of funds and the demand to achieve the economies of diversification and the high return on investment in the automotive retail industry, there are more investment oriented ways to analyze how much to pay for blue sky. We suggest pricing by looking at a payback on investment method. Overlay the expected operating structure and expenses over current sales volume or what the manufacturer suggests based on their market study. But beware that many manufacturers are exercising their right of first refusal and you may need to test the waters first.
One of the most important aspects of protecting your investment in your dealership is due diligence. Typically, transactions are only purchases of assets. The assets acquired should be tested for market value and condition. In the valuation of inventory, ensure that all programs and manufacturer credits are accounted for, including those not just appearing on the vehicle’s invoice. If the seller’s DMS system is going to be continued, a thorough check of the system, hardware and licensing agreements would be in order. This is often an overlooked procedure. In addition, make sure that all the set ups are accurate. In the event the DMS system will not be continued, great care needs to be given to obtaining the customer files, service history and lost souls.
In the event of a potential sale or acquisition, feel free to contact us for a complimentary checklist for due diligence and a menu for putting together a sales information program.