-FAQ'S
How Much Does a Dealership Sell For?
The price of a dealership can vary quite dramatically based on several factors. These factors include, location, sales volume, brand, reputation, customer satisfaction, real estate and the list goes on. No two stores are the same and it is difficult to compare stores or provide a general estimate without throughly examining the entire operation. To provide a general range smaller market low performing store in a less desirable rural location can start at $500K. To compare, a large metro area luxury branded dealership performing well can sell for up to $50 MM. Both of these figures would exclude real estate and assets.
How Much Working Capital Is Required (Debt to Equity Ratio)?
If you are considering purchasing a Dealership you will likely secure financing through one of the major banks. When you are considering purchasing a new franchise, most banks and manufacturers have a minimum amount that you are required to retain in the business are referred to as a Debt to Equity ratio (typically 7:1). This value is determined by two equations to ensure you have enough money in the bank to cover the business for 1.5-2 months.
First is total net worth (TNW). This is taking the total liabilities (inventories & accounts payables to people/vendors) minus shareholder equity (capital/treasury stock + retained earnings + YTD net profit) and divided by 7. This amount is your required working capital to meet your covenants, keep in mind as inventory goes up- so does your cash flow requirements. If you have a month that loses money, you will likely be required to provide additional shareholder loans.
Second is the working capital ratio (CA/CL). This is calculated by taking total current assets and dividing it by the total current liabilities. The ratio typically requested is a ratio > 1.10 but will vary depending on the Bank or Manufacturer.
When you are buying a business you would not typically assume any retained losses in the company so using the TNW calculation will give you a good idea of cash flow requirements (total liabilities divided by 7).
Example. A small franchised store (selling 40 new/used per month) that has total liabilities of $6 MM would require approximately $850,000 in working capital. Working capital loans usually come with a high interest rate.
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Real Estate- How Much Down Payment Is Required?
If you are looking to acquire the real estate along with the Dealership operations, you will again have to put some money down to secure financing. As the amount down will vary on you and your credit situation, a typical down payment will range from 20-30% of the total transaction. When consider purchasing the building, you should consult with a professional appraiser, legal counsel, your accountant and banker.
What Are The Additional Purchase Fees That I Should Be Aware Of?
When you are purchasing a Dealership and potentially the real estate, there are some significant fees that you may want to consider. Though at the point when you take ownership you can include these expenses into your financial statements as payables, be aware that these items will affect your Debt to Equity/Working capital ratios;
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Legal Fees. If you have partners in this venture, a well thought through USA (unanimous shareholders agreement) can cost a significant amount of money and is definitely worth covering every scenario in the event the partnership doesn't work out.
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Licensing. Keep in mind most provinces and states have local required licenses that you must obtain to become a dealership. These include local sales licenses, registering your company, Demo plates/registration etc.
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Accounting. Another major expense will be the accounting for all inventory and assets associated with the transaction. Keep in mind that you eventually will have to count parts, book used vehicles, review receivable/payable schedules and create a balance sheet/operating cash schedule to present to your bank/OEM. In addition to this, the manufacturer will require a in depth analysis of your personal wealth and business plan prior to potentially approving you. You will definitely need to hire a professional accountant to assist you through this process.
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Insurances. If you are not a current client, insurance companies will likely require you to provide a letter of credit or upfront payment for insurance for at least the first year.
I Am Not A Franchised Dealer- Will I Qualify?
It is important to know that though it is not required for you to be a current "Branded Dealer", it will definitely increase your chances for getting manufacturers approval if you are. Luxury brands as well as most domestic and premium import brands will at minimum require current or prior ownership experience for consideration. If you are seeking one of these brands, you would be best to seek a partnership with a current dealer and ensure that you have a high level of experience at a branded dealership (General Manager, General Sales Manager) at the very least.
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If you do not have prior branded dealership ownership experience and no partner but you have the capital, I would suggest that you start by finding a smaller market branded store where most current dealers would not be interested in purchasing. Another angle would be to look for a brand more likely to approve people with capital but no branded dealership management/ownership experience. These would include; Mazda, Kia, Mitsubishi and sometimes Hyundai.
What Is Goodwill/Blue Sky?
When purchasing a dealership, "Goodwill" & "Bluesky" are terms that are often referenced. Both statements mean the same in that they are a consideration of a dealerships current and future value. Simply put, if a store makes $500k net profit a year and has done so for several years in a row- the dealer may request these future earnings in the form of bluesky/goodwill. These multiples will vary dependant on the variables I have listed above under "How Much Does a Dealership Sell For" and can typically range from 2x earnings (smaller non-metro Kia store) to 12x earnings (Larger metro Porsche store). It is also important to note, that despite a dealership breaking even or possible losing money- the Dealer may still request goodwill/bluesky based on the above mentioned factors or the dealer may simply acknowledge it is a poorly run store that has not had the proper operator.
I Want To Make An Offer- How/How Much?
Typically when you are ready to make an offer on a store, the seller will require a Letter Of Intent (LOI) along with a deposit held in trust in the event that they accept the offer. The LOI is typically prepared by a lawyer and is very similar in nature to purchasing a house in where you would outline your "Subject To's" as well as the price you would be willing to pay. Though dealers are known for negotiation, they typically list their stores at a FMV (fair market value) relative to similar stores that they or their peers have sold. When determining your offer to the dealer take into consideration some items that may incline them to accept a lower price:
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Do you have all cash to close the transaction at your offer?
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Are you a current performing dealer with the brand the dealer is selling?
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How likely is the Manufacturer to approve you?
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What is your proposed time to close? The sooner the better
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How in depth is your due diligence going to be? Do you plan on counting every part and negotiating on every piece?
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Are you looking for a share or asset purchase. Though you will likely benefit from the taxes on a asset purchase, the dealer will most likely prefer a share purchase.
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Comparison to real estate. If a seller had 2 offers come in with the first one being subject to financing but a slightly higher price and the second being a cash deal with an immediate close with a slightly lower price- they likely would accept the cash deal/lower price offer.