All too often this question arises from dealers looking to gather some insight as to whether the time has come for them to pass on the reigns.
Unfortunately, there is no simple answer as no 2 dealerships are created equally. Below I have provided a couple scenario’s that would present 2 similar stores selling for different multiples.
Dealership A was just sold for 5 times earnings. The store was underperforming in its market, had a poor management team and was in a good metro market and a great brand. Dealership A was making $500,000 EBITDA on a normalized basis.
Dealership B was just sold for 3 times earnings. The store was exceeding its manufacturer targets, had a great management team and was in the same metro market and the same brand. Dealership B was making $1,500,000 EBITDA on a normalized basis.
Though Dealership B is better performing store requiring less effort to maintain, it is running very efficiently and their upside potential would be minimal if any. Dealership A however, sold for a higher multiple based on a significant upside potential, though the price was lower based on the risk and effort that will be required to turn it around.
Considering both of these scenario’s, ultimately the multiple will be determined by what ROI and effort the potential purchaser is expecting and willing to put in.
How to Calculate the Total Value of Your Store
The base-line calculation used when determining the value of your dealership is:
Assets + Real Estate + Goodwill
Determining the value of your assets can be done by reviewing the fair market value (FMV) of your furniture, fixtures and equipment. Even though you have likely depreciated your assets, they may still be worth more than the depreciated amount.
Real Estate Value
This is determined primarily by several factors:
The appraised value of your store.
The affordability of the cap rate relative to the future profit of the store
Overall condition and future maintenance expenses
What stage of environmental have been completed if any?
Though an appraisal is good for benchmarking and assessing comparable properties, the ultimate value of the real estate is typically determined by the properties real use case and affordability.
Determining the good-will multiple value of your store, simply put, will ultimately be determined by what an independent 3rd views as a fair value based on their expected return on their investment. Goodwill multiples are a usually a major point of negotiation in your sale, knowing your normalized average annual income should be your starting point.
Normalized Income Calculation
The calculation most commonly used in determining the baseline value for your multiple. It is calculated as follows based on the average of your last 3 years of year end financials:
Earnings before interest, taxes, depreciation, amortization
*Usually executive or family salaries where the new owner would not assume that role and/or at that pay.
*Do you donate to charities or have a golf membership that the owner would not assume?
Additional Items That May Increase/Decrease Goodwill
Is your facility CI compliant or is there a pending change to your CI?
Are you charging yourself a realistic cap rate? On average, cap rates for dealerships in Canada range from 7-8% with more compression for markets like Vancouver & Toronto (5.5%-6.5%).
It is not uncommon to see dealers charge their business’ lower than market average cap rates, so it is important to take this into consideration when determining the real estate value. Can the purchaser afford that rent factor and maintain profitability?
Are they staying or are they going? Are they a strong or weak management team? Is the key driver the primary operator the owner or a family member?
All dealers know that recovering from a poor market sentiment/reputation can take years and lots of dollars to repair. Are you rated at or near the top on Google, Dealer-Rater, Yelp and your manufacturers CSI? Knowing that your market and your customers are speaking positive about your store can offer significant upside to a potential purchaser.
Over the years, multiples have always been higher in Metro/fringe metro dealerships for many reasons. Availability to find or replace key management, strong economies, larger market potentials and immediate access to urban amenities all increase the upside/multiple of your store. Whereas smaller towns usually provide logistic issues getting to, are harder to attract top talent to and usually have limited upside potential.
Is your brand strong? Are the margins good? How is the manufacturer to deal with? Are they investing in the future? Is your manufacturers market share improving or decreasing? How many dealerships with your brand come available and how frequently (supply & demand)?
These are just some of the many variables involved in assessing the value of your store and by no means covers all aspects that are considered. If you are looking to get a more detailed understanding of your stores potential value, consulting with a specialized accountant or qualified broker would be the best course to take.
Tim Lamb Group