After more than two decades helping dealers sell their dealerships, we’ve learned a couple of lessons about the reasons for and the consequences of “moving on.” Selling dealerships often comes down to a lifestyle decision, when for whatever reason, succession is not in the cards. What’s more valuable – enjoying the freedom that comes with a sale or maximizing cash flow? Peace of mind vs. consistent cash flow?
The case for selling. There comes a time when enough is enough. Retail automotive is a multi-faceted managerial challenge – new cars, used cars, service, and finance are separate businesses but also interconnected, not to mention consumer preferences on a macro level and customer relations on a micro level. A dealer’s wealth rides on volatile business cycles and government edicts, like tariffs.
Let’s not forget manufacturer relationships, which are always challenging. Quixotic manufacturer requirements to invest in facility upgrades are enough to push many older dealers over the edge. It’s your check book and their dream.
Another unpredictable manufacturer’s ploy is to capriciously appoint an open point that will shrink your market area. We’ve been retained as expert witnesses in several court suits for dealers harmed by new points.
I’m sure you’ve got plenty of examples yourself of draconian manufacturer policies and demands which would reduce your bottom line.
Retail automotive is largely a people-driven business. At the top of the list is recruiting and retaining capable and talented employees. Roger Penske always mentions that employee retention is a critical component of successful dealerships.
And then the inevitable frivolous lawsuits. Enough said.
The case for retaining ownership. The best reason for holding on is that, despite all the concerns laid out above, you are having fun and you can’t accept the potential reduction in lifestyle that could result in a sale. After taxes, not to mention loss of owner perks, your cash flow from passive investments will be less than retaining ownership.
Here’s a sale example to illustrate the point:
- Your dealership earns $2 million a year plus another $200,000 from rent after mortgage expense, for a total of $2.2 million in pre-tax profit.
- Blue sky multiple is 5X, so $10 million.
- Add real estate’s $2 million of equity after mortgage payoff plus another $1 million for the dealership’s balance sheet less transaction costs of $500,000.
Pretax sale proceeds amount to $12.5 million. - Assume state and federal taxes at a combined tax rate of 25% leaves investable capital of $9.35 million.
- Invested at 10% will result in $935,000 a year in pre-tax cash flow or $1.3 million less than the $2.2 million in cash flow from owning the dealership.
More than once, a client backed out of a deal when they realized the lesser cash flow after divestiture meant they “couldn’t maintain their lifestyle.”
But you say my dealership is exceptional. I get 5% on revenue and 25% net to gross. My CSI is perfect. I’m Number One in my region. And Nvidia is about to open a new facility employing 300 people a mile from my dealership. I’m sure it’s worth more than 5X blue. Maybe, if you retain Bel Air Partners as your advisor.
But you should understand this. Buyers are reluctant to pay exceptional prices for outperforming dealerships. Why? They typically believe you’ve got some special sauce they don’t have. So, they want some margin of error in their pricing in case they can’t match your elixir. Additionally, they have the choice to invest their money elsewhere for what they believe will offer better returns.
Moreover, most buyers are dealers who are typically knowledgeable about the intricacies of operating car dealerships. They’d rather buy mediocre dealerships with great potential at a reasonable price than buy at the top of the market.
The era of “dumb money” is over, if it ever existed.
Ultimately it comes down to this – can you survive on the reduced cash flow from a sale? Or, you’ve got only so many days you want to spend working on problems in the service department, dealing with the factory or managing employees. It’s time to smell the roses. Only you can make that decision.
If you’d like to discuss this further, call us. Better yet we do a lot of valuations. Maybe you’d like to know what your dealership is worth before you go into the market.
