Owners can try their own valuation calculations to estimate possible price tag in a hot deal market. BY JON MCKENNA
As any exec in the industry knows if he hasn’t been hiding out in a Montana survivalist camp, this is a seller’s market for auto dealerships. Warren Buffett’s major investment in car retailing adds a steroid-fueled dose of excitement, but his decision is really the result of high interest in dealerships and not a precursor.
“We’re seeing a lot more activity in buying dealerships, and more dealership owners considering selling in this bubble,” noted Lance Hall, the Dallas-based president of the FMV Opinions valuation consulting firm. “The blue sky component [to intangible values] has picked up a bit, particularly in the luxury car segment like Lexis, Audi and Porsche.
“Pent-up demand is there, consumers have confidence to go out and buy cars, and lenders are cooperating. And, the publicly traded dealership companies are looking for avenues for growth and getting more excited about it, because we have this phenomenally low-interest-rate environment.”
When dealership owners get serious about marketing their business, they need to hire a valuation consultant or accounting firm and live with the fees. The current methodologies are incredibly detailed and arcane to the layman (adjusted book value approach, discounted cash flow approach, market approach just to name a few), but that is how buyers and sellers come to terms over the true current value of a busy dealership.
What about in the meantime, though, for a dealership that isn’t ready to sell? Keeping tabs on at least a rough estimate of the business’ current market worth is fun and an ego boost to the owners right now, but it’s also a sound business habit. It’s useful for an owner and general manager to know how to directionally estimate the dealership’s value by diving into the financial statements and performing a few minutes of online research.
We asked several valuation consultants to suggest very basic, back-of-the-envelope approaches that dealership leaders can use to peg the worth of their business – while recognizing the inherent limitations of any calculation that rudimentary. Here are their thoughts:
From Lance Hall:
1) First, add the dealership’s cash on hand to the value of its vehicle inventory, accounts receivable, pre-paid expenses and certain other assets. Then, deduct certain liabilities such as accounts payable and accrued expenses.
2) Next, look at the combined carrying value of buildings, land and improvements and decide whether it needs to be adjusted due to age and market conditions. For example, you might decide it is worth 10% to 20% less. Back out the value of any land and/or buildings that are not directly owned by the dealership, e.g. they are leased from a partnership. Subtract the current amount of any debt that tied to those buildings and land.
3) Add the result from 1) above to the revised, net figure for fixed assets. This gives you a number for net tangible book value.
4) Then, adjust the dealership’s pre-tax income if you feel any land or building lease terms aren’t really at fair market value because the lessor is a related partnership.
Then, apply the appropriate blue sky multiple for that auto manufacturer to the dealership’s adjusted pre-tax income. Perhaps the best known, most easily available multiples come from Kerrigan Advisors’ quarterly “Blue Sky Report”; founder Erin Kerrigan used to work at Presidio Group and help publish its “Automotive Retail Buy-Sell Report.”
The resulting number is a blue sky figure for intangible assets.
5) Add net tangible book value to the blue sky number to roughly estimate the current market value of the dealership.
From Bryce Erickson, managing director of the Dallas-based Erickson Partners valuation consulting firm:
- Go into the dealership’s balance sheet and subtract total current liabilities from total current assets. This yields a working capital figure.
- Also dive into the balance sheet for a combined book value of fixed assets (real estate and buildings) and consider whether to discount it for age and market conditions. Subtract the current value of any debts tied to those fixed assets.
- Apply the Kerrigan Advisors’ blue sky multiple for that auto manufacturer to pre-tax income. This gives an estimated value of intangible assets.
- Finally, add the numbers for working capital, net fixed assets and intangible assets to get the estimated current value of the dealership’s equity.
“Balance sheet plus blue sky is honestly the simplest and easiest approach for a dealer to understand,” Erickson said.
From the ValuAdder Business Valuation Tools company:
In blogs, ValuAdder, a valuation software provider based in West Linn, Ore., suggested two basic approaches to valuing dealerships. First:
- Calculate the business’ enterprise value by adding the market value of owner’s equity to total debt, and subtracting cash and equivalents.
- Divide the enterprise value by the dealership’s net sales in order to get a multiplier.
- Apply that multiplier to the dealership’s annual revenue.
- Add the value of vehicle inventory to the result in C above.
Calculate the business’ enterprise value by adding the market value of owner’s equity to total debt, and subtracting cash and equivalents.
- Divide the enterprise value by net sales in order to get a multiplier.
- Apply that multiplier to the dealership’s EBITDA.
- Add the value of vehicle inventory to the result in C above