Put the Puzzle Together: Dealership Valuation is both an Art and a Science

You may have spent decades building your dealership. When it comes to selling it, or passing the business on to your heirs, a basic question arises: How much is your dealership worth?

The answer depends on many factors, and this is where the experience of a professional valuator comes into play. He or she can help you determine what your dealership is worth — on the market or on paper. 

Starting with book value

As a starting point for your dealership's value, the valuator may use book value of shareholders' equity. This is the difference between the carrying values of assets and liabilities on your balance sheet.

The valuator also may adjust for items that are omitted, exaggerated or understated on your balance sheet. Examples include contingent environmental or legal liabilities, write-offs for uncollectible receivables, and fully depreciated equipment.

If you own your facility, the valuator will obtain a real estate appraisal and add the value separately to the preliminary appraisal of your operations. He or she also will adjust your earnings (or cash flow) for reasonable rent expense. If this isn't done, your real estate will be double-valued.

Factoring in "blue sky"

Another piece of the valuation puzzle is intangible value — also known as "blue sky" or goodwill. The value of goodwill may be applied to your franchise's value. Goodwill often is determined using a price-to-cash-flow or price-to-earnings multiple, based on comparable transactions.

The inverse of a pricing multiple is a capitalization rate. Cap rates are a function of the business's perceived risk. These come into play if an appraiser applies a discounted cash flow analysis to value the dealership. Sounds tricky, but remember: The higher the cash flow and the lower the cap (or discount) rate, the higher the business's value.

Weighing other factors

There's a wide range of valuation multiples and cap rates for auto dealerships. Take product mix.Some brands sell better — and have higher growth prospects — than others. In general, new car dealers are more desirable than used car dealers. Likewise, mid- or high-end import dealers are more desirable than domestic or economy dealers. A strong finance or service department also might command a premium price.

Valuators consider location, too. Metropolitan dealers often fare better than rural dealers. And successful dealers have updated, accessible showrooms and ample inventory space.

Prospective buyers also evaluate financial statements before making an offer. They want a history of high profits and liquidity, efficient turnover, strong growth, and low debt.

In addition, valuators adjust earnings for discretionary expenses (such as excessive owner compensation), nonrecurring items (such as legal expenses) or deferred maintenance.

Getting ready

Even if a sale isn't in your immediate future, a valuator can provide you with the information necessary to draft a buy-sell agreement. This agreement provides a plan to follow in the event you or a business partner unexpectedly dies, becomes disabled or otherwise withdraws from the dealership. A valuator will help name and define your agreement's standard of value and suggest a formula for calculating it, so that ownership can be transferred at fair market value.

Your dealership's value also will affect the tax-related costs of gifting or bequeathing business interests, if you choose to pass the business to your loved ones. A valuation can prompt supportable discounts for lack of control and marketability, and prevent you from improperly estimating the value. Otherwise, your heirs could end up with a sizable estate tax bill that could force them to sell your business.

Choosing a pro

Transitioning the ownership of your business is a complicated matter. Make sure that the person assessing its worth is a valuation professional with experience in the automotive sector.