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Consider the following example:

Two Honda dealerships each selling 800 new units annually
and each nets $750K per year. Are the values the same?

It seems that everyone (dealers, accountants and especially bankers) calculate the value of a dealership primarily based on a multiple of earnings. The ROI may be the same on paper, but in the real world the value could be dramatically different.

  • Location - One dealership is in Nebraska and the other is in Florida - is the value the same?
  • Planning Volume - The planning volume for one dealership is 1200, and for the other it is only 600 - is the value still the same?
  • Used Vehicle - One dealership sells 200 used vehicles a year and the other sells 800 - is the value still the same?
  • Earnings Continuity - One dealership netted $750K last year, but in the previous year it netted $1.2M. The other dealership also netted $750K last year, however in the previous year it netted $600K, is the value still the same?
  • Real Property & Facility - How about the facility? Is the rent inline to reflect fair market value? When you normalize the statement to reflect fair market value rent, does the dealership still net the same? Does the facility require improvements? How much? – These factors influence the value considerably.
  • Marketing Cost - How about the competition and your required advertisement? Influenced in part by competition and access, how much of your potential profit do you have to spend on bringing the customers to the dealership? - That also impacts the value of the goodwill.
  • Service Utilization - How about the fixed absorption rate? Still potential to do better? Does the dealership have enough service bays to capitalize on it? – These factors speak to potential earnings and therefore impact the value of the dealership.
  • Competitive Environment - How many Honda vehicles are in circulation? Is the Honda dealership in a single point market? How big is that market?
  • Management - How about the management team in place? – You know how important that team is. A great team adds extra value to the dealership.
  • Future Upside - What about the future potential of the dealership? Shouldn’t you be paid for it? Buyers pay for potential! Frankly we have never sold a dealership to a buyer that did not think he could do better than the seller.
So what is the value?...     2 of 4  

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