Automotive News - February 10, 2020 - Supplement - S3

The Price is Right
The art of the deal requires maximizing value and
minimizing buyer concerns.
Determining a fair valuation of a dealership is the lynchpin
of any sale. A price that's too high will prolong an already
arduous process. And a valuation that's too low will deprive
dealers of the fruits of perhaps decades of labor and effort.
Ultimately, the value of a dealership comes down to
what a buyer is willing to pay and what a seller will accept.
So how do dealers arrive at a valuation sweet spot that
satisfies both them and potential buyers?
While each sale is different, the journey commonly
starts by developing a price based on the dealership's
tangible assets-such as inventory, equipment and real
estate-plus its blue-sky value.
The blue-sky value, which is a subjective figure, reflects
the intangible or goodwill value of the dealership above its
tangible book value. Typically, blue-sky value is determined
by applying a multiple to the dealership's pretax earnings.
The multiple reflects the overall health of the dealership
and the future earning power of the franchise. The better
the state of the dealership and the future earning power of
the dealership, the higher the multiple.
Furthermore, the multiple is influenced by more than just
a dealership's financial condition. For instance, dealerships
in high-growth areas such as Texas, Florida and other
"smile" states throughout the South can command higher
multiples than stores in low-growth regions.
Other factors that can affect multiples include the
competitors in a dealership's market, the dealership's
customer satisfaction index, the quality of its management
team and employees and whether it's image-compliant.
"The car manufacturers require dealerships to be imagecompliant," said Greg Dougherty, a partner with public
accounting, consulting and technology firm Crowe. "So if a
dealership isn't image-compliant, you're often times better
off spending the money to get it compliant so that buyers
don't need to worry about a manufacturer requesting
improvements in order to approve the transaction."

Remember the "add-backs and deductions"
In order to provide the buyers a more realistic view
of the financial performance of the dealership, the seller
also shouldn't overlook factoring in "add-backs and
deductions"-which essentially are unusual expenses,
one-time expenses or above-market-rate expenses that
should be added to profits in order to "normalize" the
profits in computing the blue-sky value.
Common add-backs can include above-market
compensation and bonus packages, excess head count,
non-recurring expenses, above-market rent expense and
entertainment expenses (for example, sporting event
tickets) that won't continue under new ownership.

Common deductions are under-market rent expense
and unusual one-time income events (for example, hail
damage).
Transparency is critical. "You need to properly prepare
financial statements and provide documentation to support
the add-backs," said Tony Allison, a Crowe partner. "You
need to give buyers confidence regarding add-backs and
deductions."
The value of a dealership can be enhanced if key
management and employees remain after the sale.
Some buyers even will pay a small premium if they know
employees will stay. And to ensure they do so, some sellers
offer employment contracts to key employees, Dougherty
said.
"Buyers want to know who are the key people, their
experience and their backgrounds," Allison said. "Often
times, a buyer sees value in a dealership if there is a strong
group of high-performing employees in place."
In addition, operational problems created by
underperforming employees need to be resolved-or at
least have remedies underway-by the time a dealership
goes on the market. If a bad used-car sales manager
contributed to poor used-car sales, for example, sellers
need to explain to buyers what they're doing or what they
already have done to turn things around, Allison said.

Hiring outside help
Using experienced outside advisers can help maximize
the asking price for a dealership. Owners must decide
whether they are comfortable going through a transaction
alone or whether they want advisers by their side. Crowe
works with many dealers who have a good sense of their
market and may minimize the use of outside advisers,
Dougherty said.
Experienced business brokers, attorneys and
accountants experienced in dealership transactions and
real estate professionals can add value to a seller or buyer.
This decision depends on the dealer and the
management team, Allison said. "Their experience with
transactions and their sense of the market will help
determine how much outside help they should seek," he
said.

Other items to consider
Buyers who express an interest in a buying a dealership
should be required to sign a nondisclosure agreement from
the seller. When that agreement is executed, the seller can
provide more detailed information on the dealership for
sale. This detailed packet is often called "the book."
"You have to lay everything out and make it easy for the

Automotive News - February 10, 2020 - Supplement

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