Automotive News - February 10, 2020 - Supplement - S6

Buyer Beware
To avoid financial surprises and costly litigation, buyers need to thoroughly
scrutinize all aspects of a dealership's operations.
A critical step in buying a dealership is the due diligence.
During this stage of the acquisition, the buyer-typically with
the help of qualified professionals-performs a comprehensive
examination of the dealership's business to ensure that the
asking price is fair and valid.
It's hard to overstate the importance of this process. In
fact, insufficient due diligence is one of the leading causes
of buyer dissatisfaction as well as post-sale litigation, said
Aaron Jacoby, a managing partner and chair of the automotive
practice at Arent Fox LLP, a nationally known law firm based
in Washington, D.C.
"You really need to investigate the inner workings of the
dealership you're interested in buying," Jacoby said. "Poor
due diligence many times results in financial losses and/or
litigation after the fact.
"Simply put, doing thorough due diligence is the best way
to avoid litigation."
David Meyer, a partner in the corporate and automotive
department at Arent Fox and a member of the firm's automotive
group, noted that "all sellers are interested in maximizing the
value of their businesses. But the buyer needs to be sure that
the dealership doesn't have problems that should decrease
the seller's valuation. You have to make sure the dealership is
performing at the level the seller says it's performing."
Typically, buyers get 30 to 90 days to familiarize themselves
with the business. During this period, they need to get a handle
on the merits of the proposed blue-sky value of the dealership
based on its historical profits, plus a multiple associated with
the brand.
Prestige brands such as Porsche, Lexus, Mercedes-Benz

and BMW-as well as mass-produced brands with great
reputations for reliability, like Toyota and Honda-command
higher multiples, Meyer said.

Kicking the tires
Due diligence is a complex process that encompasses
a multitude of steps that defy quick explanation. But in
summary, a thorough examination of the dealership's financials
represents a major component of this process, Jacoby said.
Critical metrics include the number of cars sold as well as
the gross profit on those sales on a per-unit basis.
"Car sales is a very important indicator," Jacoby said. "That
includes looking at how many of those sales are new cars and
how many are used cars and how many come from fleet sales
and how many from retail sales."
The distinctions between the kinds of sales are important
because per-unit profitability varies from segment to segment.
For example, new cars typically generate less profit than used
cars, and fleet sales to large companies and government
agencies often are discounted.
"Fleet sales create a lot of volume without a lot of profit,"
Jacoby said.
Service department revenue also is an important
consideration, especially as profit margins on new-car sales
continue to shrink. In fact, it's not unusual these days for fixed
ops to account for about half of a dealership's annual revenue,
according to statistics from the National Automobile Dealers
Association.
As such, it pays to take a close look at figures such as
the absorption rate for fixed operations, the closing rate

You really need
to investigate the
inner workings
of the dealership
you're interested
in buying

6
Automotive News - February 10, 2020 - Supplement

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