Automotive News Canada - August 2023 - 31

Sponsored Content
DEBUNKING THE MYTH:
'MULTIPLE OF EARNINGS'
ROBERT W. ARMSTRONG, SENIOR PARTNER
With more than two and a half decades of experience in brokering new vehicle
dealerships, one question we frequently encounter is, " What's my business
worth? " It's often a matter of gauging the goodwill accumulated over the
years in your store. While many may instinctively associate this with net profit,
its impact on goodwill may not be as significant as perceived.
So, how do you estimate the worth of your dealership? Is it a matter of intuition
or the guidance of your accountant? Perhaps it's shaped by expert insights
or general industry publications? It appears that most people base much
of their judgment on the most recent articles and publications that discuss
a theory known as " Multiple of Earnings. "
Over the past decade, we've noticed a concerning trend with articles
advocating Multiple of Earnings as the main metric for valuation. They
frequently provide updates, indicating brand-specific fluctuations, sometimes
as slight as a fraction of a point. This data even infiltrates formal valuations
by CPAs and other advisors.
It's common to hear dealers and brokers discuss dealership value using
certain rules of thumb. However, we often question the reliability of these
rules within our firm, particularly the highly promoted Multiple of Earnings.
NADA characterized this concept as a " Greater Fool's Theory " in 1995, further
highlighting in 2004, that it's " rarely based upon sound economics or valuation
theory. " Nearly two decades later, we align with these NADA sentiments,
particularly given the uncertainty looming over the new car industry.
For instance, the statement that a specific brand trades for 3-5 times earnings
can be misleading. Consider the following scenarios:
1 :: The gap between 3 times and 5 times is 66%. A quarterly update to
these reports may alter the suggested multiple by a mere 0.25 points.
2 :: What financial periods are in consideration - Most recent 12 months?
3-year average? 5-year average? Are we referring to a straight or
weighted average? How about COVID-19 earnings and government
contributions during that time?
3 :: If a dealership is operating at a loss, does the multiple become
zero? (No).
4 :: What if the dealership operates at only 15% of Planning Volume?
5 :: Does a Toyota dealership in a bustling metropolitan area hold the
same value as one in an extremely rural market? (No).
We, therefore, ask you - Where lies the real value in these practices in
providing a true valuation?
Rob Armstrong, Senior Partner
E-mail: rob@performancebrokerageservices.com
Direct: 289. 275. 7179 | Cell: 905. 320. 3433
For over 25 years our firm has assisted Dealers in selling their dealerships,
often representing a significant portion of their retirement planning and net
worth. Relying on incomplete data or a simplified approach to valuation
may lead to false pricing expectations, faulty financial planning, and costly
- even incorrect - decisions.
Relying solely on a Multiple of Earnings to gauge a dealership's value can,
at best, distort the reality, and at worst, be outright deceptive. We view it as
an ill-advised approach to a realistic valuation.
What is the takeaway for you, having examined all of this? We've successfully
sold dealerships that have lost millions of dollars - for millions of dollars! As
recently as this year, we've sold domestic franchises for over 10 times their
2022 earnings. Does this imply all domestic dealerships now command a
10-times multiple? Certainly not.
Being the owner of a franchised business with territorial protection is a
thrilling aspect of owning a new car dealership. It allows you to demand
intangible value over and above the hard assets within the dealership -
even if it's running at a loss. Every dealership is unique and complex, just as
is every buyer. Most dealerships are privately held and sold to other private
entities, each under unique circumstances. With this in mind, we believe that
there's more to understand about the value of your dealership than simply
a Multiple of Earnings.
If this has captured your interest and you want to discuss your unique
situation, we're only a call away. Whether you're considering acquiring a
new opportunity or discussing your current options, we would appreciate
the opportunity to serve you.
Steve Allen, Partner
E-mail: steve@performancebrokerageservices.com
Direct: 289. 274. 9697 | Cell: 905. 220. 9306
John Campbell, Partner
E-mail: johnc@performancebrokerageservices.com
Direct: 289. 270. 9760 | Cell: 416. 721. 4750
BROKERA GE SER VICES
CALIFORNIA * UTAH * TEXAS * ILLINOIS * OHIO *
289. 334. 1661 * PERFORMANCEBROKERAGESERVICES.COM
FLORIDA *
VIRGINIA * NEW JERSEY * ALBERTA * ONTARIO
https://performancebrokerageservices.com/?utm_source=automotive-news
Automotive News Canada - August 2023

Table of Contents for the Digital Edition of Automotive News Canada - August 2023
