Digital Dealer - September 2017 - 46

FINANCE & INSURANCE

Continued from pg. 44

AS IN ALL ELEMENTS OF THE BUY/SELL WORLD, SUCCESSFUL TRANSACTIONS
RESULT WHEN BUYERS' AND SELLERS' EXPECTATIONS OVERLAP.
the earnings will not begin for
several years, since the insurance
premiums are earned over time.
In other words, in purchasing
a given dealership, a buyer
has gained the opportunity to
replicate the seller's historical
cash ﬂows from reinsurance. But,
because of the lag
associated with
the reinsurance
income stream,
a seller cannot
simply add those
earned premiums
to its dealership
earnings to
determine
their valuation.
However, this
stream of cash ﬂow
available to the
buyer should not
be ignored.

discounted cash ﬂow value of these
proﬁts. This approach recognizes
the value of reinsurance earnings
to the dealership operations in
today's dollars, and appropriately
discounts the cash ﬂows for timing,
uncertainty and risk.
Another way to tackle the

THE NEW DEAL

CONCLUSION

As the average size of auto retail
transactions continues to climb,
ﬁnancial sophistication on the
part of both buyers and sellers
is increasing, placing increased
interest on this previously overlooked proﬁt stream tied to
auto retailing.
Reinsurance proﬁts
are now commonly
discussed in
the context of
valuation. While
there are valid
reasons as to
why reinsurance
proﬁts are not a
simple addition
to dealership
proﬁtability,
they can be
fairly assessed
as creating real
value and worthy
of consideration
in the valuation
process.

As in all
elements of the
buy/sell world,
successful
RYAN KERRIGAN
transactions result
...FIND COMMON GROUND AS IT RELATES TO
is Managing Director
when buyers'
and sellers'
VALUING REINSURANCE PROGRAMS, INCLUDING at Kerrigan Advisors.
Kerrigan Advisors
expectations
is a leading advisor
THEIR
PROJECTED
PROFITABILITY
AND
THE
overlap. We
to sellers of higher
are ﬁnding it
VALUE OF THIS CASH STREAM.
value dealerships and
increasingly
dealership groups
necessary to ﬁnd
throughout the U.S. Ryan works with
valuation of reinsurance programs is Kerrigan Advisors' private equity clients
common ground as it relates to
to explore the possibility of actually
valuing reinsurance programs,
advising them on their auto retail
investment strategy and works with
selling the existing reinsurance
including their projected
sell-side clients seeking private equity
entity, along with the dealership
proﬁtability and the value of this
exit. Ryan has extensive experience
assets. This approach allows the
cash stream.
in both private equity and auto retail,
buyer to experience earnings in year
While each program is unique,
having run his family's dealership.
one, and reduces the uncertainty
we can generate common
He started his career at McKinsey
tied to reseeding a new program.
assumptions of unit sales,
& Company as a management
penetration rates, and performance While this is not the way these
consultant, advising Fortune 500
transactions have typically been
that enable us to generate cash
companies on growth strategies,
structured, the numbers are large
ﬂow projections over 5 and 10
organizational issues, pricing and
enough now that new approaches
years. It is then possible to use
business valuation. EMAIL: ryan@
kerriganadvisors.com.
merit consideration.
these projections to determine the
46

SEPTEMBER 2017

D I G I TA L D E A L E R . C O M
http://www.DIGITALDEALER.COM
Table of Contents for the Digital Edition of Digital Dealer - September 2017
