Consolidation, succession, and other components leading to mergers and acquisitions (M&A) activity continue to be prominent in the dealership industry. As a dealer, you may be considering buying or selling your dealership to take advantage of the current market. In the latest edition of the “Business Valuation Resources (BVR) What It’s Worth: Automobile Dealership Value Report,” our team, along with other industry leaders, details various nuances of valuations for dealerships and answers key questions on obtaining a fair and accurate value for a dealership. Five of these topics are explored in this article. To learn more about the “What It’s Worth Report,” fill out the form at the end of the article.
Within our leading dealership practice, we have dedicated professionals who have worked with hundreds of dealership clients on valuations for more than 20 years, as well as buy-side and sell-side M&A deals. If you’re interested in buying a dealership and want to explore key considerations you should be aware of as you and your team of advisors assess the dealership you’re purchasing, or if you’re a seller and want to identify dealership best practices as you approach your valuation, this article is for you.
Outlined in the following paragraphs are five key topics to consider for automotive, machinery and equipment, and commercial truck dealership valuations.
Valuation Methods in a New M&A Landscape
In the years since 2020, the world experienced a major upheaval with the COVID-19 pandemic, unpredictable market fluctuations, and supply chain issues. Dealerships were certainly not immune from these pressures. The cybersecurity breaches that occurred across dealers and dealer management system (DMS) platforms, along with tariffs, have added new elements of complexity more recently.
These fluctuations show it’s more important than ever to use a valuation method that is accurate and realistic for the industry’s current state. Here are some issues appraisers should consider when determining the blue sky of a dealership:
- Which earnings to use? Many methods often apply multiples to earnings, but it is important to know which earnings to use in the calculations.
- Location. Manufacturers give each franchise a certain number of ZIP codes and/or geographic landmarks that define an area of responsibility (AOR).
- Facility status. The condition and the age of the building(s) are important.
- Franchises. The type of franchise(s) a dealership holds is a huge component of its value.
- Impact of high earnings. The more money a dealership makes often results in changing multiples.
- Synergistic or hypothetical buyers. As in most industries, at times, there are differences between synergistic and hypothetical buyers for a dealership.
Proper Preparation & Financial Due Diligence
If an appraiser assigned value to a dealership based on the financial statements with no changes made, the result could be a skewed version of reality.
Normalizing earnings prior to a valuation can help translate a more accurate picture. Rent, officers’ compensation, and other niche areas on the reporting earnings statement often need normalizing. Connecting with a financial due diligence professional can help address these areas.
Talent Impacts on Dealership Valuations
Employees and staff contribute to the intangible assets that are part of a dealership’s valuation. Reputation and store appearance are also intangible assets, but they go hand in hand with the employees. An engaged, attentive staff will put effort into the store’s appearance and work to build a solid, positive reputation for the dealership. The adverse can negatively impact the dealership.
The tenure, knowledge, and skills of the staff are also desirable and can impact the dealership’s valuation. These elements of the team contribute to the store’s reputation. Customers who experience an educated team are likely to favor the dealership, and revenues can be impacted positively.
Cybersecurity Impact on Dealership Valuations
In 2024, cybersecurity incidents brought increased attention to the dealership’s cybersecurity measures. Cybersecurity can have broader impacts on the trust of the dealership’s staff and customers.
Dealerships are continually evolving, and the acceleration of technology and software used within the stores has presented challenges and implications that must be considered. If a dealership is on a different DMS than the one acquiring it, buyers vary in whether they convert the store to their DMS or remain on the current system. However, whether or not a store converts its DMS, no two dealership groups will have the same process, technologies, or security and privacy measures.
As the valuation professional assesses the dealership’s intangible assets, including their current processes and procedures, cybersecurity is an area that will likely have more scrutiny and should not be overlooked.
Trends Unique to Machinery & Equipment & Commercial Truck Dealers
As consolidation continues in the auto dealership industry, so does diversification into other dealer niches. Dealer owners may also have machinery and equipment dealerships for large or compact equipment or have a commercial/heavy truck dealership. These niches’ valuations may differ from those of a traditional auto dealership valuation.
One area of nuance within valuations for these subniches is the support and backing of the original equipment manufacturer (OEM). Making acquisitions outside of a previously owned brand can be complicated, as OEMs are able to use the right of first refusal. Those making valuations of dealerships need to consider the territory, market size, and the quality of nearby competition.
Other considerations, specifically for commercial truck dealerships, include inventory (both amount and type), the types of trucks that can be sold in certain states due to regulations, and the level of technology used by the location being acquired. Parts and service centers account for 30 to 40% of the total revenues of most commercial truck dealerships. These departments may already be thriving or could be areas of untapped growth for the buyer.
The lease and rental department for machinery, equipment, and commercial truck dealers is much more expansive than for auto dealers. Lease and rental revenues can be a steady income stream, which may be more appealing to investors. When valuing the rental and lease areas of the dealership, looking at the revenue generated over a span of time can paint a more accurate picture of the business’s operations.
Other common findings and adjustments for valuations of machinery and equipment dealers include rental depreciation, self-insurance warranties/prepaid maintenance, and guaranteed buybacks (typically governmental programs).
How Forvis Mazars Can Help
Forvis Mazars has a wealth of experience that valuation professionals can tap into when assisting in the M&A and valuation process. Our professionals have spent years consulting and helping clients with dealership valuations and on either side of the buy/sell due diligence process. We provide a variety of services for dealerships nationwide, ranging from tax compliance and planning to assurance and consulting. We nurture a deep understanding of our clients, delivering greater insight, deeper specialization, and tailored strategies through people who listen to understand, are responsive, and consult with a purpose. If you have questions or need support with a valuation, reach out to one of our professionals.
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