How to Value a New Car Dealership
Businesses in the new car dealing industry sell new and used vehicles such as cars, SUVs, trucks, and passenger vans. Many new car dealerships also sell auto parts and provide car repair services. According to IBIS World, this industry has performed well over the past several years, generating over $1 trillion in revenue. Moving forward, the industry may continue to grow as the industry gains a larger share of the market. This presents an opportunity for those looking to buy, grow, or sell a new car dealership. It is important to note that the new car dealing industry is extremely competitive. To succeed, it is beneficial to learn how to value a new car dealership.
To learn how to value a new car dealership, it is best to receive a business appraisal. During a business appraisal, you will learn the fair market value of a new car dealership. Additionally, you will learn about the risks and opportunities associated with buying, growing, or selling your new car dealership. This information can help you take the next steps in maximizing the value of a new car dealership.
Peak Business Valuation, business appraiser, is happy to help! At Peak, we commonly value new car dealerships. We are happy to provide you with a business appraisal for a new car dealership. Peak can also discuss any inquiries you may have on how to value a new car dealership. Start now by scheduling a free consultation with Peak Business Valuation below!
How to Value a New Car Dealership
When valuing a new car dealership, there are many common business valuation approaches to consider. Peak Business Valuation often utilizes the market approach and/or the income approach as part of the valuation process. Both approaches are effective, however, each uses a different basis of valuation. As such, a valuation expert will determine the best valuation approach during a car dealership valuation. This often includes using a combination of valuation methods.
Valuing a New Car Dealership Using the Market Approach
The market approach is a prevalent method in business valuation. To understand the market approach, consider the real estate appraisal process. When valuing a home, real estate appraisers look at similar properties that recently sold in the area. This helps them accurately determine a fair value for the home. Similarly, business appraisers assess similar businesses that were recently sold when using the market approach to value a new car dealership. If the business is privately owned, business appraisers gather data from private data transaction databases.
Multiples for a New Car Dealership
When utilizing the market approach for a car dealership valuation, an expert works with valuation multiples. Multiples are financial ratios that compare a business’s value to metrics such as earnings, sales, and cash flow. To determine the valuation multiples for a new car dealership, a valuation analyst applies the proper NAICS or SIC code. Below, we discuss SDE, EBITDA, and REV multiples for car dealerships.
SDE (Seller’s Discretionary Earnings) Multiples for a New Car Dealership
- SDE multiples measure a new car dealer’s value based on its seller’s discretionary earnings. This is a common valuation multiple when valuing a new car dealer.
EBITDA Multiples for a New Car Dealership
- The EBITDA multiple represents a new car dealership’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a new car dealership can expect.
REVENUE or SALES Multiples for a New Car Dealership
- REVENUE or SALES multiples measure the value of a new car dealership with the total amount of sales or revenue it generates.
To learn more on how to value a new car dealership using the market approach, see Valuation Multiples for a Car Dealership.
Valuing a New Car Dealership Using the Income Approach
The income approach is also common when valuing a car dealership. This method assesses a new car dealership’s earning potential. Additionally, a business appraiser looks at the risks associated with a new car dealership when utilizing the income approach. We discuss a few common risks below.
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- Competition: The new car dealing industry is fragmented and competitive. As such, operators need to differentiate from competitors to succeed.
- Supplier Relationships: New car dealers need to have strong supplier relationships. Additionally, operators should avoid relying on only one vehicle supplier.
- Financial Performance: Financial conditions may fluctuate in the new car dealing industry. To succeed, it is important to have strong financial planning and budgeting skills.
- Location: The location of a new car dealership plays a crucial role in its success. New car dealers should locate near key markets and suppliers to maximize profits.
Methods to Value a New Car Dealership Using the Income Approach
There are various ways to use the income approach when valuing a new car dealership. The most common income methods are the capitalization of cash flow method and the discounted cash flow method. Both of these methods measure a business’s value based on its earning potential. In the following paragraphs, we highlight how to value a new car dealership using the capitalization of cash flow method and the discounted cash flow method.
Capitalization of Cash Flow Method
The capitalization of cash flow method is best for new car dealerships with long and stable histories. When using the capitalization of cash flow method, a valuation expert calculates an appropriate amount of income for one period. Then, the valuation analyst applies a capitalization rate which indicates the rate of return investors can expect. The capitalization of cash flow method also considers the risks of a new car dealership. We highlight some of these risks above.
Discounted Cash Flow Method
The discounted cash flow method is best if your new car dealer has a strong financial history and/or a predictable forecast. This method involves projecting future cash flows over a 3-5-year period. Then, the earnings are divided by a discount rate to take the time value of money into account. Keep in mind, the discounted cash flow method is less common since it relies on future cash flow estimates which can be subjective.
Summary
If you are looking to buy, expand, or sell a new car dealership, it is helpful to learn how to value a new car dealership. There are several valuation methods a business appraiser may utilize to value your business. To understand which approach is most applicable, receive a new car dealership valuation. As part of a business appraisal, you will also learn about the strengths and weaknesses of a new car dealership. This information can help you take the next steps to increase the value of a new car dealership.
Peak Business Valuation is here to assist! As a professional business appraiser, Peak works with new car dealerships across the country. We are happy to provide you with a business appraisal for a new car dealership. In addition, we can answer any questions you may have on valuing a new car dealership. Schedule your free consultation with Peak Business Valuation today to get started!
For more information see Valuing a New Car Dealership, Valuation Multiples for a Car Dealership, and Value Drivers of a New Car Dealership.
