How to Value a Used Car Dealership
Used car dealerships sell used vehicles such as cars, trucks, passenger vans, and SUVs to consumers. An industry report on IBIS World suggests that this industry has seen healthy growth in recent years, generating over $181.2 billion. Moving forward, used car dealerships may benefit from increasing environmental consciousness. As such, you may consider buying, growing, or selling a used car dealership. Therefore, it is beneficial to understand how to value a used car dealership.
The most effective way to learn how to value a used car dealership is to receive a business valuation. As part of a business valuation, a business appraiser will determine the fair market value of a used car dealership. Additionally, you will learn about any risks and opportunities associated with your used car dealership. This information can help you take the next steps in maximizing a used car dealership’s value.
As a professional business appraiser, Peak Business Valuation is happy to help! At Peak, provide used car dealership valuations. As such, we are happy to provide you with a business valuation for a used car dealership you are buying or selling. Peak can also discuss any questions you may have on how to value a used car dealership. Start now by scheduling a free consultation with Peak Business Valuation below!
How to Value a Used Car Dealership
Business appraisers consider various valuation approaches when deciding how to value a used car dealership. In many cases, valuation experts at Peak rely on the market approach and/or the income approach to value small businesses. Each valuation method provides a different perspective on the value of a used car dealership. As such, a business appraiser will determine which method is most applicable as part of the valuation process. This may include using a combination of business valuation approaches.
Valuing a Used Car Dealership Using the Market Approach
The market approach is one of the most common business valuation techniques. To understand the market approach, consider the real estate appraisal process. When valuing a home, a real estate appraiser looks at similar properties that recently sold in the area. This helps the expert accurately determine a fair value for the home. Similarly, a business appraiser assesses similar companies when valuing a used car dealership with the market approach. If the dealership is privately owned, the appraiser relies on private transaction databases to gather relevant information.
Multiples for a Used Car Dealership
Valuation multiples are a key component of the market approach. Multiples are financial ratios that reflect the value of a business in relation to metrics such as cash flow, sales, and earnings. To find the valuation multiples for a used car dealership, a valuation analyst applies the proper NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for a used car dealership.
SDE (Seller’s Discretionary Earnings) Multiples for a Used Car Dealership
- The SDE multiple is common in small business valuation. This multiple helps a business appraiser assess the value of a used car dealership based on its seller’s discretionary earnings.
EBITDA Multiples for a Used Car Dealership
- The EBITDA multiple assesses a used car dealership’s earnings before interest, taxes, depreciation, and amortization. This helps a valuation analyst understand the return on investment (ROI) a used car dealership can generate.
REVENUE or SALES Multiples for a Used Car Dealership
- The REVENUE or SALES multiple measures the value of a used car dealership with the total amount of revenue it generates.
To learn more on how to value a used car dealership using the market approach, see Valuation Multiples for a Car Dealership.
Valuing a Used Car Dealership Using the Income Approach
Another common valuation approach is the income approach. When using the income approach, a valuation expert assesses the cash flow potential of a used car dealership. This valuation method also considers the risks associated with buying, expanding, or selling a used car dealership. Below, we highlight some common risks.
- Competition: The used car dealing industry is very fragmented and competitive. To succeed, operators must find ways to differentiate from competitors.
- Financial Performance: Operating a used car dealership can come with high expenses. As such, strong financial planning and budgeting skills are needed at a used car dealership.
- Location: The location of a used car dealership plays an important role in its success. By locating near suppliers and key markets, used car dealers can save money and reduce risk.
- Supplier Relationships: It is important for used car dealerships to have strong supplier relationships and avoid working with only one supplier.
Methods to Value a Used Car Dealership Using the Income Approach
There are several variations of the income approach. The most frequently used income methods are the capitalization of cash flow method and the discounted cash flow method. Both of these methods assess the cash flow potential of a used car dealership. In the following paragraphs, we discuss how to value a used car dealership using the capitalization of cash flow method and/or the discounted cash flow method.
Capitalization of Cash Flow Method
The capitalization of cash flow method is best for used car dealers with long and stable histories. When using the capitalization of cash flow method, a business appraiser determines an appropriate amount of cash flow for one period. The income is then divided by a capitalization rate which indicates the rate of return investors can expect. This method also assesses the risks associated with a used car dealership. Some of these risks are highlighted above.
Discounted Cash Flow Method
The discounted cash flow method is ideal if your used car dealership has a strong financial history and/or a reliable forecast. This income approach involves projecting future cash flows over a 3-5-year period. Then, a valuation analyst applies a discount rate to the cash flow to account for the time value of money. Please note that the discounted cash flow method is less common since it relies on future cash flow estimates which can be inaccurate.
Whether you are looking to buy, expand, or sell a used car dealership, understanding how to value a used car dealership is useful. Business appraisers may use a variety of valuation methods when valuing a used car dealership. To know which method is best for your business, obtain a business valuation. As part of a business valuation, you will learn the fair market value of a used car dealership. In addition, a valuation expert may discuss the strengths and weaknesses of your used car dealer.
Peak Business Valuation, business appraiser, is happy to help! Peak specializes in used car dealership valuations. We can provide you with a business valuation for a used car dealership you are buying, growing, or selling. In addition, we are happy to answer any questions you may have on valuing a used car dealership. Schedule a free consultation with Peak Business Valuation below to get started!