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How to Value an Automobile Wholesale Business

How to Value an Automobile Wholesale Business

The automobile wholesale industry distributes automobiles, trucks, motorcycles, motor homes, and trailers to various markets. According to IBIS World, there are about 8,300 automobile wholesale businesses in the United States. In recent years, these businesses have generated over $677 billion in revenue. Additionally, we can expect healthy growth in the coming years. This is ideal if you are looking to buy, grow, or sell an automobile wholesale business. Whether you are entering or exiting the automobile wholesale industry, it is beneficial to learn how to value an automobile wholesale business

The best way to learn how to value an automobile wholesale business is to obtain a business valuation. As part of a business valuation, you will learn the fair market value of an automobile wholesale business. In addition, business appraisers will discuss the risks and opportunities of buying or selling an automobile wholesale business. This information can help you take the next steps to maximize the value of an automobile wholesale business

Peak Business Valuation, business appraiser, values automobile wholesale businesses in the United States. We are happy to provide you with a business valuation for an automobile wholesale business! In addition, Peak can discuss any questions you may have on how to value an automobile wholesale business. Schedule a free consultation with Peak Business Valuation below! 

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How to Value an Automobile Wholesale Business

When valuing an automobile wholesale business, valuation experts consider a variety of common business valuation methods. The most common methods are the market approach and the income approach. Both approaches are effective, however, each uses a different basis of valuation. As such, a business appraiser will determine the best approach as part of a business valuation for an automobile wholesale business. This may include employing a combination of valuation methods. 

Valuing an Automobile Wholesale Business 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 an automobile wholesale business. If the business is privately owned, business appraisers gather data from private data transaction databases. 

Multiples for an Automobile Wholesale Business

When using the market approach, valuation experts work with valuation multiples. These are financial ratios that measure the value of a business with metrics such as cash flow, sales, and earnings. To find the valuation multiples for an automobile wholesale business, valuation analysts apply the proper NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for an automobile wholesale business. 

SDE (Seller’s Discretionary Earnings) Multiples for an Automobile Wholesale Business
  • The SDE multiple is common when valuing an automobile wholesale business. This multiple assesses the value of a business based on its seller’s discretionary earnings
EBITDA Multiples for an Automobile Wholesale Business
  • EBITDA multiples reflect an automobile wholesale business’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) an automobile wholesale business can generate. 
REVENUE or SALES Multiples for an Automobile Wholesale Business
  • REVENUE or SALES multiples measure the value of an automobile wholesale business in relation to the total amount of sales or revenue it generates. 

To learn more on how to value an automobile wholesale business using the market approach, see Valuation Multiples for an Automobile Wholesaling.

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Valuing an Automobile Wholesale Business Using the Income Approach

The income approach is another favored valuation approach for valuing an automobile wholesale business. This valuation method looks at the earning potential of an automobile wholesale business. In addition, business appraisers assess any risks associated with an automobile wholesale business. We discuss a few common risks for the automobile wholesale industry below. 

    • Financial Performance: This industry has seen adverse financial conditions in recent years. As such, an automobile wholesaler needs to have strong financial planning and budgeting skills. 
    • Competition: The automobile wholesale industry is extremely fragmented and competitive. To succeed, operators must find ways to differentiate from competitors. 
    • Location: The location of an automobile wholesaler plays a vital role in its success. By locating near key markets, operators can reduce transportation costs and maximize profits. 
    • Technological Advances: The automotive industry is seeing rapid technological growth. This puts pressure on automobile wholesale businesses that have lots of older vehicles in stock. As such, keeping up-to-date with technology is key. 

Methods to Value an Automobile Wholesale Business Using the Income Approach

There are many variations of the income approach. 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 discuss how to value an automobile wholesale business 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 ideal if your automobile wholesale business has a long and stable history. When using this method, business appraisers determine a reasonable amount of earnings for one period. The earnings are then divided by a capitalization rate which reflects the rate of return investors may expect. The capitalization of cash flow method also assesses the risks associated with an automobile wholesale business. We discuss a few of these risks in the above section. 

Discounted Cash Flow Method

The discounted cash flow method is best for automobile wholesale businesses with strong financial histories and reliable forecasts. This method involves projecting future earnings over a 3-5-year period. Then, a business appraiser applies a discount rate to the earnings which accounts for the time value of money. Keep in mind, the discounted cash flow method is less common since it relies on future earning estimates which can be imprecise. 

Summary

Whether you are buying, expanding, or selling an automobile wholesale business, it is helpful to learn how to value an automobile wholesale business. To do so, it is best to receive a business valuation. During a business valuation, you will learn the fair market value of an automobile wholesale business as well as its strengths and weaknesses. This information is vital if you are looking to increase the value of your automobile wholesaler. 

Peak Business Valuation is here to help! Peak works with automobile wholesale businesses across the country. We are happy to provide you with a business valuation for an automobile wholesale business. Additionally, we can answer any questions you may have on valuing an automobile wholesale business. Schedule your free consultation with Peak Business Valuation today to get started! 

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