Valuation Multiples for a Car Dealership

Valuation Multiples for a Car Dealership

Within the car dealership industry, there are used car dealerships and new car dealerships. Across the United States, there are nearly 22,000 new car dealerships and over 129,000 used car dealerships. Together the new and used car industry generates over $1 trillion in revenue. Due to stable demand, this industry is constantly transacting businesses. As such, Peak Business Valuation values auto dealerships regularly. A business valuation can help an individual grow, buy, or sell an auto dealership.  Below we discuss valuing a car dealership and what market multiples for a car dealership look like.

Valuing a Car Dealership

Whether you plan on buying or selling a car dealership, understanding the value of a car dealership is vital. For buyers, a business valuation can help you feel confident in the purchase price. For sellers of car dealerships, a business appraisal can help determine a listing price and help with negotiations between potential buyers.

The first step of either process is understanding the value of a car dealership. Get started today by scheduling a free consultation with Peak Business Valuation.

Valuation Multiples for a Car Dealership

A valuation expert will determine the fair market value of the car dealership using a variety of methods. One of the methods they use to value a car dealership is by using valuation multiples. Here is a brief overview of what valuation multiples for a car dealership look like. Keep in mind these numbers are only a guide. For specific information about your car dealership, schedule your free consultation.

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Valuation Multiples For A Car Dealership

**Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.

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What is a Valuation Multiple?

A valuation multiple is a ratio. It compares to factors to each other. For instance, one of the common multiples in business valuation is an SDE multiple. The SDE multiple compares the seller’s discretionary earnings with the implied value of the company. A valuation expert uses multiples of other similar businesses that have recently sold on the open market. They compare your business to similar businesses and apply an applicable multiple to your car dealership to get a range of value.

For instance, a car dealership has $775,000 in SDE. The valuation expert applies a 3.83x SDE multiple. In this case, the car dealership has an implied value of $2,968,250. ($775,000 times 3.83x) On the contrary, a 4.10x SDE multiple implies the value of the company would be $3,177,500. ($775,000 times 4.10x)

As a business appraiser, Peak Business Valuation works with many individuals looking to buy, sell, or expand a car dealership. Below are ranges of valuation multiples, that transact and are valued at. Keep in mind every car dealership is unique. As such, the range of value can be significant. Below we discuss SDE, EBITDA, and REV multiples for a car dealership.

SDE Multiple

Average SDE Multiple range: 1.38x – 4.10x

According to our data, new and used car dealerships transact between a 1.38x – 4.10x average SDE multiple.  To derive an implied value of a car dealership, apply the multiple by the most recent 12-month period of revenue. The calculation is as follows:

SDE X Multiple = Value of the Business

For instance, a car dealership generates $650,000 in seller’s discretionary earnings. It transacts at a 2.89x SDE multiple. The business is worth approximately $1,878,500.

$650,000 X 2.89x = $1,878,500

Seller’s discretionary earnings is a common cash flow multiple. A valuation expert uses it to value small businesses specifically car dealerships. It starts by calculating the company’s operating profit and adding back potential expenses that may not be incurred by a new owner. These expenses may include the owner’s compensation, the owner’s personal expenses, and other expenses such as non-recurring or non-related business items.

EBITDA Multiple

Average EBITDA Multiple range: 1.76x – 5.37x

Average EBITDA multiples for a car dealership can range between 1.76x – 5.37x. Applying the multiple to the company’s EBITDA derives an implied value of the car dealership. The calculation is as follows:

EBITDA X Multiple = Value of the Business

For example, a car dealership’s EBITDA is $600,000. It transacts at a 4.90x EBITDA multiple. Using the above calculation, the car dealership is worth approximately $2,940,000.

$600,000 X 4.90x = $2,940,000

An EBITDA multiple measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalized ratios also more accurately represent the future earnings a buyer can expect from the business.

REV Multiple

Average REV Multiple range: 0.11x – 0.31x

According to our data, car dealerships sell for an average of 0.11x – 0.31x revenue multiple. To calculate the implied value of the business, a valuation expert multiplies the revenue of the car dealership by the valuation multiple. Below is the calculation.

Revenue X Multiple = Value of the Business

For instance, a used car dealership makes $8,000,000 in revenue. It transacts at a 0.23x REV multiple. The business is then worth approximately $1,840,000.

$8,000,000 X 0.23x = $1,840,000

A valuation expert uses a variety of business valuation methods to determine the value of a car dealership. One of the other common multiples they use is known as the blue sky multiple. A blue-sky multiple considers the asset value plus intangible goodwill. A blue-sky multiple can range anywhere from 2x – 9x depending on the car dealership.

Summary

When using valuation multiples, it is important to understand there are many factors that impact the multiple. A valuation expert considers each of these factors when applying multiples and determining the fair market value. Car dealerships are especially unique due to their 13-month calendar year. As such, Peak Business Valuation would love to talk with you more about how to value a car dealership.

Peak Business Valuation loves working with small business owners to maximize the value of a car dealership. We are happy to answer any questions you have about valuing a car dealership. Get started by scheduling your free consultation below!

 

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