Valuing a New Car Dealership
The automotive industry is experiencing a drastic lack of cars. This is primarily due to shortages in the supply chain due to the COVID-19 pandemic. As such, many car dealers are looking to enter or exit the market. Whether you plan on selling a new car dealership or buying a car dealership, it is important to understand the fair market value of a car dealership.
There are many factors that can impact the value of a new car dealership. As a business appraiser, Peak Business Valuation works with dozens of car dealerships. One of the first steps in transacting a car dealership is obtaining a business appraisal. A business valuation determines a fair value and discusses key factors a valuation expert uses to value a new car dealership. Below we discuss these factors as well as market multiples for a new car dealership. Keep in mind the below factors are only a guide. For specific information about valuing a car dealership you are buying or selling, schedule a free consultation with Peak Business Valuation.
Market Multiples for a New Car Dealership
- SDE Multiple Average: 2.97x – 5.55x plus inventory
- EBITDA Multiple Average: 3.37x – 7.73x plus real estate and hard assets
- REV Multiple Average:0.08x – 0.22x sales plus inventory
**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.
Blue Sky Value
A valuation expert uses a combination of business valuation methods to determine the fair market value of a car dealership. Often a term called “blue sky” value is used in combination with the asset value. The “blue sky” value is equal to the dealer’s pretax income times the blue-sky value multiple. It often depends on the operations of the car dealership. “Blue sky” is often interchangeable with goodwill. Hence the blue-sky value is the tangible book value of hard assets plus any intangible/goodwill value. A blue-sky multiple can range anywhere between 2x-9x.
Dealer Financial Statements – 13-month Calendar Year
Another unique factor that impacts the value of a car dealership is the dealer’s financial statements. Most dealers operate on a 13-month calendar year. As such, a valuation expert will request dealer financial statements rather than tax returns and audited statements. The dealer’s financial statements pertain more directly to the operations of the business than audited financial statements. 13-month dealer financials include year-end tax adjustments. These adjustments include adjusting the new vehicles to fair market value by reflecting current depreciation and other adjustments.
A valuation expert knowledgeable in business appraisals for car dealerships will consider these aspects. Understanding what your business is worth can help you increase the value. It is also helpful when expanding a car dealership or buying a car dealership. If you are searching for more extensive information, schedule a free consultation with Peak Business Valuation.
Key Success Factors
Peak Business Valuation values car dealerships on a regular basis. Below are several success factors that can help distinguish your car dealership. They will also impact the value of a new car dealership. For more ideas see Value Drivers of a New Car Dealership.
Location and Quality of Facility
The first factor that impacts the value of a new car dealership is the location and quality of the car dealership. Facilities that are well-kept and in high-traffic locations receive premium valuations. Areas with growing populations and strong demographics also support higher valuations. A valuation expert will also consider the costs associated with the location.
Most transactions of new car dealerships are subject to factory approval. Keep in mind, this can impact the value a buyer may place on the car dealership. The factory may require a buyer to invest in upgrading or expanding a facility if it is in disrepair. This is an area for negotiation between the seller of a car dealership and the buyer.
Next, the economy plays a large part in the value of a new car dealership. This includes oil prices, interest rates, and tax incentives for new cars. A valuation expert such as Peak Business Valuation will analyze the current market when determining the value of the new car dealership.
Franchises tend to be more valuable than independently-owned businesses. The type of franchise also matters. Luxury and European dealers like BMW, Lexus, and Mercedes typically have higher valuations. While Hyundai, Mitsubishi, and Volkswagen are towards the lower end. But the value of the car dealership also lies in the financial operations of the business. The spread of the valuation multiple depends on the quality, stability, product development, and long-term outlook for each of the brands. This includes the product supply, which recently has dwindled.
Most new auto dealerships do not make a large profit through new car sales. As such, it is often a high-volume, low margin if not break-even business. Most car dealerships have large, fixed overhead expenses resulting in low margins per sale. The most profitable and valuable new car dealerships have found ways to create other revenue streams. Examples include providing service and repairs, financing, and insurance, among others. For more ideas, see Diversifying Revenue Streams.
Parts & Servicing
Often one of the most valuable parts of a new car dealership is its parts and servicing arm. The goal is to create recurring revenue. Particularly for new car dealerships, this is an essential piece of the business. The more servicing bays the car dealership has, the higher the value.
Last, a valuation expert will assess the level of competition and how your car dealership operates compared to similar car dealerships. The competition includes other dealers and substitutes such as car rentals, car-sharing companies, and public transportation availability and demands. Competition for new car dealerships is not quite as intense as for used car dealerships. This is due to franchise agreements that limit the number of dealers in a given area.
In summary, there are many important facts a valuation expert considers when valuing a new car dealership. Understanding these factors is key to buying, selling, or growing a car dealership. Obtaining a business appraisal for a car dealership can help determine a fair market value. A business appraisal will also identify opportunities to grow a car dealership.
Peak Business Valuation, business appraiser, values car dealerships across the country. We are happy to answer any questions you have about the value of a new car dealership. You can reach out by scheduling your free consultation below.
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