Value Determinations

A number of factors impact a dealership’s value. In addition to the dealership’s performance, potential buyers, brokers, and valuations experts examine the dealership’s geographic market, future potential, its competition as well as the brand’s desirability.

To accurately determine value, each of a dealership’s departments needs to be examined. A parts department sells high-volume, low-cost items; the new and used vehicle sales departments sell lower-volume, higher-cost units. Then there’s the service department and body shop, which sell labor, and the financing department, which brokers loans and other products. Each department has different operations, profit drivers, and potential landmines. What this means in a transaction is that looking at a dealership’s performance as one unit isn’t a great measure of its value or its earning potential.

Further, the sale of a dealership involves a wide range of assets, including real estate, fixed assets, inventory and personal goodwill. Each of these has its own value to both buyer and seller, who ultimately need to come to an agreement for a sale to be successful. How pricing is allocated between these asset types can also have a substantial tax impact. Note that a valuation calculated for purposes of GAAP may differ from the valuation calculated for tax purposes.

Manufacturer’s Right of Refusal

Auto manufacturers can intervene in a potential transaction involving the franchise. A manufacturer might do so, for example, if it isn’t happy with a potential buyer, has a different buyer in mind, or is concerned with concentrations of ownership in a geographic market. In these cases, the manufacturer may elect to exercise its right of first refusal.

Confidentiality

Confidentiality is a significant factor in any deal, and sellers are often surprised by how quickly it can be lost, despite their best efforts to keep a deal private. The dealership business is a fairly close-knit community, and once people learn a dealership may be for sale, information tends to spread quickly to the marketplace.

This can result in a workforce issue as the dealership’s employees scramble to plan for the situation. As a result, it’s critical that a dealership has all its contingency plans in place and is well prepared for the sale leaking to the marketplace.

Tips for a Smooth Transaction

Knowing what surprises and complications you may encounter is a large part of making any potential transaction go smoothly. To get ahead, perform sell-side due diligence early—even before you’re ready to initiate a transaction. This not only helps you anticipate questions but also illuminates opportunities for your dealership to increase its potential value.

Further, make sure you work with professionals who know the automotive industry. From your tax accountant to your legal advisor to your valuations experts, each one needs to understand the nuances of the accounting methods, tax provisions (especially deferrals), and entity structuring arrangements that are relevant to your business.