Many dealers we talk to might have a general idea of what it would take to get them to sell their store, or what they would pay to acquire a new store, but few of them are able to explain how they got to that number. There are a lot of variables involved, and when you’re dealing with a family-owned business, there’s also a subjective or emotional aspect to what you’d be willing to accept or pay for a store. This is where valuation experts come into play, providing an independent and objective measure of what a business is worth; however, not all valuations are created equal, and it’s important for dealers to use those familiar with the industry and its many nuances.
While dealers are often interested in what their store might be worth, there is generally a triggering event or requirement before a valuation is undertaken. Although there are many different reasons a valuation may be needed, it’s important to understand your objectives and the implications of the valuation, and to make sure the valuation is being performed by a qualified professional that is familiar with the industry. Valuations can be fairly intensive, cost thousands of dollars, and have an indefinite shelf life (think about 2019 vs 2022 vs 2025), so you want to be confident in the product you’re receiving.
The two most common situations where we see dealers seeking a formal valuation is for a transaction or in estate and gift tax planning. In a transaction, you’re going to want an objective measure of what your store is worth so that both parties can at least agree on a starting point. The seller wants to maximize the value and the buyer wants to pay as little as possible, which may necessitate each party obtaining an independent valuation and using some composite of the two. In estate and gift tax planning, you’re typically trying to arrive at the lowest justifiable value in order to use as little of your lifetime exemption as possible. The IRS requires the valuation to be performed by a qualified, independent specialist, but those who work with auto dealers regularly will have a better understanding of the operations.
By using a qualified appraiser that is familiar with the industry, you can be more comfortable that they are capturing the types of adjustments that are commonplace to auto dealerships. For example, if using an income-based approach, some of the common adjustments we’d expect to see would be for fair market rent; related party fees or income; dealer/executive salary; inventory adjustments; etc. It isn’t necessarily wrong to pay a dealer through w2 wages vs management fees and/or distributions, but those will all appear in different areas of the financial statements and have different impacts on the bottom line. Such impacts need to be identified and quantified before arriving at a normalized earnings figure that could be used with blue sky multiples or similar approaches.
There may also be balance sheet items, or off-balance sheet items, that typically need to be adjusted for. Are there any unusual items in inventory or dealer vehicles? Is there a reserve for chargebacks or “lifetime oil changes”? We don’t typically see these items recorded, but they are potentially significant liabilities that can have a major impact on the valuation. A specialist experienced in auto dealerships will know to look for these, and other similar items, to make sure they’re addressed.
Additionally, other factors, like the franchise, will have a significant impact. Aside from the underlying product being sold, there are other key aspects in dealing with any particular OEM. Facility requirements, inventory allocation, investment in EV or other programs, and overall difficulty in dealing with OEM can all impact what someone is willing to pay. Purchasing a store becomes a very different deal when you need to put $10 million into a new or updated facility or worry that the factory may veto a future sale.
Every industry has its own nuances, and the auto dealer industry is no exception. Although stores may seem interchangeable to the outside observer, those involved in the industry are familiar with the complex operations and circumstances that make each dealership different. Whether you’re trying to expand your footprint, liquidate, or transfer to the next generation, these are all significant life events that should be carefully considered. When a valuation is necessary, you should consult your advisors to ensure they’re helping you to identify an appropriate and knowledgeable specialist.
Matthew Marcoullier is a director at ARB. He focuses primarily on financial accounting and consulting services for auto dealerships, commercial businesses, and closely-held businesses. Matt previously served as a Senior Auditor for the State of Maine Department of Audit.
