Do you need to determine the value of an auto dealership?
In U.S. autos, still the largest retail sector but that pile is getting smaller. According to IBIS World, the number of auto dealerships is expected to contract by 19%, to 17,582, this year vs. 2008.
New and used car dealerships are a significant part of the automotive retail and services industry in around the world.
Valuations are by their definition a moving marker, they are fluid in nature and depend on a whole host of factors like location, franchise or used, facility, market, etc. In general, a European franchise like Mercedes-Benz or Audi is more highly valued than earnings from a big three domestic dealership Ford, GM or Chrysler. Why is this? European brands tend to earn a more stable revenue stream.
Franchise. The value of a dollar of earnings is dramatically affected by the franchise that is generating those earnings. For example, $1 of earnings generated by either Mercedes-Benz or BMW is more highly valued than $1 of earnings generated from a Big-Three domestic dealership. The dealerships that represent these two German luxury brands generate a higher return on tangible assets and enjoy a more stable earnings stream than their American competitors.
The strongest franchises tend to be the luxury imports, provided the market is large enough and wealthy enough to support a decent level of volume. Such as Toyota and Honda.
Employees. A strong management team can be the difference between profit and loss. generates pretax profit, as a percentage of sales, equal to 2% or less. According to NADA he average dealership generates net profit of 2.2% before taxes as a percentage of total sales. If a dealership does $20 million in sales, you can estimate that the profit is roughly $440,000.
Costs don’t have to veer off course too badly before losses start. Competition among dealerships is intense.
Location. The attractiveness of a specific location and the costs associated with that location are an important part of the equation. Areas with expanding populations and strong demographics support higher valuations, as do dealerships with highway locations.
People buy assets based on what they think they can earn versus what the person who currently owns it earns.
Quality of the facility. Acquisitions and sales of dealerships are subject to factory approval. Buyers look at their total investment. If somebody is selling a car dealership and the facility is in disrepair when they sell it, the factory can require the dealer or buyer to invest, upgrade, and/or expand the facility. The more the dealer is required to invest in the real estate, the less overall value the car dealership has from the seller’s point of view.
The barriers to entry are low, resulting in a competitive, fragmented, and saturated market. Any one can open a used car dealership. One of the biggest barriers is related to zoning requirements, if they exist. New car dealerships, on the other hand, are subject to franchise agreements that limit the number of dealers in a given area.