33% Return Urged in Dealership's Sale

What is the average small-town dealership worth these days? As auto makers seek to reduce their franchise ranks, senior dealer accountant Carl Woodward has developed several valuation formulas for dealers selling 240 new and 240 used retail units a year and averaging gross profits of $1,800 per vehicle. Woodward looks at retention by selling dealers of a 33% return as equitable. Under this model,

What is the average small-town dealership worth these days?

As auto makers seek to reduce their franchise ranks, senior dealer accountant Carl Woodward has developed several valuation formulas for dealers selling 240 new and 240 used retail units a year and averaging gross profits of $1,800 per vehicle.

Woodward looks at retention by selling dealers of a 33% return as equitable. Under this model, the selling dealer shows total current gross profit of $1,214,000.

The breakdown for this profit yield is $432,000 annual gross profit on new units (including finance and insurance), $432,000 used-vehicle operations (including F&I) and $350,000 parts and service.

Assuming there is but a single buyer, who is adding the selling store to an existing facility, Woodward calculates that it is reasonable to project annual retained gross profit — or “Blue Sky” — of $720,000.

“The buyer should retain 33%, or $240,000, of the expected annual retained gross profit as additional net profit before income taxes a year,” says Woodward.

“I believe most dealers would find a 33% return on their investment to be a good deal.”

Woodward notes that some money-losing dealerships could be worth minimal Blue Sky, especially if the buyer wants to use the seller's facility.

Woodward also presents a scenario wherein four same-brand surrounding dealers buy out a store in their midst. Each of the four should be expected to pay 20% of the seller's annual gross profit for the target to close, he says.

“This allows the four adjacent dealers as a group to keep 80% of the selling dealer's gross profit and increase their net profits,” explains Woodward.

“Selling dealers in such a buyout,” he adds, “may obtain more for Blue Sky than if a store was sold to only a single buyer.”

Woodward, whose Bloomington, IL-based accounting firm is a member of the AutoCPA Group, advises dealership buyers to first determine anticipated gross and net profit amounts which, in turn, will guide them in setting a price for Blue Sky.

TAGS: Dealers Retail
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