6 KEY CONSIDERATIONS Although the buy/sell market is starting to show signs of slowing, many dealers are still flush with cash accumulated over the past several years and are still looking to grow by adding additional franchises. Dealer groups, both large and small, are generally in a strong cash position, which can lead to considerable purchase opportunities. WHAT ARE SOME KEY CONSIDERATIONS WHEN A BUYER TARGETS A DEALERSHIP FOR PURCHASE? • Facilities — Whether or not a dealership’s facilities are factory-compliant influences both the attractiveness of the franchise and the value of the franchise. If a dealership is not factory compliant, then a normalizing adjustment should be made to the earnings. This will reduce the historical earnings of the dealership against which a multiple or return on investment is applied, reducing the goodwill the buyer is willing to pay. • Goodwill/“Blue Sky” — Obvious factors affecting a dealership’s intangible value (goodwill/“blue sky”) are location, market size, competition and the type of franchises you already own, in addition to understanding the intrinsic value of the specific target franchise. Large discrepancies in valuation multiples exist among different franchises. Whether you are considering a luxury franchise, import franchise or domestic franchise, each will have a significant range of multiples when considering franchise value. It is also important to understand the current dealership’s reputation within its local market. Service absorption is another important component of a dealer’s profitability, so pay particular attention to an analysis of a dealer’s fixed operations and units in operation. An underperforming dealer may have more upside and may be worth more to a purchaser than an over-performing dealership in the same market. An add-point may also be worth more to an acquiring dealer than one who is entering a new market. • Inventory Valuation — How to define the value of the inventory you are buying is included in the letter of intent and the buy/sell agreement. New vehicle inventory is purchased at a price net of factory incentives already received by the selling dealer. The purchase price generally does not include hold back, floorplan or advertising assistance. The seller generally has already collected or will collect these factory incentives, so the buyer would not pay for them again. It is important to understand what factory incentives a manufacturer has and what should be excluded from the purchase price. Used vehicle inventory is usually purchased at a negotiated price adjusted for any modifications made to the vehicle by the selling dealer. The value paid for OEM parts inventory is usually an amount for returnable undamaged parts. The buyer and seller generally negotiate the price paid for non‑OEM parts. • Appraisal of Assets — Aside from goodwill and inventory, what other business assets are you acquiring? It is important to take an inventory and value all fixed assets. As a buyer, you should not buy assets at the value on the factory financial statement. Often the value presented here is due to a previous purchase price allocation. Who knows if the value is accurate and representative of what you are receiving? Sellers should take note of their previous capitalization policies. Did you expense certain items? How did you account for special tools? You should ask these questions prior to putting a value on these assets. While considering the assets you are selling, you should also consider various contracts you want a potential buyer to inherit. Accumulate these contracts and make sure they can be assigned to another company. • Quality of Management — An often-overlooked aspect of many deals is the importance of assessing a target dealership’s existing workforce. If the buyer is a local dealer group, they are more likely to have existing management team personnel and/or employees they can transfer to the new dealership. However, if the buyer is an outside dealer group expanding into a new market, they are likely to be more reliant on the target dealership’s current employee base, especially its management team. Most buyers believe they can improve on the profitability of FOR BUYING OR SELLING A DEALERSHIP BY, RANDALL & BENNETT AN NHADA SILVER PARTNER 23
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