Pub. 3 2021 Issue 1

Why Valuing your Dealership by Multiples Leaves Money on the table N ancy Phillips Associates has been selling auto dealerships throughout New England and New York State for 30 years. Documenting and studying dealership transactions has proven to be a reliable way to anticipate and project future dealership values. Every month we receive numerous calls from dealers asking what the current multiples are for their franchise. The flaw with this method is that a dealership losing money may in fact be worth the same as a profitable one. We have found that value is often more accurately inter- preted when Business Value (Goodwill) is defined as a percentage of total dealership revenues. This method also requires careful analysis of dealership financial statements, recasting of true net profit and concise adjustments for rebranding requirements in order to insure that the deal- ership’s unique potential is clearly understood. The three key elements to dealership value are Franchise, Market Area and Facility. Profitability may be an enhancement, however loss or under average profitability should not be a deterrent. Few Buyers Radically Overpay While there have been exceptional increases in the amount of Business Value paid for certain franchises, overall fluctuations have been moderate. They are nei- ther as low as you might have expected during bad years, nor do they skyrocket in better years. That’s because buyers in difficult markets pay based on better futures and those buying at the top of a market do so with an eye toward the next downturn. There are very few buyers, regardless of size, who will substantially overpay without a quantifiable return. The Market Today Yes, the market is strong today, but nothing lasts forever and the current surge may be short lived. Despite the ongoing pandemic, dealers did very well in the second half of 2020. Profits were up, expenses were down, and more dealerships than normal changed hands. Yet, you will see from the chart 1 depicting historical franchise values that the increase from 2018 to 2019 was moderate and was higher than expected in 2020. We believe this is tied to the trend of bigger buyers with more available funds, and a serious concern for the vol- atility of their non-automotive investments. Quite simply, the current state of our economy and the world at large contributed to the thinking that investing in auto dealer- ships is safer than other investment opportunities during this volatile time. Information in the chart above taken from Dealership transactions com- pleted by Nancy Phillips Associates (NPA) and affiliated Sellers. Data is based on original values prior to any reallocation of purchase price. Transactions may include Pending Transactions approved by Franchisor. THREE DECADES OF DEALERSHIP VALUES IN GREATER NEW ENGLAND NANCY PHILLIPS AND CARRIE PHILLIPS FORBES Chart 1 NHADA BRONZE PARTNER, NANCY PHILLIPS ASSOCIATES, INC. D R I V E 20