Owners of automobile dealerships have seen an increase in the value of their business over the last five years. This has been driven by many factors, including the following:
a) Privately-owned dealerships
The majority of automobile dealerships are privately owned, and typically a family business. That is what has defined the automotive dealership industry since automobiles began being sold. Today automotive dealerships remain one of the most highly fragmented industries in North America with 95% of dealerships being privately owned. Many of these have been passed on through three or four generations. This is unusual in business as most industries cannot support this many intergenerational transfers. In many cases, the automobile dealership has defined the owner’s family for many years and has become their most important asset. This is one of the main reasons why there are typically more buyers than sellers in the industry. Conglomerates and strategic buyer groups are driving dealership values skyward in an effort to persuade families to sell. The values are to a point where many families that own automobile franchises are finding it hard to turn down such lucrative offers.
b) Current owners buying other dealerships
Current owners of automobile dealerships are finding that one of the best ways to increase their market share is to purchase another dealership under the same franchise. They are choosing to reinvest into a familiar investment, being a business they already know how to run. This has resulted in bringing more strategic buyers to the table. Strategic buyers will generally pay more for the investment, as there will likely be economies of scale in owning multiple automobile franchises under the same manufacturer.
c) Demand for automobiles
The economic downturn had many negative effects and the automobile industry was one of the hardest hit. New vehicle sales dropped and the average age of a vehicle on the road increased. There were many casualties in terms of dealerships unable to weather the storm. For those that survived, they were rewarded with a significant bounce back in new vehicle sale volumes. The pent up demand for new vehicles resulted in the last five years being some of the best years automobile dealerships have enjoyed in terms of both units sold and dealership profitability. The industry is uncertain if this increase in units sold and profitability is simply the new norm for earnings going forward or if this is a temporary increase driven by pent up demand. Buyers may be relying on recent earnings trends to support higher dealership valuations when making a purchase decision.
How is value determined for an automobile dealership?
There are many ways to determine the value of a business, but the traditional method employed in valuing automobile franchises is by combining the “Blue Sky” (a multiple of adjusted pre-tax earnings) and the value of the other tangible assets purchased.
Blue Sky multiples are published quarterly by Kerrigan Advisors and Haig Partners, being two of the larger automobile dealership brokers in the U.S. Their publications provide updates on recent transactions in the industry and the multiples paid to provide an indication of the value of a franchise. The “Blue Sky Report™” by Kerrigan Advisors and “The Haig Report®” by Haig Partners currently suggest the range of multiples for automobile dealerships reflected in the graphs included below.
Article written by: Colin Cook, CPA, CA, CBV