3 Things that Help (or Hurt) the Valuation of Your Dealership
1: Less tax today = less goodwill $$ tomorrow
Most owner operators of privately held companies do what they can to mitigate taxes. Nothing wrong or illegal in that. But when you push the edge of the envelope year after year, you are reaping immediate rewards (lower taxes & more immediate income) while sacrificing long-term value (a higher sales price) because your historical tax returns consistently show lower earnings.
Yes, you can detail “add backs” to increase the historical earnings stream, but most buyers and investors rely on taxable income to do their own analysis and projections. Most privately owned dealerships sell at a goodwill multiple of earnings + FF&E + inventory. If the multiple is three, every dollar of earnings is worth three dollars in goodwill.
If you are thinking of selling in the next 5 years, you really should “do the math” to figure out how much those tax deductions are really worth. You can do it yourself in Excel or ask for help from a tax advisor.
2: Systems = more autonomy = more value
Implemented and proven systems in place mean the Dealer Principal does not have to be present every hour the dealership is open. OEMs have stiff requirements. There is a very small pool of buyers who have the net worth and experience demanded by the OEM that also want to work 60+ hours a week. If you have a well-run dealership that an investor can rely on to be turn-key, you have a much better chance of selling your dealership with a reasonable amount of goodwill.
Yes, there are some investors out there looking for underperforming dealerships. You know who those investors are? The ones that have strong processes in place, have built and trained their teams around them, and are now looking for more dealerships in which to implement their best practices. Their attention to the daily “small things” made them enough money to buy more dealerships.
3: Good records
I wish I had kept track over the years of the correlation between well-kept records and goodwill value. I do not think reliable financial and operational reports cause an effectively run dealership, I think reliable reports are evidence of a Dealer Principal that is in control: monitoring daily operations, taking action to run an efficient and profitable dealership and producing clean records to prove it.
Written by Laura Lemco for Lightspeed DMS blog