How has COVID affected Dealership Valuations?
Several people have asked how business valuations differ before and after COVID. I recently co-presented with Kelly McCann, Esq. of Burnside Law Group to the Oregon Society of CPAs on the topic to over 50 attendees. It is an important question!
First of all, a valuation is based on a projection of future earnings. Historical earnings are an important part of predicting future performance, but there are many other pieces. US, state and local economies affect business value, as does the industry of a business. COVID has made it particularly complex because it has affected regions and industries in different ways. Some businesses got a boost in revenue, some were devastated. Some business owners were able to successfully pivot, while others spent money trying to do so, only to fall harder.
How do we perform any sort of appraisals with so many unknowns? We do the best we can with what we have to work with – the same as all business owners have been doing this year. We can only work with the information available, not with what we wish we had. We work hard to gather evidence and substantiation to “paint a picture” of each individual business’ prospects.
Within the dealership that we are appraising, we start with historical financials. Most management projections, if they exist, could use some help, so we work together with the Dealer Principal and staff to build reasonable projections. I also ask Dealer Principals and managers for any reports that they use themselves in their day-to-day operations and planning. How do they know how much inventory to order? What do they use to plan staffing levels? In each appraisal, I dig in to learn exactly what is important to them and how they track it. What drives sales and customer satisfaction? How can we compare what the business is doing now to a year ago and the last 5 years? It usually takes several rounds of questions and discussions. Digging deep into each individual dealership is the key to understanding how they operate and how to project what will happen in their future.
There are several industry resources available such as the National Auto Dealers Association, Motorcycle Industry Council and National Independent Auto Dealers Association. We can compare how a dealership had done relative to its industry in the past so that we can make an educated guess on how it will perform relative to the industry projections.
There is a plethora of economic information available from government agencies. A small sampling includes:
Treasury Rates: https://www.treasury.gov/
Federal Reserve Economic Data: https://fred.stlouisfed.org/
Bureau of Economic Analysis: https://www.bea.gov/
Your state and county will also have resources for economic information.
It takes time-consuming work to find, sort and evaluate data to develop good projections and it is even more difficult and important since COVID. Once we have developed projections, we still have more research to conduct. Appraisals require applying a discount rate or a capitalization rate to projected earnings to bring the value of the future benefit stream to a distinct value in the present. Through more research and analysis, we determine what interest rates market participants are demanding to take on the types of risks that our subject dealership faces.
Once we finally have substantiated projected benefit streams and the interest rate the market requires to invest in companies with similar risk profiles, we discount the future benefits to derive the present value of the dealership. We then write a clear substantiated report so that the users understand how we arrived at this concluded value. Much like your algebra teacher said “show your work!”, we clearly demonstrate how we developed the income projections and what risks we analyzed to build the discount or capitalization rate.
Yes, it is complicated, but like any complex business procedure, we break the process down to steps. We develop an opinion of value with in-depth research specific to the particulars of each company. Right now, COVID has a major impact on all markets and how it affects each individual business presents several more pieces of the puzzle. By digging in deeper than ever, we can still determine reasonable conclusions of value.
If you are looking for information specific to your dealership, please feel free to contact me. I believe appraisals and economic information are vital pieces in building a realistic strategic plan. If you are looking to sell, there is still an active market for dealerships, despite the uncertainties we all face. If you want to talk about your specific situation, contact us for a free, confidential consultation. We are glad to help where we can or point you in the right direction! Laura Lemco, MBA, Certified Valuation Analyst (303) 994-6919