Blue sky is high as dealers seek good stores

Prices of desirable new-car dealerships are at a two-year high, driven by dealers' robust profits.

Nissan, Infiniti and Cadillac, which have well-regarded new products, have the fastest rising valuations. They are reaching levels enjoyed by Honda, Toyota and the top luxury lines.

Cadillac values have grown by 100 percent or more, says Joe Aboyoun, a lawyer in Fairfield, N.J., who specializes in dealership sales and purchases.

"If you're going to talk about one franchise on the domestic side that has really made a move, it's Cadillac," Aboyoun says. "It went from almost oblivion to being a real franchise of demand."

Valuations probably won't return to the crazy levels created in the late 1990s when public dealership groups went on a buying frenzy, say experts in dealership sales. But economic recovery and available cash have put more buyers in the market, generally pushing blue sky past the levels seen two years ago.

Blue sky is the value of a dealership beyond its tangible assets. Blue sky generally includes store location, franchise reputation, customer base and reputation. It is expressed as a multiple of a store's pretax earnings.

Sheldon Sandler, founder of Bel Air Partners, a Princeton, N.J., investment firm that helps dealers sell their stores, says he has seen blue sky rise by 20 percent in some cases during the past couple of years. "There's a huge demand for good dealerships, and there's very little supply," he says.

But not all franchises are equal, and valuation growth varies according to demand for the brand.

Honda and Toyota franchises remain at the top of buyers' wish lists, with blue sky of four to five times pretax earnings, experts say. In 2002, the average dealer's pretax net profit was 1.9 percent of sales, according to the National Automobile Dealers Association. Data for 2003 are not available.

Luxury brands such as Lexus, Mercedes and BMW demand about five times pretax earnings. Big 3 domestic brands, Korean brands and the second-tier Japanese franchises are around two to four times pretax earnings. Valuations for most domestic brands have grown little, experts say.

Active buyers range from owners of single-line stores who want to expand to the big public retail companies. Sellers can be owners ready to retire or those being required by the manufacturer to invest a large amount of money in store renovation.

Many dealers are using the profits they've gleaned from the incentive-driven sales of the past two years to bankroll new dealership purchases.

The market also has gained stability, says Walter Czarnecki, Penske Corp. executive vice president who has worked on several acquisitions for UnitedAuto Group, a dealership group based in Bloomfield Hills, Mich. Roger Penske is CEO of UnitedAuto Group.

The frenzy -- and the inflated premiums that came with it -- has died down, but buyers still are willing to pay an additional premium if a dealership fits their overall strategy.

During the buying spree by public groups, blue sky typically was four to six times pretax earnings.