The great divide on VW store prices

Some buyers expect to acquire a Volkswagen store at a bargain-basement price. But sellers didn't get the memo.

"Buyers are misinformed," said buy-sell adviser Mark Johnson, president of MD Johnson Inc. in Seattle. "Sellers are hunkered down to see it through."

Despite VW's diesel-emissions scandal, many VW dealerships continue to make money in fixed operations and used-vehicle sales. Those dealers want to be paid a premium for their dealerships. If VW dealers do agree to sell at a cheap price, it's often because they want to keep the real estate, buy-sell advisers say.

In contrast, some buyers are hunting for a VW store in the hope the brand will rebound. They expect a discount for taking a risk.

The diesel emissions scandal erupted in September. Some 580,000 U.S. vehicles were equipped with "defeat devices" that allowed them to pass emissions tests despite exceeding federal pollution standards.

Many dealers worry about the financial impact the scandal will have on VW and the ding to its image. VW brand's new-vehicle U.S. sales through May slumped 13 percent in a market that rose 1.1 percent. In 2015, VW's sales slid 4.8 percent against a 5.7 percent industrywide gain.

Some buy-sell advisers say VW dealers who want to sell can expect to receive little, if any, blue sky. That's the intangible value of a dealership beyond its hard assets, and it can vary widely, based on a store's circumstances.

For example, Alan Haig, of Haig Partners in Fort Lauderdale, Fla., has VW's blue sky listed as a flat dollar amount -- not the traditional multiple of earnings -- because the brand is worth so little. Haig estimates it at $0 to $1.5 million per store.

But Johnson said VW dealerships that are making money should get four to five times earnings. "We're not discounting VW assets that are making good money," he said.

Johnson is negotiating "several" deals involving the sale of multistore groups that include VW stores. Although the VW stores make up a small part of each of the groups' overall revenues, the stores are profitable and command blue sky, he said.

"I don't see anyone in a big hurry to give their VW stores away," said Johnson. "The buyers think they can get it at a steal, though."

Steve Uiterwyk, a buy-sell adviser in Lakeland, Fla., works mostly in the Southeast. The impact of the emissions scandal has been less acute there simply because diesels traditionally have been a smaller portion of sales in the Southeast than in, say, California.

Still, some buyers tell him they do not want any VW stores, even for a cheap price.

"They don't want to assume the risk of VW going away," said Uiterwyk. "You need to be a buyer who at least has some comfort that it'll be there."

Uiterwyk is currently working with four dealers, all of whom have VW stores within their individual dealership groups for a total of 10 VW stores.

He has not done any deals involving those VW stores yet, and he does not expect to because even buyers who have confidence in VW are put off by sellers' price expectations.

The sellers feel justified because many of the VW stores Uiterwyk has looked into are making $2 million to $4 million in profits a year, he said. Dealers will not sell their VW store on the cheap unless they've really given up on the brand, he said.

"They're frozen because they're still making money and VW still has a huge worldwide presence, so unless you view VW going away from the U.S., like Suzuki did, it'll be hard for a seller to agree to sell for anything short of five or six times or more," Uiterwyk said.

But some dealers have other plans for the real estate their VW dealership sits on. In those cases, they will sell the store at a discount or even give it away free, said Uiterwyk and Haig.

Two dealers in the Northeast want to sell and earn some blue sky, Haig said, but they also want to keep the real estate. No buyers are biting. So now the sellers are willing to "give it away," charging only for the assets. If they don't find any takers, they'll give the franchise back to VW, Haig said.

He declined to name the sellers but said they recognize that land is scarce and costly. If their VW stores are not covering expenses, then "you can see a dealer saying, "My Mercedes-Benz business is doing great, and my VW is shrinking, so at some point I'm going to bump my VW out to handle my expanding Mercedes-Benz business,'" he said.

"It just shows the weakness of the Volkswagen franchise," Haig said. "VW, at least today, is way down at the bottom."

Even those dealers who refuse to sell cheap are worried, Uiterwyk said.

"They're concerned about the parked cars, stop-sale orders. Everyone has that right now, but VW has it on steroids," he said. "That affects the buy-sell market. If you have 30 cars on a stop-sale, how do you get a buyer to take those, and how do you price them? I don't know if you could."