Buy-Sell Q&A: How are dealerships being valued today?

With record numbers of dealerships exchanging hands this year and store valuations and profits reaching unprecedented highs, opportunities abound for both buyers and sellers. But how long might this exuberant market last? What can sellers do to maximize valuations? What steps must dealers take to maintain high valuations for the long term? Alan Haig, the founder and  president of Haig Partners, a leading buy-sell consultant, offers some thoughtful insights on and context for these issues – and more.
 

Q:  How  are  dealership  valuations faring  in  the  current  economic  climate? Is the industry still at a high point?                                                                           

A: Alan Haig, Haig Partners: Dealership valuations have reached all-time highs, just like dealership profits. In our third-quarter  2021  Haig  Report,  we  estimate  the  average  blue-sky value for dealerships is $10.9 million, up 63% since 2019.The  “Chipdemic”  as  we  call  it,  will continue for some time, and dealers are also finding other ways to boost profits. We expect these high prices will stay with us well into 2022 and beyond. There  are  longer-term  risks, however. If the OEMs revert to over- producing,  interest  rates  go  up,  and new entrants like Tesla, Carvana and Vroom  take  significant  market  share from traditional dealerships, then we will likely see values fall.

Q: Is this a good time to buy or sell a dealership – or both?

A: A record number of dealerships will trade hands in 2022, so I would say that conditions are excellent for sellers and  buyers. Sellers are getting record high prices and can exit the industry with enough money to ensure their families’ financial security for generations to come. From the buyers’ point of view, they are seeing more quality acquisition opportunities than at any time in my career. And while prices are high, so are profits, so their return on investment is still strong. Finally, acquisitions can help buyers to establish the scale they need to thrive over the long term.

Q: What  are  the  main  factors  that currently  are  influencing  dealership valuations?

A: A buyer’s perception of future cash flows  largely  determines  what  it  will pay for a dealership. How much profit will  the  dealership  make  in  the  next two,  five  or  ten  years? These  projections  can  be  particularly challenging today. Buyers are having to make calculated guesses on how much longer the Chipdemic will last. Also, what is the  cost  of  the  real  estate  and  what investments  will  be  needed  to  make it compliant with OEM requirements COVID is making these calculations difficult as well due to higher costs for labor and materials.
 

Q: What steps can sell-minded dealers take to ensure they’re  maximizing  their  store valuations?

A: High profit is a seller’s best friend. Every extra dollar of profit gets a seller three to ten times more in purchase price.  Dealers  should  also  pay  close attention to their real estate value and obtain one or more real estate appraisals to make sure they are getting the fair  value.  And  at  the  risk  of  sounding  self-serving,  an  advisor  like  Haig Partners also can add significant value to a seller. Our team can clearly explain the positive attributes of a dealership to  buyers,  how  much  money  it  has been making after add-backs and show opportunities to improve profits in the future. And perhaps most importantly, we run a confidential sales process among the most qualified buyers in order to get them to  compete and pay the highest possible price. The team at Haig Partners has extensive experience in helping dealers to maximize the value of their lives’ work.

Q: How are dealership valuations calculated and who should make that calculation?

A:  Dealers  know  that  the  record  profits  we’re  currently enjoying will not last forever, but they do expect extreme profits to last well into 2022 and remain elevated in 2023 and 2024. While every deal is different, we see many buyers basing their offers upon an average of pre- and post-Chipdemic earnings. This method takes the average of adjusted profits  for  2018,  2019  and 2021,  then applies a blue-sky multiple to calculate the amount of blue sky a buyer will pay for a dealership. This method generates a blue-sky value of $10.9 million for an average  dealership  (see  below),  up 63% from 2019, before the pandemic. We have also seen buyers pay off just current earnings for acquisitions  that  they  see  as  strategic  and  transforming. Since we are sometimes seeing wide ranges for dealership valuations, it’s critical for sellers to run a competitive sales process in order to find the very best buyer.

Q: What do you think the value of stores will be in five to 10 years?

A: We believe values for most dealerships will be strong for the foreseeable future. Earnings should remain high and buyers still have plenty of capital and desire to grow.  But there are some longer-term risks that could hurt the value of some dealerships, as we mentioned before. Consumers are  increasingly  comfortable  buying  autos  sight  unseen. This means companies that sell direct to consumers could take  significant  market  share.   To  compete,  dealers  will need to offer consumers a shopping experience similar to what they enjoy online: huge inventories and a frictionless buyer experience. Dealers will thrive if  they  own  many  franchises, offer thousands of vehicles and embrace digital retailing, in addition to being consumer  friendly  in  their  physical dealerships.   The  get-big-or-get-out strategy can create massive wealth for  those  dealers  that  embrace  it, but it could also erode value for dealers who do not evolve.