Article

Buying or Selling a Dealership: When to Call in the Experts

December 2008, Auto Dealer Today - WebXclusive

by John Carroll - Also by this author

For anyone trying to sell a dealership, nothing beats a combination of financial health and clear potential for new growth. But with the economy in a swoon, demonstrating either of those traits these days is no easy task.

“The best time to sell a dealership conceptually is when your gross profits and sales are still growing,” said Brady Schmidt, president of National Business Brokers. “The most difficult time to sell a dealership is when you have a decline in revenue, gross profits and profits, and that trend is still happening. If a store has gone through a decline and stabilized and picked back up, that’s a good time to sell.”

Many experts agree that times are tough for a large number of dealers, making this more of a buyers’ market than a sellers’ market, and many dealers just don’t have the stomach to weather this kind of an automotive recession. “A guy gets up in years,” said Pat McNulty, who runs Owensboro, Kentucky-based McNulty and Associates, “he just doesn’t want to face this.”

But there’s plenty to think about before deciding to sell. Brokers suggest you take a close look at your dealership before you make up your mind. Keep in mind that blue sky values have changed, and consider whether you can make a deal on your own or if you need a broker (along with a lineup of specialists to back you up). And keep in mind the ever-changing variables that go into valuing your business.

Drop the Calculator
If you think you can take a few top- and bottom-line numbers and use a calculator to come up with a simple estimate of what your dealership is worth, think again, say the experts. There’s as much art as science in making the right assessment of value.

“With a valuation, there are so many variables,” said Greg Gilmore, president of The Apex Group, a non-brokerage firm that develops buy-sell and open point packages for clients. “It’s not as easy as pulling out a financial statement and applying a multiple. You really need to take a look at the operations. A financial statement can help sort out the status of expenses, used car trends, parts and services, sales, and so on. After that, you can build a better picture of the true value of a dealership.”

“There’s no perfect answer. But looking at profitability and potential is a start,” said Tim Lamb, president of the Tim Lamb Group. “Any buyer wants to see what that business is making and how quickly they can recover their investment. And there are so many other things that go into it: a good location, facilities, great employees that have been there for a long time, a good economy, the dealer network.”

“If you take any franchise over a five-year cycle, the value goes up and down,” offered McNulty. “When you’re evaluating it, you have to understand where they are in the cycle, and you also have to understand what their future is. Hidden assets can indicate where to make a return. Many of my clients would rather buy a store that was doing average and build it up.”

“We have a valuation service we’ve provided for several years that’s reliant on several factors,” said Adam Logemann, director of mergers and acquisitions for Trinity Limited. “Some static, fixed assets can be appraised. Parts and real estate really don’t have much flux. The question is the goodwill. What’s the propensity for value growth? What kind of future does the manufacturer have?”

Blue Sky Gets a Little Gray
“I’ve read that there’s no blue sky in the business anymore,” said Lamb, “but it’s just not true. I’ll take a domestic store, say one that makes $3 million year after year after year, and that’s worth some money. It’s certainly worth some blue sky.”

There was considerable agreement among brokers with Lamb’s comment. Blue sky these days isn’t what it was five years ago, when dealerships were hot commodities. But the rumors of its demise, as they say, have been greatly exaggerated.

“I don’t think it’s gone,” said Logemann. “When someone comes in to buy a dealership after 15 years, they’re buying a hard asset, but they’re not truly starting over. There’s a fixed and variable customer base. They’ve built a reputation, and sellers are entitled to a level of blue sky based on the fact that they’re selling a viable going concern.”

But there’s no single approach to determining blue sky values, said Schmidt. “There are different degrees based on different brands and different regions of the country,” he noted. “A Toyota store in Dallas is going to be worth more than a Chevy store in a mining town in Pennsylvania.”

“Sales volumes have been declining for certain manufacturers, but not for everybody,” said Gilmore. “Ultimately it will depend on the size of the market and what kind of franchise it is. Sellers will want to maximize it, but today, real estate is playing a bigger role. I see deals with minimal blue sky, but I also see more of the price going into real estate.”

Do You Need a Broker?
Ask a broker a question like this and you could expect to hear some predictable responses, but brokers also know they’re dealing with a tough crowd. Most dealers won’t bring in a broker unless they know he will earn his slice of the deal. And most brokers aren’t at all shy about making a case for themselves.

“There’s a very, very strong case for bringing in a broker,” said Schmidt, whose group has sold hundreds of dealerships over the years. And the best case is “creating the right competitive environment to maximize value in the sale.”

You don’t have to have a broker, said McNulty, but in most cases, dealers learn firsthand that they need one. “The clients I work with, the majority have already tried it on their own,” he explained. “There are so many pitfalls out there, it’s almost limitless.”

Without a broker, “you’re going to waste a lot of time and money bringing in an unqualified buyer,” said Gilmore. “A brokerage firm should provide qualified buyers. If you’re selling to the guy across the street, one of your buddies, that’s a different story.”

“It seems like more and more guys are using [brokers],” noted Lamb. “I think guys are looking for someone to do the dirty work, so to speak, because a lot of guys get emotional. Brokers take the emotion out of it. They have the expertise and understand the market.”

“When you’re out there every day and built profiles of what buyers are looking for, it can be quicker than trying to do it yourself,” said Logemann.

Additionally, there are other pitfalls that brokers are trained to spot—and steer around.

“The biggest pitfall is going through the whole process with a buyer who will not be qualified,” said Gilmore. “A buyer could have a hard time getting floor-planned. Banks out there are not that excited about flooring certain manufacturers right now. That’s an issue. Of course, the floor plan doesn’t matter if the manufacturer doesn’t approve.

“Unless you have a buyer in mind, I would recommend engaging a broker,” added Gilmore, who was quick to note that he’s not a broker. “A good broker should provide confidentiality. You don’t want it to get out there that the dealership is for sale on the open market.” Once the word gets out to staff and the general public, it’s harder to operate, and that hurts the value of what you’re trying to sell.

Keeping it Confidential
Matchmaking buyers and sellers in absolute confidence is no easy business. And that’s how brokers really earn their keep. Any good broker should have a lengthy list of contacts to call once a dealership comes on the market. Finding the right fit quickly is what brokers are all about.

“I worked for GM for 22 years,” said Lamb, “and I have guys who were dealers for years and years. The best way to sell is through the network you’ve built up over time. We just know who the buyers are.” Some dealers are always looking to acquire more, he added, telling him to call when someone turns up that fits the right profile.

“We’ve been doing it for 20 years,” said McNulty. “We have a database of 800, 900 buyers that we stay in close contact with. There is a match out there. And we spend as much of our resources staying in contact with buyers and trying to understand what they want, so when we get something, we can get a match to what they’re looking for.”

“The worst thing is for a broker to take your deal and throw it out to the world,” agreed Logemann. “There’s a need for respect and confidentiality. [Dealers] have a business to run, and there are potentially devastating results to sellers when word gets out that their stores are for sale. The auto industry is notorious for having a powerful rumor mill.”

Creating a Team
One thing the experts couldn’t agree on is the right time for bringing an attorney, an accountant and any necessary consultants in on a deal. “A good automobile attorney should be employed at the very beginning,” asserted Gilmore. “I would bring a CPA in for the due diligence process. A consultant will help make sure that working capital guides are set correctly. Manufacturers like to throw a lot at you. And the longer you sit on it, the less likely it is that the deal will close.”

“Some guys call attorneys first to find the right broker to handle a deal,” said Lamb. “And some guys get their attorney involved even before brokers, searching for the right person to represent their client.”

“There’s planning that really should happen well in advance of selling the store,” said Schmidt. “If you’re looking at selling in the next couple of years, start a conversation with a broker, an attorney, and an accountant. There are a lot of things that can be done to structure a deal, to make sure you’re going to maximize value. Have your tax returns reviewed and make sure you’re not taking out as many discretionary expenses. Make sure those profits stay in the dealerships. That can equate to hundreds of thousands of dollars in goodwill. Have the proper corporate structure. Make sure there are no environmental concerns. Know what your hard assets are worth. Appraise fixed assets.”

Others counsel against an early call. “I think an attorney needs to be involved at the point binding agreements are created,” said Logemann, “when the seller is at the point of accepting an offer.”

“Attorneys do an outstanding job,” added McNulty. “CPAs do an outstanding job, for what they do. However, you’re dealing with car dealers who are not tuned into lawyers or accountants when you’re talking about buying and selling. You need an attorney, you need an accountant, but if you put them in too early, you’ll reduce the value.”

But don’t wait too long. “The automobile business requires a great deal of focus and attention,” noted McNulty. “When a dealer starts thinking of retiring or selling, he should follow through with that thought until he comes to a conclusion. As long as the thought is in the back recesses of his mind, his business will go down, down, down. This business is too competitive.”

Vol 5, Issue 11

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