Typically, when valuing a business, three approaches to valuation are considered: the income approach, the market approach and the asset-based approach. These three approaches are relevant to valuing automobile dealerships; however, for automobile dealerships, transaction data is available specific to goodwill. Thus, the asset-based approach can become a “hybrid” asset-based/market approach. The hybrid asset-based/market approach is relevant due to the fact that automobile dealerships are typically sold for the value of the tangible assets plus goodwill.
For an automobile dealership, goodwill is known as “blue sky”. Transaction data is available based on a multiple of pre-tax earnings used to determine blue sky for a particular brand of vehicle. For example, Honda might range from a pre-tax multiple of 5.0 - 6.5. However, a specific dealership can have a blue sky multiple below or above this range, depending on company-specific factors. Below are some factors that need to be considered when determining blue sky value:
- The growth potential of a specific dealership is considered in determining the multiple. In general, when a dealership is expected to experience high growth, the multiple could be higher. However, this factor can also depend upon current economic conditions.
- Location is another factor. A dealership that is on a back road or is land-locked could have a reduced multiple.
- Manufacturer requirements can also reduce the multiple. If there are significant improvements that need to be made in order to be image-compliant, a buyer will want a reduction to the multiple, since the buyer will need to make additional investments.
- Rent expense is also considered. A building with high rent expense for the market could reduce the multiple, and low rent for the market could increase the multiple.
- Demand for a specific brand in a given location is also considered. If a Lexus dealership is located in a low-income neighborhood, then the multiple for that dealership might be well below the typical range, since there is likely no market for that luxury brand in its current location.
- Another factor that impacts the blue sky multiple is the amount of competition in that location.
- Existing workforce is another factor. If a dealership lacks sufficient service technicians, the blue sky multiple could be impacted.
There are multiple considerations for each factor and other factors that might need to be addressed depending on the specific dealership. Also, certain factors may cancel each other out; for example, if rent is high but demand for that brand in that location is high, then the multiple could be average, since those factors might cancel each other out. The valuation process requires judgement in determining the proper multiple to apply to a specific dealership.
Christy Samek specializes in valuing automobile dealerships for estate and gift tax planning purposes. Valuing a business requires significant judgement in determining the correct approach and assumptions. For assistance in determining the value of your dealership, please contact Christy Samek at 412-697-5415.