Typically, when valuing an automobile dealership, all three approaches to valuation, the Income Approach, the Market Approach and the Asset-Based Approach are considered. In the Income Approach, earnings are estimated using projections or historical earnings. An appropriate discount rate is used to value the estimated future cash flow. The discount rate should be applicable to the industry and adjusted for any company-specific risk factors.
Market Approach - Valuations
The Market Approach should also be given consideration; however, often it is difficult to find truly comparable transactions. Finding relevant transactions is difficult since the number of reported transactions is limited. Location, size and brands play a major role in determining the transaction price paid; and it is difficult to find a statistically relevant sample size that is comparable in size and brands offered. However, there are publicly traded automobile dealerships that can be used for the Guideline Method of determining value. Based on key statistics from finance.yahoo.com for six publicly traded automobile dealerships on October 16, 2014, the median enterprise value/earnings before interest, taxes, depreciation and amortization (EBITDA) was 12.2. However, this multiple cannot be directly applied to the EBITDA of a privately held company since subjective adjustments would need to be made for differences such as size, access to capital markets and geographic concentration. At June 30, 2014, the publicly traded automobile dealerships revenue ranged from $4.4 billion to $18.1 billion. The publicly traded companies have access to public markets to facilitate growth; while a private company does not. A private company might operate in only one geographic location, while publicly traded companies operate in several states. Accordingly, the private company is more likely to be effected by a slowdown in one or more of the primary markets in which it operates.
The last approach to consider is the Asset-Based Approach. Given the large amount of inventory held at an automobile dealership, this approach is usually considered. Under the Asset-Based Approach, all of the assets and liabilities are adjusted to reflect fair market value. Typically an adjustment is made to value Blue Sky, which represents the value of the business over and above the value of its tangible assets. There are numerous qualitative factors that influence the amount estimated to represent Blue Sky, including, but not limited to, the condition of the automobile industry as well as the overall economy, viability of the dealer locations, competition, financial performance, depth of management, workforce in place and service departments.
All three approaches require the valuer to implement judgment in determining the value of an automobile dealership. Call Christy Samek, Valuation and Advisory Services Manager at Schneider Downs, at 412-697-5415, if you have a need for a valuation of your automobile dealership.
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