How are Automobile Dealerships Valued?

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.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2022 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
How To Identify Supply Chain Vulnerabilities
Automotive Dealerships and the FTC Safeguards Rule Deadline: Is Your Information Security Program Compliant?
The World's Most Valuable Beer Brand (Alas, it’s Not Iron City)
Understanding the Value of Value Chains
Automobile BY Steven Barber
In the 2008, the Housing Market Bubble Went POP! Is the Used Vehicle Market Next?
Profitability Strategies Beyond Price Increases
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.