By Rex A. Collins CPA, CVA
HBK Dealership Industry Group
Recently, as we were completing a valuation of a dealership that was to be sold, a large, national business broker contacted the dealer and offered to provide a competing valuation. Nothing wrong with a second opinion. The dealer agreed and the broker did its study and submitted its valuation. But instead of confirming our value, the broker’s study came in at $22 million dollars less, about 20 percent less. We reviewed our valuation and stood by our numbers. Then, capitalizing on our long history in the industry and our network of dealer relationships, we brought two buyers to the table. A couple of months later the deal closed within one percent of our valuation, netting the selling dealer $20 million more than the listing price submitted by the broker.
Why were the two valuations so different and what conclusions can be draw from the difference?
Dealerships are complex businesses with a wide range of factors that influence overall value. Getting value right requires a complete analysis of all the dealer’s assets and income sources, as well as consideration of a variety of internal and external economic factors. That is, an accurate valuation requires an intimate understanding of today’s dealership business, in particular:
- A glut of used agriculture equipment in the market has weakened values.
- Manufacturers believe the market will support only the strongest dealerships, and are pressuring dealers to get big, by sale or merger.
- Lower commodity prices resulting from increased production in recent years are driving down prices for agricultural equipment in the U.S. and worldwide.
- A strong fixed operations will help to support a higher value.
As such, we are witnessing unprecedented merger and acquisition activity.
Buyers and sellers both need to be aware of how transactions are being framed in today’s market, what kind of due diligence should be done, and how to avoid common pitfalls. Even a small mistake could cost big dollars.
A host of factors combine to determine a dealership’s value. The economic climate, local as well as national, impacts value. Value is also subject to the dealership’s marketability, which includes consideration of such things as location and competition. Buyer and seller will have to win approval of the manufacturer or franchisor, so value will be subject not only to the balance sheet but the dealer’s reputation and access to capital.
There are many other factors that are being used to determine value in negotiations these days. Consider the following:
- It’s not just how much but how the dealer generates revenue. A dealership is more valuable if it sells to a wide range of businesses as opposed to being dependent on a particular industry. So too, the dealership adds value by profiting from selling repairs and parts, finance, insurance and other products and services.
- Better brands bring better prices. A dealership’s value is enhanced if it owns the rights to sell a market-leading product or products.
- Inventory levels are driving dealership prices more today than they have for several decades, in particular, used equipment on the ground.
- Location, location, location. Value is enhanced by being in the right location and in having adequate operating facilities.
Several factors can work to decrease the value of a dealership:
- If your business is dominated by one or a few customers or a single industry, that increases risk and risk decreases value.
- If your company’s financial performance compares unfavorably to “best in class” dealers in your area, your business will be considered worth less than “best in class.”
- If it’s all about you, that is, the customer relationships are too closely tied to owners or upper management, those customers are at risk which reduces a dealership’s value.
The current economic environment is driving mergers and acquisitions. The manufacturers are pressuring dealers to get bigger. Buyer or seller, only a comprehensive valuation that considers the economy, the market and the complex network of issues and activities that drive dealership business will ensure a transaction that is fair and in the best interests of both parties.
Rex Collins is a Principal at HBK CPAs and Consultants. He directs HBK’s National Dealership Industry Group, which provides transactional, tax, accounting and operational consulting exclusively to dealers. Rex can be reached by email at email@example.com; or by phone at 317-504-7900.