As a business owner, you probably wonder from time to time what your dealership is worth. Valuing an auto dealership, much like any other business, boils down to the income or cash flows that can be generated by the entity. Generally, valuation approaches are based on determining the “blue sky” or goodwill value of the dealership. Blue sky is the amount a buyer would pay for the dealership over and above the value of tangible assets such as equipment and inventory. Adjustments may need to be made to the value of the assets and liabilities on the balance sheet used before applying the blue sky value.
Blue sky multiples are used in the current industry market indicator, or CIMI method. The multiple to determine blue sky is applied to pre-tax earnings. Blue sky multiples will vary depending on the vehicle brands sold, with Mercedes-Benz dealerships selling at a higher blue sky multiple than Nissan dealerships, for example. Blue sky multiples will also vary depending on items related to the specific dealership, such as prior earnings and the potential for growth, the real estate location and the number of locations.
Market data may also play a role in determining the value of the dealership. There are two main methods under the market approach – the guideline public company method and the direct market method. There are eight publicly traded dealership groups with valuation multiples that can be used to value a private dealership. However, all the publicly traded dealerships are significantly larger than the average dealership, and adjustments will need to be applied to account for the size difference and other factors that would make the public company multiple higher. Private sales transactions of dealerships may also be used to determine the value of a dealership.
The above information gives you some background on the key valuation concepts for dealerships. If you’re interested in knowing what your dealership is worth, CSH’s business valuation experts can help you through the process and show you how these concepts impact your business.
