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Operate each day like it’s your last: Sale-ready dealerships can fetch more and sell faster

October 22, 2013


Buy-sell new-car activity is up through the first part of 2013, according to The Presidio Group, a brokerage firm that specializes in the auto industry. And NADA reports that average dealer earnings — which have an effect on determining selling prices — are at all-time highs. These trends are good news for owners thinking about retiring or selling their dealerships.

Even if you don’t plan to sell anytime soon, you never know when you might receive an offer that’s too good to refuse — or when the unexpected might force you or your heirs to sell the business. It’s always a good idea to run your business “sale-ready” to maximize your return on investment.

First impressions

The physical condition of your facade, landscaping, showroom and service waiting room is the first impression you give prospective buyers. You might not want to spend money on manufacturer-recommended imaging enhancements, but some updates may be required to retain your franchise and compete with nearby stores. Deferred maintenance and improvements turn off customers and prospective buyers.

When buyers tour your facilities, they also assess the competence and friendliness of your staff. Some prospective buyers may even stop by unannounced, posing as customers. Eliminate or retrain employees that aren’t up to your customer service standards, because they could drag your selling price down.

Lean operations

Next compare departmental profit margins and overhead expenses to industry benchmarks. Identify and fix weaknesses as soon as possible. If overhead seems too high, maybe you’re paying above-market rent or salaries to related parties — typically the owner’s family members working at the dealership. If your interest expense is out of whack, you might be carrying too much inventory or need to renegotiate your financing terms.

Also identify discretionary expenses that a new owner wouldn’t necessarily need to incur, such as season tickets to your area’s football team or museum memberships. Buyers should pay for the future earnings they’ll receive, which doesn’t include your discretionary spending.

Hands-off owners

Many owners can’t relinquish control, especially if the next generation is green and unproven. Centralized management structures, however, make your store harder to transition to a new owner. Relinquishing control needn’t happen overnight. Give up tasks one by one, giving middle managers opportunities to fail or succeed. Often the former teaches more than the latter.

A vacation is an easy litmus test of how dependent a dealership is on its current owner. If you can go out of town for two weeks without much handholding and interruptions, you’re decentralized and sale-ready.

Professional management 

Anticipate the documents prospective buyers will need to conduct their due diligence, including financial statements, tax returns, leases, insurance contracts and loan agreements. Put together a selling packet.

Unless your financial statements are prepared by a CPA firm in accordance with Generally Accepted Accounting Principles (GAAP), buyers may not trust the results or be able to compare them with other dealerships in the marketplace. Buyers also are leery anytime they need to adjust your dealership’s financial statements for unconventional accounting practices and related-party transactions. So, avoid using corporate assets for personal purposes.

Buyer concerns
Before entertaining any offer, evaluate the quality and reputation of the buyer. Your manufacturer has the right of first refusal on ownership changes, and factory reps prefer financially secure, proven buyers. You may get a higher price and close sooner if you’re dealing with a buyer who already owns other dealerships or has a high net worth.

Smart planning

Dealership operations provide owners with an income stream and an abundance of perks, especially as market conditions improve. But no one can milk a cash cow forever. Eventually every dealership sells.

Whether you’re planning to sell now or later, look at your dealership from the perspective of a prospective buyer. With a few housekeeping tasks, you can attract buyers and maximize your selling price.


What drives your dealership’s value?

Most small and midsize stores sell based on a market-driven formula that combines net tangible value (hard assets minus debt) and intangible value. The latter component, often referred to as “blue sky,” is based on a multiple of pretax, pre-LIFO earnings.

Multiples range from zero to seven (or higher) depending on the dealership’s characteristics, according to The Presidio Group’s Mid-Year 2013 Automotive Retail Buy-Sell Report. Your dealership’s multiple will vary depending on value drivers, such as:

Location. Urban dealers tend to sell for higher multiples than rural ones. But what’s most important is how well the franchise’s target market matches the dealership’s neighboring demographics.

Dealership status. Dealers with high profits, volume and customer service ratings usually receive preferential treatment from their manufacturers and tend to sell for higher pricing multiples.

Leases. Buyers also consider lease terms, if your dealership doesn’t own its facilities. Favorable rates, renewal terms and assignee rights add value.

Franchises. Some brands are more popular among buyers. Presidio reports that average pricing multiples are highest for Mercedes and BMW dealers. But multiples have risen for Audi, Subaru and the three domestic manufacturers since December 2012. Brands with lower average pricing multiples through June 2013 include Hyundai, VW and Mazda.
Please contact Frank Panzeca for more information on this topic or with any questions at [email protected].

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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