Auto Dealerships

Summary of Valuation Approaches

The value of an auto dealership facility generally fluctuates with the strength of the auto sales market. Although each appraisal assignment is different, the value of a healthy and profitable auto dealership is generally going to place primary reliance on the income and market approaches. A summary of public and private transactions appears later in this article. An automobile dealership in financial difficulty is more likely based on a net worth analysis (market value of assets less liabilities).

Usually the sale of an auto dealership facility (the real estate) means the concurrent sale of the business and the franchise. This occurs because auto dealership facilities are typically constructed for a specific use and are not readily adaptable to alternative uses. From a real estate perspective, auto dealership facilities are considered special use or a special purpose property, which means that the real estate cannot typically be assigned other uses.

Rules of thumb are not helpful in valuing auto dealerships. Auto dealerships are larger businesses that are sold based on sound economics. These economic considerations can be summarized in key performance indicators (see description below), but such economics cannot be accurately summarized in a single simple formulae.

Description of the Industry

The automobile dealership industry (SIC 5511 and NAICS 441110) is comprised of two segments; new car dealers and used car dealers. Both segments sell a variety of vehicles and automobile-related services such as financing, warranties, and insurance. Within the United States, the industry includes approximately 20,700 new car dealerships, which sold $13 billion cars for 2008.

Industry Trends

Trends in the auto industry have changed dramatically over the past several years. The trend of large oversized SUVS is gone. Several new trends have taken its place, a few of the most significant for 2009 and upcoming years are:

1. Fuel Efficient Automobiles
   Auto makers have moved towards developing hybrid vehicles, electric vehicles, and clean diesel engines which use ethanol instead of gasoline. These advancements increase the mileage output of vehicles. Also, since more states are enforcing environmental requirements, these advances move towards a smaller amount of polluting emissions.
2. Technology Enhanced Vehicles
   Recently, auto producers have added new technology features to vehicles that are in high demand, such as mp3 players, GPS systems, handless cell phone calling systems, and more. Also, since the recent laws have passed that restrict cell phone usage for drivers, more consumers are looking for features that accommodate their communication needs.
3. Concentration of sale sites within new auto centers
   These auto centers contain multiple different auto dealership facilities grouped together in the same area like a shopping center or mall. Older dealerships that are not within the auto dealerships have faced greater challenges because they lack the (i) destination orientation of buyers who are interested in examining a variety of automobile makes in one stop, and (ii) increased access and visibility. New construction or major improvements of auto dealerships have generally been concentrated at new and existing auto centers.
4. Globalization and Consolidation of Auto Industry
   Since the recent fall out of the auto industry, auto makers are looking into producing and selling in foreign countries. China, India, and Mexico now have the growing auto industries.

   In the U.S., a large closeout of franchised and other dealerships is expected. This will consolidate the industry into a more refined size for the current demand.

Key Dealership Performance Metrics

1. Percentage of new vs. used cars
2. Average sales price
3. Total revenue generated
4. Profit per car
5. Total incentives per car
6. Advertising costs
7. Number of cars sold
8. Inventory turnover

Benchmark Statistics

The following average benchmarking data is based on studies from various new car dealerships:

As noted above, the dealership industry experiences a relatively high degree of leverage due to the large amount of physical assets that can be used by lenders to secure loans.

Industry Organizations and Publications

Some organizations that publish helpful information include:

1. National Automobile Dealers Association
2. Americans Well-informed on Automobile Retailing Economics – (AWARE)
3. American International Automobile Dealers
4. National Independent Automobile Dealers Association

Availability of Publicly Traded Guideline Firms

Fulcrum identified 11 publicly traded auto dealership companies in the U.S. As of 1/30/09, the dealership industry’s public companies have an average P/E ratio of 3 and an average price to free cash flow value of 4. The market capitalization for these 11 companies range from $6 million to $17.5 billion dollars and market capital ranges from $1 million to $1.5 billion dollars.

The top five publicly traded auto dealership companies ranked by sales are:

1. Autonation Inc.
2. Penske Automotive Group Inc.
3. Sonic Automotive Inc.
4. Carmax Inc.
5. Group 1 Automotive Inc.

Availability of Purchase Transactions

Fulcrum reviewed information regarding private company purchases of auto dealerships. The size of these private companies varied enormously, both in terms of their vehicle sales volume, and the purchase price paid for the companies. From 2000 to 2008, the ratio of:

1. Market value of invested capital (MVIC) to Net Sales ranged from 0.05 to 0.7 times
2. MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 2 to 9 times.

This range of market multiples is too variant to be useful without further analysis. A proper value for the company that you are assessing should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which obviously affect dealerships as investment opportunities.

Troubled Company and Industry Restructuring Considerations

Starting in late 2008, a slump in automotive sales threatens the majority of automotive manufacturers and their affiliated dealerships. A substantial number of dealerships are threatened by the economic recession.

Recently in 2009, Chrysler and GM have filed chapter 11 bankruptcies and have notified the public that they will be closing certain dealerships. Chrysler will drop 789 dealerships as part of their restructuring plan and GM will close 2,600 dealerships. The GM dealerships will have until October 2010 to sell their inventory and make preparations for the phase out; Chrysler dealerships were given three weeks.

Most of these 789 Chrysler dealerships carry more than just Chrysler branded cars in their inventory, which will allow them to continue to sell these other brands as well as various used cars on their lots. However, the reduction in product offerings will hurt sales and make profitability in an already struggling automobile sales market for these dealerships even more difficult. The value of a Chrysler dealerships are negatively impacted as a result of Chrysler’s recently declared bankruptcy.

Unlike Chrysler, most of GM's dealerships carry a majority GM brand vehicles. As a result, the 2,600 GM dealerships affected by GM’s closure announcement have little to no value as a going concern. The value of these dealerships would likely be best determined on a liquidation basis. Those GM dealerships that are not part of the announced closures may remain a going concern; however, they will suffer a significant negative impact to value due to the uncertainty and financial concerns of GM’s future after emerging from chapter 11 bankruptcy.

Fulcrum Inquiry performs business appraisals for auto dealerships, and other businesses.