The value of an auto dealership facility generally fluctuates with the strength of the auto sales market and interest rates. 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).
The sale of an auto dealership facility (the real estate) often 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 without substantial reconstruction costs.
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.
According to the US Census Bureau, auto dealerships (NAICS 4411) comprises establishments primarily engaged in retailing automobiles and light trucks, such as sport utility vehicles, and passenger and cargo vans, or retailing these new vehicles in combination with activities, such as repair services, retailing used cars, and selling replacement parts and accessories. The industry is split between new auto dealerships (NAICS 441110) and used auto dealerships (NAICS 441120). Within the United States, the industry includes approximately 16,800 new auto dealerships.
New vehicle market share by manufacturer is as follows:
|Ford Motor Company||14.2%|
|Toyota Motor Corporation||14.2%|
|Nissan Motor Company/Mitsubishi||9.9%|
|Honda Motor Company||9.6%|
Most new auto dealerships do not make substantial money directly by selling new cars. Thanks largely to the availability of pricing information and related competition, new car sales is mostly a break-even business. Instead, most auto dealerships make money by selling used cars and/or performing car maintenance. New car sales then are a means by which auto dealerships can attract customers who might find it economical to instead purchase a used car, and as a means to attract customers to their maintenance department.
Total dealership sales by segment, as a percent of total sales:
|Service & Parts||12.2%|
Industry Organizations and Publications
Organizations that publish helpful information include:
- National Automobile Dealers Association
- Americans Well-informed on Automobile Retailing Economics – (AWARE)
- American International Automobile Dealers
- National Independent Automobile Dealers Association
Key performance Metrics
When evaluating the performance of a particular dealership to the prices obtained by both the industry and in comparable transactions, it is helpful to consider key dealership performance metrics, such as:
- Percentage of new vs. used cars
- Average sales price per vehicle
- Total revenue
- % of revenue by department
- Number of cars sold
- Profit per car
- Advertising costs
- Inventory turnover
Financial Benchmark Statistics
The following benchmarking data is based on studies from various new auto dealerships:
|Gross Profit %||11.5||11.1||11.8||11.8||12.3|
|Net Income before Taxes %||1.3||1.6||1.6||1.7||1.5|
The following benchmarking data is based on studies from various used auto dealerships:
|Gross Profit %||20.1||20.2||20.9||20.5||19.3|
|Net Income before Taxes %||2.5||2.2||2.1||2.2||1.7|
Summary of Valuation Approaches
There are four commonly accepted valuation methods that should be considered when valuing a auto dealership. These methods are:
1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities. This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets. This approach is seldom used for an auto dealership being valued as a going concern because the value of a retail business is more closely related to its earnings and cash flow.
2. Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable growth in earnings and have a history of operations. The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.
4. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded auto dealership companies and privately held businesses. The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.
Availability of Publicly Traded Comparable Companies
For auto dealerships that are publicly-traded, the availability of financial data makes it possible to compare a subject company to industry benchmarks and apply industry multiples. When valuing a auto dealership, however, it is important to use benchmarks and multiples based on companies that are similar to the subject company.
The top publicly traded U.S. auto dealerships companies, ranked by market capitalization, are:
1. Copart, Inc.
2. CarMax, Inc.
3. Carvana Co.
4. CarGurus, Inc.
5. Penske Automotive Group, Inc.
6. AutoNation, Inc.
7. Lithia Motors, Inc.
8. Cars.com Inc.
9. Rush Enterprises, Inc.
10. Asbury Automotive Group, Inc.
11. Group 1 Automotive, Inc.
12. Sonic Automotive, Inc.
13. America’s Car-Mart, Inc.
14. Rush Enterprises, Inc.
15. Lazydays Holdings, Inc.
The trailing twelve month price to earnings ratio of these companies range from negative (not meaningful) to 87.2. The trailing price to sales ratios range from 0.16 to 10.11.
Availability of Private Purchase Transactions
In addition to publicly traded auto dealerships, data regarding privately held companies can provide a useful benchmark when valuing a business. However, these benchmark market multiples are generally too variable to be useful without further analysis. As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company. The financial metrics of a potential guideline transaction should be compared with those of the subject. Specific factors that are unique for each company must be considered. Additionally, industry economic conditions also vary over time, which can affect auto dealership businesses as investment opportunities.
 NADA 2018 Mid-year report
 Statistica, NADA 2018 Mid-year report
 Risk Management Association (RMA), Annual eStatement Studies
 Risk Management Association (RMA), Annual eStatement Studies