Summary 

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).

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.

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 16,700 new car dealerships in 2016.  Industry-wide dealership sales are approximately 58% new cars, 30% used cars, and 12% service and parts.[1]

New vehicle market share by manufacturer is as follows:

General Motors 17%
Ford 15%
Toyota 14%
Chrysler/Fiat 13%
Honda 9%
Nissan 9%
All Others 23%
100%

 

Industry-wide gross profits have continued a steady decline, from nearly 4.5% in 2011, to less than 3% in 2016.The dealership industry sustains a relatively high degree of leverage (borrowing) due to the large amount of physical assets that can be used by lenders to secure loans.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:

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

Industry Organizations and PublicationsOrganizations 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 FirmsThe disclosures of publicly-traded companies are useful in providing information about the industry, as well as   possible value indication using the Market Approach.  In 2017, the top publicly traded auto dealership companies, ranked by market capitalization are:

  1. Carmax Inc. (KMX)
  2. Autonation Inc. (AN)
  3. Penske Automotive Group Inc. (PAG)
  4. Lithia Motors (LAD)
  5. Group 1 Automotive Inc. (GPI)
  6. Ashbury Automotive (ABG)
  7. Sonic Automotive Inc. (SAH)

Generally, in 2017, publicly-traded automotive retailers sold for:

  1. Price to Earnings multiples of high single digits to high teens,
  2. Price to Sales multiples of .0.1 to 0.8, with the majority of companies selling in the low portion of this range

Availability of Purchase TransactionsPrivate company purchases of auto dealerships identify a wide range of purchase multiples, thus requiring further analysis and comparison.  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, which obviously affect dealerships as investment opportunities and the related multiples paid.Generally, one can expect the market multiples approximately as follows:

  1. Market value of invested capital (MVIC) to Net Sales – 0.05 to 0.7 times
  2. MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from three to six times without consideration of real estate
  3. For consistently unprofitable dealerships – the wholesale value of hard assets less liabilities

Fulcrum Inquiry performs business appraisals for auto dealerships, and other businesses.[1] NADA Data, 2016 report