This article was updated June 28, 2022.
Buying or selling an automobile dealership business is unlike any other business transaction.
Dealership transactions are a complex process that can surprise buyers and sellers alike—and not always pleasantly—due to the different ways a dealership’s departments operate, its relationships with manufacturers, dealer-specific tax provisions, the types of assets dealerships hold, and how dealership values are determined.
Explore specific challenges of buying or selling an automobile business and steps you can take to prepare.
The Change in Automobile Dealership Business Transactions
Transactions among auto dealers continued at a frenzied pace across the nation since the second half of 2020. This is a product of the industry’s perceived strength among traditional buyers, Wall Street, and private equity investors alike.
During the 2008 recession, when consumers put new vehicle purchases on hold, auto dealers demonstrated sustainability by putting more emphasis on used vehicles, parts, and service. Likewise, due to the COVID-19 pandemic, auto dealers face tight supply and high demand that’s expected to continue well into 2024.
The investor community took note of the elasticity of the franchised dealer. High levels of capital, high profitability, and continued consolidation in the industry are expected to drive the dealership transactions market.
With this as the backdrop, many dealers are poised to take advantage of their strength and attractiveness to investors. Before diving in, it’s important to review and be prepared to tackle common pain points.
Automotive Dealership Value Determinations
Several factors impact a dealership’s value.
Dealership Buy or Sell Value Factors
In addition to a franchise’s historic performance and departmental mix, potential buyers, brokers, and valuation experts examine numerous factors.
- Facility image compliance
- Facility location
- Geographic market
- Local economic indicators
- Earnings growth potential
- Local brand strength
- Competitive environment
- Customer relationships
- Strength of reputation
- Digital marketing presence
- Manufacturer’s product pipeline
- Manufacturer’s dealer relationships
Automotive Dealership Departments
To accurately determine value, a valuation expert should examine each department in a dealership.
- New and used vehicle sales departments which sell lower-volume, higher-cost units
- Service departments and body shops, which sell labor
- Parts departments which sell high-volume, low-cost items
- Financing departments that broker loans and other products
Each department has different operations, profit drivers, and potential challenges. In a dealership buy or sell transaction, this means considering performance as only one unit isn’t a great indicator of its value or its earning potential.
How Business Assets Affect the Process for Selling a Dealership
Further, selling a dealership involves a range of business assets. Each asset is a negotiation point between the buyer and seller, who ultimately need to come to an agreement for a sale to be successful. How pricing is allocated between these asset types can have a substantial tax impact.
Assets Commonly Involved in Selling a Dealership
- Fixed assets
- Corporate goodwill
- Personal goodwill
- Real estate
What Are Blue Sky Multiples?
Blue sky multiples, which are applied to pre-tax income, are often discussed in the automotive industry. They represent a general indication of goodwill or intangible value, and there are factors that might drive a dealership to be at the higher or lower end of the blue sky multiple range for your brand.
For example, a dealership located in a well-suited, high-growth metro area with low tax rates would be expected to be priced at the higher range of blue sky multiples versus a dealership with the opposite characteristics.
Pre-Tax Income Considerations
The pre-tax income to which the blue sky multiple is applied should be given close consideration. Carefully consider and investigate adjustments to income and expenses that don’t recur or are discretionary.
Inventory shortages in the automotive industry that led to short-term increases in gross profit are causing many to consider a mix of pre‑pandemic and pandemic results when pricing dealerships using blue sky multiples.
Manufacturer’s Right of Refusal for Dealership Transactions
Auto manufacturers can intervene in a potential transaction involving the franchise.
Why Would a Manufacturer Intervene in a Dealership Sale?
- Potential buyer is deemed unsuitable
- Another buyer holds manufacturer preference
- Concerns for concentration of ownership in a geographic market
In these cases, the manufacturer may elect to exercise its first right of refusal, stopping the agreed upon transaction and potentially triggering a sale to a different buyer.
Transactions often involve more than one franchise with some brands considered more desirable than others. The transaction often becomes unviable for the buyer when the manufacturer pulls the desirable brand. Proper planning around these scenarios is important.
Costs, Taxes, and Timing of a Dealership Sale
The costs, taxes, and timing surrounding a dealership buy or sell transaction add nuance to the process.
The costs of an automobile dealership transaction are significant once you add in brokerage fees, accounting services, consulting, and legal fees—not to mention tax on the transaction.
Transactions often trigger tax liabilities many dealerships don’t realize they carry.
Dealer accounting methods specific to inventory, including last-in, first-out (LIFO) inventory management and the lower-of-cost-or-market method for used vehicle inventory, are some examples of great automotive dealership tax planning that can complicate the financial picture during a transaction.
It’s common to find aged items on the balance sheet if schedules aren’t reconciled regularly, which may result in additional income or expense the dealer didn’t anticipate.
Timing is often a sore spot for dealers.
Deals typically take about six months from start to finish given the level of complexity involved in a dealership transaction.
The longer the transaction takes, the more opportunities for a decline in dealership performance, economic disruptions, brand-related events—such as the impact on Nissan after the arrest of former CEO and chairman Carlos Ghosn, and employee fallout.
Timing can also be important in an ever-changing tax environment. Any pending or proposed tax legislation at the federal and state level should be considered. The difference in tax liability between a transaction that closes before or after a new tax law takes effect could be significant.
Confidentiality is a significant factor in any automotive dealership deal, and sellers are often surprised by how quickly privacy can be lost.
The dealership business is, after all, a close-knit community, and once the manufacturer, broker, and potential buyers learn a dealership may be for sale, information tends to spread quickly to the marketplace.
This can result in a workforce issue as the dealership’s employees scramble to plan for the situation. As a result, it’s critical that a dealership has all its contingency plans in place and is well prepared for the sale leaking to the marketplace.
Tips for a Smooth Automotive Dealership Transaction
Knowing what surprises and complications you may encounter is a large part of making any potential transaction go smoothly.
How to Prepare for a Dealership Sale
- Perform sell-side due diligence early, even before you’re ready to initiate a transaction
- Prepare cash flow projections to help understand how much cash will be left after all liabilities have been paid, including taxes
- Discuss financial and other goals with your advisors
- Anticipate questions from the buyer and manufacturer
- Explore opportunities for your dealership to increase its potential value
Further, make sure you work with professionals who know the automotive industry.
From your tax accountant to legal advisor and valuation expert, each needs to understand the nuances of the accounting methods, tax provisions—especially deferrals—and entity structuring arrangements that are relevant to your business.
We’re Here to Help
To learn more about how you can prepare your dealership for a transaction, contact your Moss Adams professional.
You can also visit our Automotive & Dealer Services Practice.