HOW DO YOU MEASURE YOUR DEALERSHIP’S PERFORMANCE?
Auto dealerships are bought and sold every day and there are very many valuation methodologies. Most of those methods are usually reflected as some level of multiplier of the annual operating profits of the dealership averaged out over a number of years. While this practice is commonly accepted and applied for dealership acquisitions, it does not necessarily reflect upon the performance of the store as it relates to its potential.
Whether it is for purchase evaluations or just to evaluate the performance of a dealership there are very many other factors which need to be considered while assessing the value of a dealership or merely understanding its performance level.
ROS…SNAP SHOT OF PERFORMANCE
Often times the easiest snap shot for a quick idea is of course the return on sales (ROS) numbers. ROS will reflect upon the performance as it relates to sales volumes in dollars. Unfortunately, especially in the auto retail industry new vehicle margins are determined by the popularity of the franchise. Therefore for similar size stores even at high levels of performance you cannot achieve the same level of ROS in different franchises. Particularly in evaluating potential performance of a retailer, sales efficiency, gross margins, cost structure, service and parts performance as a function of vehicle sales are all pieces of the puzzle that needs to be evaluated.
DETERMINING REVENUE POTENTIAL
Additionally and more importantly, after determining the revenue potential, all expense lines must be carefully reviewed against a relevant and accurate composite to determine how efficient the operation is in operating expenses. In our view, while ROS is a determining factor to pay the price for a dealership, understanding the operational efficiencies and measuring potential is critical to make a decision to acquire a store.
The first step in determining operational efficiencies would be to gather information to learn the market penetration of the store. This is usually a simple comparison of the sales in the market against the competitive set and then referencing against the manufacturers penetration reports for the region or the market. Then the manufacturer gross margins per unit retailed would be the second leg of the equation. The important thing to remember is that both the gross profit itself and all of the “Other Income” revenue must be taken into consideration to assess the gross margins.
Pre-owned evaluation becomes relatively simple since there are enough data out there to determine if the dealership is retailing enough used cars and creating enough gross revenue.
MEASURING CUSTOMER PAY RETENTION LEVELS
In understanding the fixed operations performance, you must first evaluate customer pay retention levels. We recommend measuring it by ROS written per new vehicle retailed per month averaged out over a running 12 month period. This count for a good performing store should be well above 5 ROS per unit retailed per month. In most metro markets hours per RO for customer pay sales is around 2.2 hours which would be the last stat you need to arrive at a gross sales number and compare it to what the store generates. Warranty performance can simply be identified by examining manufacturer warranty index for the store. Used car sales efficiencies and dollars per internal repair order added to the other two types of labor would give you a pretty good idea about service performance efficiencies.
A PROPER EXPENSE STRUCTURE
You can of course use the same approach to calculate the parts department revenue plus the wholesale and retail business that the store generates.
As to the expense structure, make sure that whichever comparative data you choose to use as a composite, you must combine gross profit and all the other income in order to evaluate the percentage of expenses against total gross revenue. Otherwise you would have no consistent factual basis against which to compare. In this evaluation, if you can arrive at an 80/20 ratio between operating profit and expenses against the gross revenue, it would be a pretty healthy operating structure.
Ultimately if you are looking at a store that reflects a healthy net profit on their statement and that you are contemplating acquiring it at a multiplier of those earnings for goodwill value, YOU MUST condition a book review in your purchase agreement as a contingency to reconcile the reflected profits. If you remember from our previous newsletters, the net profits that are represented are only real to the extent that the balance sheet is crystal clear. Any amount of non existing assets that sit on the balance sheet might be distorting the net profits and you would be paying too much.
Last but not least, in some cases some sellers get creative with their add-backs to inflate the returns, be careful what is being added back, depreciation, owners salary (if reasonable), low rent factor (if the lease is long enough), are not considered add-backs, while LIFO, management fees, interest paid on cap loans are acceptable add-backs.
ANNUAL BENCHMARK TEMPLATE
NEW UNIT SALES: 1200 G.P./UNIT: $2,500 TOTAL G.P.: $ 3,000,000
USED UNIT SALES: 600 G.P./UNIT: $3,750 TOTAL G.P. $ 2,250,000
SERVICE SALES: 13,800 ROS 1.8HRS@: $110/HR. G.P.@ 75% $ 2,049,300
PART (SERVICE) SALES: 100%SERVICE TOTAL SALES: $ 2,732,400 G.P @ 40% $ 1,092,960
PARTS W/S & RETAIL: 50% SERVICE TOTAL SALES: $ 1,366,200 G.P @ 25% $ 341,550
TOTAL REVENUE: $ 8,733,810
TOTAL EXPENSES: 80% OF TOTAL REVENUE $ 6,987,048
TOTAL NET PROFIT: 20% OF TOTAL REVENUE $ 1,747,762
In our view above example is a good benchmark for a normally operating store provided that the new unit sales efficiencies are in line with manufacturer performance. We have more detail and analysis on the subject if you have any questions feel free to e-mail or call me. See you next month.