Is it time to buy or sell?
Depends on what side of the spectrum you are traveling.
If you are a seller, and your intention is to get out of business, maximize your return or to relocate and buy another dealership, I’d say this is the best time to sell. Automotive industry enjoyed six consecutive record breaking years in units and profits. As the history repeats itself, between now and of 2017, you will have enjoyed the most profitable years of your business. Another year from now bottom lines will start to come down, therefore so will the transaction prices.
However, the picture is quite different on the buyer’s side. Most people seem to be anxious to pay these astronomic blue sky figures based on the record earnings. When you combine the high earnings with further increased multipliers, you end up seeing these numbers that will choke a horse. Here are the critical considerations if you are looking to buy.
What’s looming around the corner?
We are on the threshold of a down turn within about a year. Assuming that whatever the amount of goodwill you contemplate on paying is based on these sky rocketing earnings, there are two potential problems:
1- If you paid 4 times earnings for a store which makes $500,000 net pre-tax annual profits, that would be $2MM plus the assets. In two years if that annual profit just drops to $400,000, you already lost $400,000 of your invested value.
2- In most cases you will find that it is the ownership of the store, and its authenticity that is the primary contributor of the success rate. If you are not 100% certain that everything will stay the same, all the key players will remain in place and the environment will not change, you might be able to maintain the status quo if there is no economic down turn. After all “Mrs. Fields’ Cookies” taste the way they do because of a specific recipe, if you change one ingredient it will not taste the same anymore.
Silver lining in a dark cloud…
If you are out there looking to expand your business and acquire more dealerships, I’d say look for the opportunity stores. If you have been historically successful in your operations, and you believe that you have the formula, knowhow, resources and the human infrastructure, this is the only way to maximize returns. Looking at the same example and identifying some specifics will lead you the way.
1- Dealership is currently performing under its market potential, based on planning volume, gross margins, fixed operations performance, excessive spending, poor facility etc.
2- Purchase price is $240,000 goodwill and its annual profits are around $60,000. Your analysis shows that you could increase the annual profits to about $300,000 within a year. Based on the same multiplier that you paid, now your store is worth $1.2MM. No need to elaborate on return on investment.
I would also like to talk about another trend that has been taking place in the industry. In every market there are some very talented and ambitious young retailers who may have just gotten their break while they were working as a general manager and got noticed by the manufacturers and have been granted an opportunity to own their dealerships. With very little exception, these young entrepreneurs are anxious to expand their businesses and start multiplying their portfolio. Unfortunately over the years I have personally experienced some of them vanish into thin air in no time. There is a significant difference between managing single versus multiple stores. Particularly if it becomes one that you cannot touch every day since you could not be at two places in one time and geography prevents it. It is critical to understand that in order to sustain such under taking; you MUST first build your process, controls, human resources and an elaborate reporting system at your finger tips. Otherwise if you are the key man at your current store who does everything and responsible for the success of the store unless you clone yourself you will have a problem. After all leadership is not about climbing up the ladder but rather finding out about the wall against which the ladder is leaning.
I may have talked about this before, but this seems to be the appropriate time, even after all this you find yourself to be making these sizable investments and pay big money, do yourself a favor, make sure before you pull the trigger, someone who knows what they are doing actually justifies the goodwill that you are about to pay through a serious due diligence. I have seen over the years that even sometimes the seller is unaware of book clutter and inconsistencies which distort the actual profits.
As always, we are always an e-mail or a phone call away if you have any questions.
Have a great Memorial Day.