Dealers-Expansion and Exit Strategies
Thinking about Buying or Selling a Dealership?
Is it a good time to sell?
Is it a good time to buy?
by: Ed Lemco
The answer to both questions is YES. The retail business is better than it has ever been, though it is also tougher than ever. You can make more money, but the investment required is greater. There is an absolute need for structure and systems. If you have established the ability to make the most of the current market conditions and have developed some key players, this is a great time to expand by acquiring additional dealerships.
The benchmarks are pretty clear. A well run Harley-Davidson dealership should make 11 – 12 % in pre-tax operating profits (EBITDA). A metric dealership should make 7 – 8% (EBITDA). If you find you are not making that return and you lack the energy or desire to force the processes that will bring that about, it is a great time to sell to someone who can reap more and pay you based on the potential of the dealership.
My advice to a buyer is always to base the purchase price on what you are going to do with it. Unit and total dollar sales and some fixed expense information can be used to develop a forward earnings picture. It does not make sense to pay more than 3 times that number and less if there are significant capital expenditures required to bring about the forward earnings estimate. To make the transaction a win X win that number also needs to be 5 times trailing earnings for the seller. The good news is that is often attainable.
Would I be better off to seek a buyer from outside the industry?
Once in a while the “tooth fairy” does appear and somebody shows up with a wad of cash. They inevitably make a small fortune in the business by starting with a large one. The vast majority of time, however, they fade away when they find out that they must personally guarantee significant lines of credit. Lenders and OEMs take a very hard look at neophytes seeking to become dealers. When there was lots of “low hanging fruit” and the retail business was easier, someone new to the business had a lot more time to learn. There really is no such thing as a turn key dealership.
What about selling to my son, daughter or protégé?
The short answer is both YES and NO. Another question I receive is “How do I get out of a sale I made to my kids?” There are a lot of reasons why we want to pass on our business to our kids, but if it is done improperly you are setting them up to fail while setting yourself up for more angst than you experienced operating the dealership. While I have experienced far more bad experiences than good, there are also a number of success stories in the industry. If you want to sell to your kids, I stress the need to do it right.
Assuming junior is not going to give you cash up front, the acquisition has to be in defined increments. Even if your son or daughter or protégé has spent a long time in the dealership, they have inevitably gravitated to the area of the dealership they like best. In the future as Dealer Principal they will not be able to hide there. Make sure they are genuinely prepared. If they fully understand that the boss does more than sit in the fancy office between leisure activities and exotic incentive trips, there is a good chance of success. The closer the relationship, the more you need to delineate in the contract. There is no one boiler plate or template that fits all, but there are some proven structures that work. If you need some expanded information on structuring a buyout for the next generation, please feel free to contact me at 972-439-4882. Funding may even be available for the right participants in the right market.
Thinking about Buying or Selling a Dealership?
Is it a good time to sell?
Is it a good time to buy?
The answer to both questions is YES. The retail business is better than it has ever been, though it is also tougher than ever. You can make more money, but the investment required is greater. There is an absolute need for structure and systems. If you have established the ability to make the most of the current market conditions and have developed some key players, this is a great time to expand by acquiring additional dealerships.
The benchmarks are pretty clear. A well run Harley-Davidson dealership should make 11 – 12 % in pre-tax operating profits (EBITDA). A metric dealership should make 7 – 8% (EBITDA). If you find you are not making that return and you lack the energy or desire to force the processes that will bring that about, it is a great time to sell to someone who can reap more and pay you based on the potential of the dealership.
My advice to a buyer is always to base the purchase price on what you are going to do with it. Unit and total dollar sales and some fixed expense information can be used to develop a forward earnings picture. It does not make sense to pay more than 3 times that number and less if there are significant capital expenditures required to bring about the forward earnings estimate. To make the transaction a win X win that number also needs to be 5 times trailing earnings for the seller. The good news is that is often attainable.
Would I be better off to seek a buyer from outside the industry?
Once in a while the “tooth fairy” does appear and somebody shows up with a wad of cash. They inevitably make a small fortune in the business by starting with a large one. The vast majority of time, however, they fade away when they find out that they must personally guarantee significant lines of credit. Lenders and OEMs take a very hard look at neophytes seeking to become dealers. When there was lots of “low hanging fruit” and the retail business was easier, someone new to the business had a lot more time to learn. There really is no such thing as a turn key dealership.
How Much Is Your Dealership Worth?
As I travel around the country perhaps the most asked question I receive is “What is my dealership worth?” There is no quick answer or formula that can be broadly applied. I do however have a standard reply - “What else are you going to do??” Before looking for what your store is worth to someone else, consider what it is worth to you.
In spite of all the challenges the business provides, it can also earn you a great living and a life style most people envy. Before considering earnings or a price based on a multiple of those earnings, think about everything you get out of the business.
Take a look at the calendar as well as the balance sheet. What trips have you taken in the last year? What toys did you have to play with? Think about all that the business has provided for you and your family.
What are the reasons driving you to sell? If you are tired of the swirl and constant struggle to stay in control, consider what you will have in your “next life”. Will you be more in control of your next endeavor? Will it provide the life style you have now? If there is a business out there that is truly “turn key” and does not confront you with a myriad of challenges, it will cost you more than you can get for your motorcycle dealership.
If it is time to retire or if there is something else you really would like to do, what your dealership is worth is a serious consideration. What drives the price? The easy parts first.
The value of the real estate is easy to establish with professional appraisals. I always try to remove the real estate from negotiations for this reason. The market price is the market price whether you sell or lease the property.
FF & E (fittings, fixtures and equipment) are typically priced at book, market or replacement cost. There is room for negotiation here. As a seller you would like to obtain replacement price and the buyer wants to buy at the net depreciated value. A price somewhere in between is fair.
The inventory valuation is a little more complex. Here are the most common formulas:
- New, zero mile, current inventory is priced at 100% of current invoice
- Non-current and demo models are priced at 90%, less any damage
- Used inventory is priced at NADA used wholesale “clean”, less floorplanning and reconditioning costs
Parts and accessories:
- Current inventory 1 – 12 months in stock = 100% of current wholesale
- Non-current inventory 13 – 24 months in stock = 50% of current dlr. price
- Parts and Accessories in stock over 24 months are worth nothing
You have appraised the property and counted the inventory, now what is the business worth? Call it goodwill, blue sky or enterprise value, the number, like most things in life, is what you can get. The blue sky number is all over the board.
For a Harley-Davidson dealership, or a metric dealership in a state with good franchise laws, I advise buyers to target 3 times forward earnings.
That equation turns into a win X win for an underperforming dealership. The seller receives a high multiple of earnings, sometimes 6 or 7 times trailing earnings and the buyer who can cash in on the “head room” makes a good buy.
If you have a well run dealership that cashes in on all of the peripheral opportunities, used bikes, F& I, maintenance agreements, etc., there is not the head room and you will not receive the high multiple.
So, back to my first question: Do you really want to sell?
If you are in a state that does not offer good franchise protection to the dealer by providing a defined area or territorial exclusivity, the value of the business is greatly diminished. Does your state law guarantee you the right to sell? Does the law limit OEM challenges to just cause?
Without some sort of guarantee of supply and the exclusive rights to sell the products you offer, the business has no value, other than inventory. Hopefully you are in a state with a franchise law that protects your investment. (If you want to sell your dealership in the future, now is a good time to check out your state association and help get some good franchise laws in place!)
When it does come time to sell, you need someone who can credibly project the forward earnings and potential of the dealership. You need more than just your tax returns as a basis. The tax returns will never reflect the true value of the business.
End
Consider all of the above and if you really want to sell, or you are just curious about what your dealership will bring e-mail at: cycleloan@gmail.com
903-910-9776
