In the fast-evolving automotive industry, dealership valuations have never been more crucial. For automotive dealer principals looking to make informed decisions, whether buying, selling or securing financing, understanding how valuations work can dramatically influence outcomes. 

Significant Metrics Shaping Valuation Outcomes: When it comes to assessing a dealership’s worth, there are several critical metrics that play a pivotal role. Profitability is paramount — how a dealership has performed financially over time provides the foundation for its valuation. As Bill Fields, principal M&A executive, USA, Southeast at DSMA, explains, “Trends in profitability, along with key performance metrics, form the backbone of any dealership valuation.” Dealers must also consider other aspects such as location, whether the facility is compliant with manufacturer image standards or not, and the nature of the franchise. 

The Pitfalls of Wishful Thinking: A common mistake many owners make is relying on wishful thinking when assessing their dealership’s value. It’s easy to assume that a dealership is worth more than it truly is, but this overestimation can lead to missed opportunities. Andy Church, vice president, USA, East at DSMA, emphasizes, “Many dealers are overly optimistic about their dealership’s worth and skip the critical step of getting an accurate valuation.” This can result in pricing the dealership too high and consequently scaring away potential buyers or failing to attract offers altogether.

Uncovering Hidden Potential: It’s also important to note that valuations not only serve to prevent dealers from pricing their dealerships too optimistically; many dealers are often pleasantly surprised to find that their dealership’s valuation comes in higher than expected. Andy says, “Our CPA team are profit hunters, they understand the business and where to look to ensure the value of the dealership is accurate and fair. Oftentimes our valuation comes in higher than what the dealer originally thought. You can’t skip a valuation process.” 

Location Marketability: The importance of location in the results of a valuation cannot be overstated. As Bill highlights, “A dealership’s location is a massive factor in its valuation. Being situated on the wrong side of town or in a declining auto row can negatively affect its marketability.” A dealership in a prime area, however, has an inherent advantage, making it more desirable to buyers and lenders alike.

The Weight of Franchises: Additionally, dealership franchises carry a significant weight in valuation. There is a stark contrast in value between franchises, with luxury brands typically commanding a higher price than domestic volume franchises. Independents, on the other hand, lack the built-in brand equity of a franchise, making their valuations more challenging. 

Understanding the Goodwill Factor: Goodwill or “blue sky” represents a substantial portion of a dealership’s overall value. The quality of management, customer satisfaction scores and franchise value all contribute to goodwill. 

The Critical Element of Financial Health: The financial health of a dealership is the most critical factor in determining its value. If a dealership is struggling financially, a “flag value” is often used — an estimate based on the inherent value of the franchise and location, rather than profitability. The need for clean financials is also crucial. Andy advises that dealerships should “get their financial statements cleaned up” before seeking a valuation. 

The Importance of Ongoing Valuations: The valuation process is not a one-time affair. It is crucial to monitor the value of your dealership continually. At DSMA, clients enjoy the benefit of free valuation updates within 12 months of a paid engagement, ensuring that dealers remain informed as market conditions change. 

The Value of Expertise: The expertise of firms, like DSMA, plays a central role in helping dealer principals understand and maximize the value of their business. DSMA brings unparalleled proficiency in valuations. Their extensive experience underscores their ability to provide critical, data-driven insights that inform decision-making and provide dealers with a comprehensive and nuanced understanding of their dealership’s true worth. A dealership valuation is far more than a number; it serves as a strategic roadmap to success. By understanding the intricacies of a dealership’s value, owners can make more informed decisions, avoid costly mistakes and strategically position their business for long-term growth.