As we gear up for the National Automobile Dealers Association (NADA) convention, the automotive industry is undergoing a paradigm shift in dealership valuations.
Over two decades of brokering deals, one consistent observation has been the resilience of the earnings multiplier for top brands, changing by no more than 100 basis points. What has undergone significant transformation, however, is the earnings base.
With the seismic rise in COVID-19 earnings followed by the uncertainty surrounding the timing of earnings stabilization, understanding pricing dynamics has never been more crucial.
Unraveling the Complexity
To grasp the true essence of current dealership valuations, it's imperative to delve into two crucial aspects: the brand's position in its post-COVID normalization cycle and the operational adaptations made by individual dealerships during the pandemic.
Brand Normalization Period
The aftermath of the COVID boom is not uniform across all automotive brands. While Stellantis experienced the end of its COVID-induced profitability around August 2023, others like Toyota are still reaping the benefits.
The challenge lies in determining which years of earnings are suitable for sustainable evaluations, considering the varied normalization timelines. A thorough understanding of where the target brand is in its COVID normalization cycle is indispensable.
Operational Learnings During the Pandemic
Beyond the numbers, the operational resilience and adaptability of a dealership during the COVID-19 boom are paramount. It's not just about achieving high earnings but about learning from the experience. Did the dealership maximize fixed gross and streamline processes? These are the key indicators of sustainable success.
Pricing based solely on the "right" year is a simplistic approach. Instead, leveraging a blend of fixed gross from COVID years and variable gross from other years can offer a more accurate representation of sustainable earnings.
Pitfalls in Valuation
In the pursuit of understanding current dealership valuations, it's essential to acknowledge and address the pitfalls that some brokers are falling into:
- Pricing Off the Best Year: One common mistake is pricing based on the best year in the auto industry. This fails to consider the changing dynamics and challenges post-COVID, leading to inflated valuations that may not be sustainable.
- Rapid Unit Growth Assumptions: Overly optimistic projections of unit growth using current gross numbers can be misleading. Not all brands and dealerships can achieve projected growth due to constraints within the original equipment manufacturer (OEM) distribution system. Brokers need to comprehend the intricacies of OEM turn-and-earn models to avoid overestimating potential growth.
- Ignoring Deferred Cap Ex: Another oversight is the disregard for deferred capital expenditures (Cap Ex) and their impact on earnings. With inflationary costs affecting remodel expenses, overlooking these factors can result in distorted valuations. For instance, an image cost of $2.5 million in 2019 could significantly rise in the current economic climate.
The Landscape of Buyers and Sellers
Despite the challenges and complexities, the automotive industry presents ample opportunities for both buyers and sellers. The key lies in understanding and accurately assessing sustainable earnings. In a market where the pool of buyers exceeds that of sellers, strategic navigation is essential.
Our Commitment to Accurate Valuations
As experienced brokers committed to representing only one side of a deal, we recognize the importance of leveraging our knowledge for the maximum benefit of our clients.
Navigating the intricacies of current dealership valuations requires a nuanced approach, considering both the brand-specific normalization period and the operational learnings from the COVID boom. Our commitment is to provide insights that go beyond the surface, ensuring our clients make informed decisions in this dynamic market.
As we converge at NADA, the discourse around dealership valuations is more pertinent than ever. The industry is at a crossroads, and understanding the sustainable earnings of a dealership is the compass that guides successful transactions.
In the flux of post-COVID challenges and opportunities, the importance of an experienced broker cannot be overstated. It's not just about the numbers; it's about decoding the story behind them and navigating the intricate landscape of dealership valuations with acumen and foresight.
If you're considering buying or selling an auto dealership and want an experienced broker in your corner, let Ozog Consulting Group be your trusted partner. With decades of experience, we're confident we can help you achieve your goals. Reach out to our team today to get started.