There is never a bad weather buy a car dealership, just a mistake path to buy one.
In 2009 there have been dealerships (both domestic and import) that have made more than half a million dollars in a month, however, most experts said that 2009 was not the time to buy a dealership.
Remember: “If you wait for the perfect conditions, you can never do anything.” Ecclesiastes 11: 4. It’s not the “conditions” that count; it is your “analysis”. The fact is, most of the car dealerships that closed in 2009 were bought or established during what experts now describe as “the good old days.” The times when homeowners and experts lamented were “the right times” to buy and build.
Case in point: In 2008, Automotive News ran a front-page story about a colleague building a Toyota dealership on the freeway across from the Oakland Coliseum, a $ 35 million store with five floors and a glass showroom. four-story. Experts proclaimed about the dealership “… you have a broader view of the relationship between real estate and auto dealers than you would normally find.”
On February 24, 2009, The Oakland Tribune reported: “New Oakland Toyota Dealer Closes.” In that article, the dealership’s customer relations manager lamented: “I’m a bit in shock because we thought we had such a bright and opportunistic future here, and with this, it just leaves an empty taste …”
When you analyze that situation, the dealership was supposed to fail.
For a plethora of reasons, one of which was the store’s income factor, the dealership’s success would have been contrary to the laws of nature. However, the analysis of this situation remains for another article. For this article, the object lesson learned is: Although the factory approves a transaction, the lenders finance it, and the trade publications applaud it, those endorsements provide no guarantee that a dealership will be successful. Having said that, there are many buyers who will still believe that those endorsements mean success.
With today’s epidemic of lawsuits, factories and lenders cannot give business advice because if the dealership is unsuccessful, factories and lenders will be sued. Consequently, one must trust oneself and the advisers who are not afraid to contradict the boss.
As an aside, be careful not to associate with the usual “deal breakers.” Some advisers are perpetual naysayers because advisers are not sued for telling a client not to make a deal. They are only sued when a customer reaches a deal that goes wrong because it is never the customer’s fault. It is the bank, the factory, the accountant, the lawyer, the business advisor (anyone other than the client) that is at fault.
The bottom line is that there are two critical factors in buying from a car dealership that will help ensure long-term success: (1) How it is purchased; and (2) How it is managed.
Each factor has a story, but those are the two keys. How the dealership is purchased and how it is managed will determine its long-term success or failure. We say “long-term” because auto dealers provide enough cash flow that some deals could take five years to close.
Buying a car dealership
What’s the right way to shop for a car dealership in tough economic times?
In the “good old days,” buyers paid premiums for dealerships, based on brand names, nice buildings, nice locations, and so on. The fact is, in good times or bad, dealers should be valued the same way – by how much the buyer expects to earn after the purchase. In other words, based on expected ROI (return on investment), not brand, building, or location.
Determining what a store can earn after its purchase involves more than math. Regardless of how often the “profit multiple theory” has been proven wrong, members and associates of the trade still perpetuate the myth that buying from a car dealer can be that easy.
As a natural consequence of the ROI method, purchase prices will fluctuate because one would tend to expect to do more during “good” times rather than “bad.” Therefore, when you claim that blue sky or goodwill values are falling, your statement has nothing to do with the “value” of the dealer. Also, there is no information in the above statement to help one decide a reasonable value to pay for a dealer. The general rules are only guides. Guides are good servants, but bad masters.
If a merchant goes under and throws the keys to the building at a prospective buyer and says, “It’s yours. I just want to get out.” That act does not make the dealer worth more or less. The questions a buyer should ask are: (a) “How much will it cost to open the doors?” and (b) “what do I think I will earn after owning the store?” In other words: “What is my expected return on investment?”
At one point there was a group of distributors in Colorado that made an offer for the existing distributor to pay (the buyer) $ 2,000,000 to take over the stores. The offer was based on projections of what the stores would lose as the buyer tried to reverse them. The seller refused and ended up losing several million more before the stores closed. The dealers’ properties were eventually sold to a church.
A good checklist for valuing car dealers can be found in IRS Revenue Resolution 59-60, published by the Internal Revenue Service in 1959. While the resolution (59-60) was intended to outline and review in general the approach, methods and factors to be considered in valuing shares of equity capital of closed corporations for inheritance and gift tax purposes, the methods discussed are applicable to valuing a car dealership and valuing the blue sky in an asset sale simply by restoring the amount of the stock valuation. attributable to goodwill / blue sky.
The Five Biggest Mistakes Car Dealership Buyers Make:
1. Thinking that when they verify their earnings they have completed an important task. The truth is, what the seller made or lost doesn’t matter. A great deal of detail and formulas need to be applied to determine what the new owner can get. What rental factor can PNUR pay for the store? Are those numbers correlated with the percentage of the gross requirements?
2. Overestimating vehicle sales projections. The first question is: “What can the new owner realistically sell?” We’ve seen too many dealerships go under because the buyer couldn’t accurately predict potential sales. On more than one occasion, we have seen factories and lenders approve dealerships where prospective buyers were projecting sales volumes that exceeded the volume of historical sales leaders in the area.
3. Famous buyers who think only of their names can switch to dealerships or sell cars. We can name more former unsuccessful car dealers who are famous than successful car dealers who are famous. We have a photo showing a famous athlete receiving a business award from the President of the United States. He went to the White House and received the award a year before the factory closed its stores. Either no one saw it coming, or no one cared.
4. Thinking that buying a store at a low or no profit multiple means they got a bargain. The biggest mistake of a bargain is when the factory awards a new point. Most people think they got something for nothing. They really didn’t. Those that do succeed, however, tend to be successful because of the timing and location, not because of the dealer.
The fact is that it takes about a year to build the service department of a new point, but the dealer has to capitalize the store as if it were already operating with 8 cylinders. In many cases, a new point suffers months of losses until, if ever, it finally becomes a successful store. Those losses are “blue sky”. In other cases, it’s the second owner who tries, and in some cases, like the Englewood store mentioned above, the dot goes away.
The smart shopper understands that it is valuable to buy from a dealership who has their number in the phone book, a loyal service base, and repeat customers. The main value is that the day after the store is sold, there are people queuing for service, people buying parts, and customers returning to the store. That’s worth a bonus (sky blue) to the owner, even if the store has been losing money.
5. Thinking that there is some “magic” formula that will make a store successful. The only formula that will work most of the time is a combination of hard work and knowledge of the automotive retail business. Each of those words is an operative word: “retail” and “automotive.” Knowledge of another business is not enough.
One last tip for newbies. When making changes to the retail automotive business, act quickly. Drafts are made because people make mistakes. We have yet to meet the person who has never used one, although in today’s world the word “eraser” could be substituted for “backward” or “erase.” When you make a mistake, the trick is to analyze, decide, and act quickly. Don’t hesitate to correct mistakes and bad decisions.
That advice has been around for thousands of years, both in the proverbs one learns as a child (such as “A stitch in time saves nine” and “He who doubts is lost”, etc.), and in Ecclesiastes 12:12 ” But, my son, be careful: opinions are ready to be expressed endlessly. Studying them can go on forever and become very exhausting! “
In short, don’t hesitate to buy a car dealership in a bad economy, just buy it right. Read the articles mentioned above and act accordingly.
“A dealer should be bought for one reason and one reason only: to make money. It should not be bought because it is close to home, because the buyer likes the franchise, because a partner wants to provide a job for a family member, or because the building It is attractive You buy a dealer to make money, and to make money, you have to “buy it right.” A practical guide to buying and selling car dealerships, National Legal Publishing Co. (1989), at page 2-4.
That was written twenty years ago. It was true then and it is true today.