Is now the right time to buy a car dealership?

there is never a bad time buy a car dealer, just a mistake shape to buy one

In 2009 there were dealerships (both domestic and imported) making over half a million dollars in a month, but most experts said 2009 was not the time to buy a dealership.

Remember “If you wait for the perfect conditions, you will never achieve anything.” Ecclesiastes 11:4. It is not the “conditions” that count; is your “analysis”. The fact is that most of the car dealerships that closed in 2009 were either bought or established during what experts now describe as “the good old days.” The times when owners 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 fellow who was building a Toyota dealership on the freeway across from the Oakland Coliseum, a $35 million, five-story store with a glass showroom. four floors. The experts proclaimed about the dealer “…has a broader view on the relationship between real estate dealers and automobiles than he would normally find.”

On February 24, 2009, The Oakland Tribune reported, “New Toyota dealership in Oakland closes.” In that article, the dealership’s customer relations manager lamented, “I’m a bit in shock that we thought we had such a bright and opportunistic future here, and with this, it leaves an empty taste…”

When you look at that situation, the dealership was supposed to fail.

For a plethora of reasons, one of which was the store rent factor, the success of the dealership would have been contrary to the laws of nature. The analysis of this situation, however, remains for another article. For this article, the practical lesson learned is: although the factory approves a transaction, the lenders finance it, and the trade publications applaud it, those guarantees do not guarantee that the dealership will be successful. That being said, there are plenty of buyers who will still believe those endorsements spell success.

With the epidemic of lawsuits today, factories and lenders cannot give business advice because if the dealer is unsuccessful, it will be the factories and lenders who will be sued. Consequently, one must trust oneself and advisers who are not afraid to contradict the boss.

Also, be careful not to associate yourself 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 only get sued when a client makes a deal that goes wrong because it’s never the client’s fault. It is the bank, the factory, the accountant, the lawyer, the business adviser (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 you buy; 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 run will determine its success or failure in the long run. We say “long-term” because dealers provide enough cash flow that some deals can take five years to close.

Buy a car dealer

What is the right way to buy a car dealership in bad economic times?

In the “good old days” buyers paid premiums for dealerships, based on brands, nice buildings, nice locations, etc. The fact is that, in good times or bad, dealerships 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 stands to earn after your purchase involves more than math. Regardless of how often the “earnings multiple theory” has been proven wrong, the myth is still perpetuated by members and associates of the trade that buying from a car dealership can be effortless.

As a natural consequence of the ROI method, purchase prices will fluctuate because one tends to expect to earn more during the “good” times than the “bad” times. Therefore, when one claims that blue sky or goodwill values ​​are falling, their statement has nothing to do with the “value” of the dealership. Also, there is no information in the above statement to help decide a reasonable value to pay for a dealer. The general rules are only guidelines. The guides are good servants, but bad masters.

If a dealer is going under and throws the keys to the building at a prospective buyer and says, “It’s yours. I just want out.” That act does not make the dealership worth more or less. The questions a buyer should ask themselves are– (a)”how much is it going to cost me to open the doors?” and (b) “how much do I think I will earn after owning the store?” In other words: “What is my expected return on investment?”

At one time a group of dealers in Colorado put in an offer for the existing dealer 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 turn them around. 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 automobile dealerships 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 In general terms of the approach, methods, and factors to be considered in the valuation of equity shares of closely held corporations for inheritance tax and gift tax purposes, the methods discussed are applicable to the valuation of an automobile dealership and the blue sky valuation in an asset sale by simply removing the amount of the stock valuation attributable to goodwill/blue sky.

The Five Biggest Mistakes Car Dealership Buyers Make:

1. Thinking that when they check income they have completed an important task. The truth is that what the seller did or lost doesn’t matter. A lot of detail and formulas need to be applied to determine what the new owner can get. What PNUR rent factor can the store afford? Do those numbers correlate to the percentage of 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 out of business 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 projected sales volumes that exceeded the volume of the area’s historical sales leaders.

3. Celebrity buyers who only think of their names can change dealerships or sell cars. We can name more famous unsuccessful ex-car dealers than famous successful car dealers. 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 went out of business. Either no one saw it coming, or no one cared.

4. Thinking that buying a store at a low or zero earnings multiple means they got a bargain. The biggest mistake of a bargain is when the factory gives a new point. Most people think they got something for nothing. They really didn’t. The ones that are successful, however, are usually 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 must capitalize on the shop as if it were already operating on 8 cylinders. In many cases, a new outlet 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 disappears.

The savvy shopper understands that there is value in buying from a dealership that has their number in the phone book, a loyal service base, and repeat customers. The main value is that the day after the sale of the store there are people lining up for service, people buying parts and customers returning to the store. That’s worth a bonus (blue sky) 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 piece of advice for newbies. When making changes in the auto retail 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 one might substitute the word “eraser” for “backtrack” or “erase.” When a mistake is made, the trick is to analyze, decide and act quickly. Do not 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,” and so on), and in Ecclesiastes 12:12.” But, my son, be careful: there is no end of opinions ready to be expressed. Studying them can last forever and become very exhausting!”

In short, don’t hesitate to buy a car dealer in a bad economy, just buy it right. Read the articles mentioned above and act accordingly.

“You should buy a dealership for one reason and one reason only: to make money. You shouldn’t buy because it’s close to home, because the buyer likes the franchise, because a partner wants to employ a relative, or because the building is attractive.A dealer is bought to make money, and to make money, it has to be “bought right.” A practical guide to buying and selling car dealershipsNational Legal Publishing Co. (1989), at pages 2-4.

That was written twenty years ago. It was true then and it is true today.