Auto Dealers: Blue Sky Appraisal
Blue Sky is the intrinsic value of a car dealership, above the value of its tangible assets. Sometimes it equates to the goodwill of a car dealer.
Most articles on the blue sky value of new car dealerships cite a profit multiple formula, such as three times profit, four times profit, and so on. The idea that “blue sky” can be determined by anything by anything is simply wrong.
Even NOTHING the National Association of Automobile Dealers in his post titled “A dealer’s guide to valuing a car dealership, NADA, June 1995, revised July 2000, is surprising, in part, regarding the valuation of a dealership by using a multiple of earnings: a valuation of the empirical rule is more appropriately known as a “theory plus dumb”. “However, it is not a theory of valuation.”
In its 2004 update, NADA omitted its reference to “dumb”, but referred to the multiple formula as rarely based on sound economic or valuation theory, and went on to say, “If you are a salesperson and the general rule produces high value, then this is not a matter of great concern. Do it, and maybe someone is stupid enough to pay you very high value. “
The blue sky of a dealership is based on what the buyer believes they can net profit. If potential buyers think you can’t make a profit, the store won’t sell. If it can produce a profit, then variables such as the convenience of the location, the balance the brand will bring to other existing franchises it owns, whether or not the factory will require facility improvements, and so on, will determine whether or not it is a buyer. . you will buy that particular brand, at that particular location, at that particular time.
I have been consulting with dealers for nearly four decades and have participated in over 1,000 automotive transactions ranging from $ 100,000 to over $ 100,000,000 and have Never have viewed the price of a dealer sale determined by any multiple of earnings unless and until all of the above factors have been considered and the buyer has decided that they were willing to spend “x” times what the buyer thought the buyer would earn. dealer, in order to acquire the business opportunity.
To think otherwise would be to subscribe to theories that (1) even though you think a dealer could make a million dollars, the store is worth zero blue sky because it made no money last year; and (2) if a store has been making $ 5 million per year, it must pay, say, 3 times $ 5 million as blue sky, even if it thinks it won’t produce that kind of profit. Both propositions are absurd. If a buyer believes that a dealership is not worth the blue sky, then what they are really saying is that they do not see any business opportunity in buying and therefore in my opinion should not buy the store.
Each dealership is unique with respect to its potential, location, balance that its brand brings to a group of dealerships, and condition of the facilities. The sale is also unique with respect to whether it is a forced liquidation, an orderly liquidation, arm’s length, insider trading, or a case where an eager buyer is trying to induce a reluctant seller. There are management factors to consider, duration and term of the leases, possibilities or not possibilities of buying the facilities and if the factory wants to relocate the store or open a new one on the same street.
In the auto business it is impossible to choose a dealer or franchise from a hat, multiply their profits by a mystical number and predict the value of the dealer or the price for which it would sell, and it does not matter if it is a Toyota, Honda , Ford, Chevrolet, Chrysler, Dodge or any other dealer. At any given time, one franchise may be considered more or less desirable than another, but they are all valued in the same way.