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Old 01-30-2015, 08:28 AM   #1
johnpico
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Default Blue Sky - The Multiples Myth

Just returned from NADA.

Every time I read or hear that a particular brand is worth “x” times earnings, I ask myself: “How does anyone even know that?”

If you were given the sales prices and the financial statements of all the dealerships that sold last year (which, regardless of what you read, is impossible), you still would not be able to give a multiple.

You would also need to know all of the adjustments made to the statement.
  • Were the dealer’s relatives employed at the store?
  • Did the store own an airplane or yacht?
  • Did the dealer have an interest in the advertising company?
  • And more.

A store is a business opportunity and a business opportunity is worth what an investor believes would be a reasonable return on the value of the investment – and that could be almost anything – ten percent, twenty percent, thirty percent. It is the subjective decision of each investor and it does not matter what the seller made.

There are many considerations in addition to Return-On-Investment that go into determining the value of a dealership: Location, Upside, Personnel, Brand, Condition of Facility, and so forth.

Regardless of what you hear, purchases of dealerships are based upon each buyer’s perspective of the type of return on investment he or she will receive, not upon some hard and fast multiple of earnings.

My friend bought a bankrupt store for $10 million blue sky, plus assets. The last time I talked to him it was earning a strong six figures per month. Was he the fool, or the buyer that walked away at a million blue the fool? How was that acquisition accounted for in the multiples game? The multiple is “infinity.”

On the other hand, I saw a store in California that never netted less than $5 million a year. It had audited statements and perfect facilities. Forty percent of the sales, however, were to contacts on the east coast. That might be an important fact, especially if the buyer could not duplicate the feat.

Try walking across a river with an average depth of 3 feet and you will drown. Using multiples to value car dealerships makes about as much sense.

In short, another term for multiples is ‘the greater fool theory.’
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Old 01-30-2015, 01:28 PM   #2
XDCX
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John - thanks for another great post.

I'll admit that I'm guilty of getting wrapped up in "multiples" because it's a quick and dirty way to evaluate what brands are most valuable and which OEMs do the best job of helping their dealers generate profits.

That said, I'll concede that using "multiples" is akin to using a chainsaw to craft a toothpick - it's not the best tool to be using when a dealer is evaluating what to pay for a business.

I also think the auto press likes writing stories about "multiples" for the same reason as I mentioned above - it creates a pecking order for the best and worse franchises.

I'd be curious to hear your opinion on the valuation trends for rural and metro stores. The impression I get is the metro stores have gained the most Blue Sky since the recession and that trend is likely to continue since larger stores tend to attract Dealer Groups and the Public Capital Groups.
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Old 01-30-2015, 05:39 PM   #3
johnpico
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As the saying goes, “a rising tide lifts all the ships.” The value of rural dealerships have increased, along with the value of metro stores, because of the common dominator. They both had increased profits, hence buyers would pay more because of their increased return on investment.

The reason the blue sky values of rural stores do not rise "in proportion" to the value of metro metro stores is because investors, especially large dealer groups, are willing to "stretch" more in blue sky value because of the opportunity to reach a substantially larger customer pool.

In other words, rural stores are obviously “capped” by the rural population, whereas with respect to metro stores, investors believe they can improve the stores profits by capturing a larger share of a much larger market.

Even if you have the only brand name in a rural area, if the population is only 125,000 people, you don’t have the same potential “upside” as you would in a metro area with a population of 8 million people – even if there are 10 same brand stores in the 8 million market.

Compare, for example a Mercedes store in Medford, Oregon (city population of about 77,677 and a metropolitan area population of about 208,545) with a Mercedes store in Fremont, California (city population of about 225,000), where there are nine Mercedes dealers competing in the Bay Area (area population of about 7.5 million people). The upside in the Bay Area is substantially larger than the upside in Medford.

I hope that helps
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Old 02-02-2015, 11:15 AM   #4
XDCX
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Thanks for the post - I follow your point and your explanation makes sense.

When I think of a rural dealer I mostly think of dealers who are in markets of 20K people or less and they're selling 20 or fewer new cars per month. While the import brands may not have many dealers in this segment I know the Detroit 3 still have a lot of dealers in this category.

The impression I get is the dealers described above have not seen the Blue Sky increase that their larger brethren have and some points are more likely to close than to be purchased by a new buyer. I also get the impression that some OEMs are willing to let their existing dealer maintain a rural point but they don't want to see the point sold to a new dealer - they'd rather see the point closed.

Maybe my impressions are unfounded, but it does seem that we've seen a fair number of rural stores close down despite being in one of the hottest car markets in decades.
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Old 02-02-2015, 11:35 AM   #5
steve_biegler
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Quote:
Originally Posted by XDCX View Post
I also get the impression that some OEMs are willing to let their existing dealer maintain a rural point but they don't want to see the point sold to a new dealer - they'd rather see the point closed.
DING....DING......DING......We have a winner!!

Last edited by XDCX; 02-02-2015 at 12:10 PM. Reason: Added quote tags to make the post easier to follow
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Old 02-04-2015, 11:45 AM   #6
XDCX
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Quote:
Originally Posted by steve_biegler View Post
DING....DING......DING......We have a winner!!
So I guess you've heard that too....

Based on what I've heard I get the impression that terminating rural points as opposed to processing a buy/sell is mostly limited to the Detroit 3. I'm assuming that the OEMs will allow a buy/sell that stays within the family but they'd prefer to close the point if it's an outright buy/sell with a new owner.
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Old 02-04-2015, 12:48 PM   #7
steve_biegler
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Here in South Dakota Nissan had sent letters out to several dealers that said they would stick with them as long as the ownership and location did not change.

Nice of them since our franchise laws state this.

Anyway in our 4th largest city the Nissan store was bought by the dealer from the largest city (120 miles down the interstate, a large group) and they still pulled the franchise, even though the buyer was an existing Nissan dealer in another city.

Still makes no sense to me.
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Old 02-04-2015, 07:36 PM   #8
mryan55
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Originally Posted by XDCX View Post
So I guess you've heard that too....

Based on what I've heard I get the impression that terminating rural points as opposed to processing a buy/sell is mostly limited to the Detroit 3. I'm assuming that the OEMs will allow a buy/sell that stays within the family but they'd prefer to close the point if it's an outright buy/sell with a new owner.
In the last two years this has been a common occurrence in rural Indiana CDJT dealers. When you include the Indianapolis metro area you had 17 "metro" CDJT stores and another five "rural" stores that were in split among a few different districts. Four of the small "rural" stores (all average less than 10 new per month) are now gone. I guess on paper it helps me out, but I started at a very small 'A' store, Jeep-Eagle only, so I still feel for the little guy.

Mind you, I don't think the operators made any significant efforts to sell these stores, but the value of a rural domestic franchise certainly isn't appreciating by the multiples that the armchair quarterbacks throw out there. In fact, unless there's a hands-on GM of a metro store who wants to buy in to a rural store to build his/her future, I don't know how much interest there would be in these smallest CDJT points.
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Old 02-05-2015, 03:20 AM   #9
johnpico
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Default Rural stores

Rural stores and domestic stores are two different animals. That is something that the Car Czar did not understand during Chrysler’s and GM’s bankruptcies. All they could talk about was how many more dealerships the domestics had than Toyota.

The reason for the imbalance of numbers was not that the imports were smart and the domestics stupid; the reason was that the domestics were here 100-years and had a base that allowed them to penetrate the small, rural towns.

Get in your car and drive along the Canadian boarder from St. Lawrence, New York to Ocean Shores, Washington and count the number of rural imports versus rural domestics. Domestics win by a long-shot because it is not a good business plan for new-comers (imports) to penetrate the rural areas while until they penetrate the metro areas.

The problem in the rural areas is not “multiples.” As I said before, no one person has the numbers to really tell you the multiples on all of the stores that sold last year. Even the factories do not know. They just get buy-sells with numbers and, although they can look at a seller's financial statements, they do not know the add-backs or deductions the buyer included or discounted in order to even determine what the multiple was, or what it was based upon (current earnings, future earnings or some kind of mix.).

The reasons for the low values being placed on rural stores, versus metro stores are several. To name a few:
1. Supply and demand – As mentioned above, most buyers want metro stores because they have a greater upside;
2. Supply and demand – there are more wealthy buyers available for metro stores than rural stores. If you have the money, you buy luxury (metro); if not, you settle for the basics (rural).
3. Eliminate interest from the publics and large dealer groups, and the rural areas are left to individuals. Many times the individuals that can afford to buy and capitalize the dealership come from metro areas and have wives and families that do not want to live in the rural area because of the lack of metro amenities such as shopping at large chain stores, international airports, competitive schools, etc.

It is generally the lack of interest of qualified buyers and families that want to live in the big city, rather than the factories that causes the demise of third and fourth generation rural stores.

If you want to sell a rural store, you have to market to the rural buyer. In addition to showing how to make a profit in the store, you have to show the advantages of living in a rural community. Low crime rate, comradery, better schools (more individual attention to students), accessibility to the outside world, etc.
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