Automotive Dealership Valuation – Market Trends, Multiples, Blue Sky, and Real Estate
With the average age of a Canadian dealer principal now in the 60’s, valuation is at the forefront of many conversations in the industry.
According to an industry survey performed by DesRosiers Automotive Consultants Inc., 75% of dealership owners plan to retire in the next decade, combined with the fact that about half of all dealerships in Canada are owned and operated by a principal who owns just a single store, have created a unique market primed for consolidation.
Age, succession issues, expensive facilities investments required by OEM’s, and increased competition are contributing factors leading many dealer principals looking to sell. Combine this with the fact that dealer groups are eager to expand through acquisitions, which provides them better access to financing, a superior ability to attract human capital, the creation of operational synergies, as well as brand and geographical diversification; and a market with increasing valuation multiples is created.
As market leaders in the automotive retail space, we have seen an abundance of transactions taking place over the last few years, and upward trends in valuation multiples are being observed.
||3.6x - 8.4x
||2.3x - 7.8x
||6.2x - 8.1x
||5.5x - 9.3x
As consolidation in the industry continues, buyer groups are competing for attractive assets to add to their dealership portfolios, driving multiples up. Factors affecting the multiple include, but are not limited to, size, earnings, geographic location, and brand.
In the public company space, we are seeing similar trends in implied EBITDA trading multiples:
When dealing with valuation, it is important to firstly distinguish a dealership’s “blue sky” from the enterprise value as well as equity value, as we have seen these terms be confused with one another.
Simply stated, enterprise value is the value of the normalized maintainable cash flows of the business, capitalized at a carefully selected multiple. The dealership’s equity value is the enterprise value adjusted for redundant assets and debt. Redundant assets, or assets not required to generate operating cash flows are added to the enterprise value, and debt is deducted to arrive at equity value. It is typical for floorplan loans to be considered operating debt and would not be deducted. Blue sky, or goodwill, is the value in which this enterprise value exceeds the tangible asset backing of the company (balance sheet). To the extent that a dealership’s value is above and beyond its net tangible asset value, the excess is often referred to as blue sky.
Blue sky inherently refers to the “intangible” assets of the dealership, which can include such things as location, assembled workforce, and the OEM agreement.
Many dealer principals also own the real estate in which their dealership operates, so we will briefly touch on some guidelines to help give you an idea of what your property may be worth.1
In the majority of instances, dealerships operate on what is called a triple net lease (i.e. the tenant – in this case the dealership, is responsible for all the operating costs, including realty taxes, insurance, and maintenance). That being the case, it is possible to apply a capitalization rate to the rental income to determine a property’s value. In most cases, capitalization rates hover around 7%, compressing closer to 6% in the prime markets of Vancouver and Toronto.
We are also seeing sale prices ranging from $370 to $580 per square foot in the GTA and GVA, and anywhere from $220 to $535 per square foot in secondary markets.
The industry will prove an interesting one to keep an eye on over the coming years.
1 We are not real estate appraisers. Any information provided above is set to serve as mere guidelines for market prices we have seen in recent engagements, and should not be construed as appraisal advice. Every situation is different, and a real estate appraiser should be consulted.