Investing in a Car Dealer – How to Evaluate Them

Most business valuations are influenced by the company’s historical financial statements, location, brand name, management, and other factors. In fact, the dealer’s balance sheet represents less than half of the information needed to give a car dealer the right price. A balance sheet is a starting point on which a number of factors must be added and subtracted to determine the true value of an asset.

The valuation of new car dealers is related to the forecasting of future earnings and opportunities based on the “dynamics” of the private dealer company being valued and the car business itself.

The Internal Revenue Service acknowledges that the assessments cover more than just the financial statements: “The appraiser should use the decision on the degree of risk associated with the issuer’s issuance, but this decision must be related to all other factors that affect the value.” Income Rules 59-60, Section 3.03.

DETERMINATION OF MARKET VALUE

According to the American Institute of Real Estate Appraisers’ Dictionary of Real Estate Appraisals, the definition of market value is as follows: and a competitive market in all conditions that provide fair sales conditions, assuming that no one is under pressure. ” American Institute of Real Estate Appraisers, Dictionary of Real Estate Appraisers. (Chicago: American Institute of Real Estate Appraisers, 1984), 194 195.

In Income judgment 59-60, The Internal Revenue Service defines a “fair market value” as follows: has related truths. “

The purpose of Income Rules 59-60 is to consider in general the approach, methods and factors to be taken into account in valuing the shares of closely protected companies.

The methods discussed in the income decision relate to the valuation of corporate stocks where market prices are either unaffordable or too low to reflect fair market value.

The decision states that a certain formula cannot be developed to determine the fair market value of closely held shares and that the value will depend on the following considerations.

(a) The nature of the business and the date on which the business is established.

(b) An economic overview in general and the state and outlook of a particular industry in particular.

(c) The carrying amount of the shares and the financial position of the entity.

(d) the company’s earning capacity.

(e) Dividend solvency. The ability to pay dividends is often more important than the date the company distributes cash to shareholders, especially when valuing controlling shares.

(f) Whether the entity has goodwill or other intangible assets.

(g) Share sales and the size of the share block to be valued.

(h) The market price of shares of companies in the same or similar field of activity whose shares are actively traded on a free and open market, either over-the-counter or over-the-counter. When it comes to individual dealer sales, the best comparable is the amount an open company pays or receives for the sale of a similar dealership, not as much as the stock value and earnings of a joint stock company are reflected in the stock market.

In practice, several different formulas have been used to achieve the fair market value of a new car dealer:

1. Investment return (or profit estimate) formula: The cost of a business to a particular buyer according to investment analysis. This value varies from buyer to buyer according to the buyer’s investment criteria and may or may not reflect fair market value. The National Automobile Dealers Association (NADA) calls this value “Investment Value.” Seller’s Evidence for Assessing a Car Sales, As amended by NADA June 1995, July 2000.

The capitalization rate is determined by the stability of the dealer center’s earnings and the risk involved in the operation of the vehicle at the time of sale, investment or valuation. This method is highly subjective because the capitalization rate is based on a particular appraiser’s perception of business risk; as a result, the less the appraiser accepts the risk, the lower the capitalization rate, and the higher the price that a potential buyer expects to pay for the work.

In short, the capitalization rate is the appraiser’s view of the rate of return on investment that will encourage a potential buyer to buy a dealership. Considerations include those set out in Rules 59-60 and the current profitability of alternative investments.

2. Adjusted net worth formula: The net worth of a company that is adjusted to reflect the estimated value of the assets used in the day-to-day operations of a business, assuming that the user or buyer will continue to use the assets. Blue value or good intentions will be added to this “net worth” value. The “adjusted net worth formula” is the most common method used in buying and selling a new car dealership.

3. Custom Cancellation Formula. This method evaluates assets as if they should be sold regularly and without time constraints, rather than as if they were all “for sale on fire.” Normally, if wealth is profitable, some values ​​are placed on goodwill.

4. Forced cancellation. Compulsory liquidation, which is the lowest of all values, means the sale of all property by auction, the sale of a creditor, or the forced sale by a court of bankruptcy. The bankruptcy process of a new car dealer almost never brings good luck. If the dealership does not have a lease (or a short period of lease) and it is practically impossible to transfer, this may be the most appropriate formula.

5. Income Formula. The income formula basically takes the store’s profit and increases it with the appropriate capitalization rate. The trick here is the definition of “profit”. When determining “earnings”, a prospective buyer can use any combination of the following:

(a) current earnings

(b) average earnings – add the last five years together and divide by 5

(c) weighted average gain – generally multiplied by the inverse weight of the current year five, last year four, a year ago three, four years ago two, five years ago, then combined and divided by 15

(d) cash flow – net income and depreciation, LIFO, personal expenses, excess bonuses and similar agreed additional reserves

(e) projected profit – future projected profit that is reduced to its present value.

6. Fair Value. NADA also refers to a third value, along with “Market Value” and “Investment Value”, which it calls “Fair Value”. NADA describes “Fair Value” as “… mainly used to assess the liquidation losses of a minority shareholder when it objects to a company’s proposed sale.” and defines it as follows: “The value of a minority interest immediately before the transaction which the opposition objects to, with the exception of any increase or depreciation on the eve of the transaction, or without reference to the minority or non-market discount.”

NADA management says: It is not common for vendors to pass this special valuation standard. It’s the author never I have never seen this value used and used in connection with the pricing of car dealers.

As can be seen in this report, this author excludes what NADA describes as “Fair Value” when discussing assessments.

7. The theory of great stupidity. The publication of the National Automobile Dealers Association (A Salesman’s Guide to Assessing a Car Dealership, NADA, June 1995), bemuses, in part: “A rule of thumb is more accurately called a ‘more stupid theory.’ (NADA threw out the phrase “stupid” in his book “Price for a Car Sales: Update 2004” and simply said the theory was “… rarely based on sound economic or valuation theory,” but told sellers to “go for it” and maybe someone would pay. will be stupid enough for you [it]. “

The considerations for evaluating new car dealers are more complex than those used to evaluate most businesses. Dynamics, such as the specific requirements of car manufacturers and distributors, can limit the amount of money that can be paid for a dealer, regardless of what buyers can offer pay the store money.

Therefore, the value of a new car dealer varies according to the needs and abilities of the buyer, and therefore the same dealer may have two different values ​​for two different buyers, and both values ​​are correct.

Thus, our assessment of the subject seller should be taken into account in the context and constraints of the sales dates and dates of new car dealers, as shown here.

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