Auto dealership valuation
Do you need valuation for an auto dealership? Here are some industry statistics to consider.
New and used car dealerships are a significant part of the automotive retail and services industry. Classified under the SIC code 5511 and NAICS 441110, there are some 43,600 such establishments in the US alone. The industry sector generates a respectable $343.1B in annual sales employing over 953,000 people. An average auto dealership is a privately owned firm with about $13M in annual sales and a staff of 33.
Auto dealership business valuation by market comparison
Auto dealerships are ubiquitous, many successful companies becoming institutions in their markets. There is a growing trend toward consolidation with smaller independent dealers being bought out by larger companies. As a result, successful privately owned dealerships are frequent acquisition targets.
This is good news if you decide to value an existing auto dealership using the market approach, i.e. by comparison to recent sales of similar companies – there are plenty of business sales to compare against.
The usual tools to value an auto dealership under the market approach are valuation multiples.
The multiples are ratios that let you calculate what is known as the enterprise value of a company based on the selling prices and financial performance of similar firms.
The valuation multiples commonly used for valuation of auto dealerships are these:
- Enterprise value (EV) divided by revenues (net sales)
- EV to EBITDA
The product inventory may be factored out of the multiplication and added on top to come up with the enterprise value of the business.
Example: Valuation of an auto dealership business
To demonstrate the concept, let’s pick a typical new and pre-owned car dealer with the following financials:
- Revenue: $13,000,000
- EBITDA: $1,000,000
- Inventory: $2,250,000
Next, we choose a set of reasonable valuation multiples to calculate the business value estimates:
| Multiple | Multiple value | Business value |
|---|---|---|
| EV to net sales | 0.13 | $3,940,000 |
| EV to EBITDA | 2.45 | $4,700,000 |
| Average Business Value | $4,320,000 | |
Another way to report these results is as a range of values, from low to high, i.e. $3,940,000 – $4,700,000. The expected business value then should fall somewhere in between.
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2 Comments
Dave says:
I need to find value my small used car lot for marital arbitration. Is the inventory valued at liquidation value(wholesale-what it would pull in at a dealer auction?). The only other assets would be some tools and supplies.
Thanks
Harry says:
It depends on the circumstances of your business appraisal. If the intent is to liquidate the business and sell off its assets, then the liquidation premise of value may be appropriate. If, on the other hand, the business will continue running after the valuation date, then the going concern value of its assets is a better fit.
You may want to review the different premises of business value as well as the standards of value, such as the fair market value defined by the IRS in the Revenue Ruling 59-60.