There's never a wrong time to get an automobile dealership, merely a wrong way to get one.
In 2009 there were dealerships (both domestic and import) which have made over half a million dollars in a month, yet the majority of the pundits stated that 2009 wasn't the full time to get a dealership Grand Junction CO.
Remember "If you watch for perfect conditions, you'll never get anything done." Ecclesiastes 11:4. It's not the "conditions" that count; it is your "analysis." The truth is that many car dealerships that closed in 2009 were bought or established during what the pundits now describe as "the great times." The occasions when owners and the experts lamented were "the proper times" to get and build.
Case in point: In 2008 Automotive News ran a front page story on a fellow that was developing a Toyota dealership on the freeway, across from the Oakland Coliseum -- a $35 million store, with five floors and a four-story glass showroom. The experts proclaimed about the dealer "... has a broader vision about the relationship between real estate and car dealers than you'd ordinarily find."
On February 24, 2009 The Oakland Tribune reported: "New Toyota dealership in Oakland closes" ;.For the reason that article the dealership's customer relations manager lamented: "I'm kind of in a situation of shock because we thought we'd this kind of bright and opportunistic future here, and with this particular, it really leaves a clear taste... "
When one analyzes that situation, the dealership was likely to fail.
For a plethora of reasons, not the smallest amount of of that has been the store's rent factor, the dealership's success would have been unlike the laws of nature. Analyzing that situation, however, is left for another article. For this article, the thing lesson learned is: Even though the factory approves a transaction, the lenders finance it and the trade publications applaud it, those endorsements provide no guarantee a dealer will succeed. With that said, there are many buyers who will still believe those endorsements mean success.
With the epidemic of lawsuits today, factories and lenders cannot give business advice because if the dealership didn't succeed, it is the factories and lenders that'll get sued. Consequently, one must rely on oneself and advisers which are not afraid to contradict the boss.
As an aside, be mindful to not associate with habitual "deal-breakers." Some advisers are perpetual naysayers because advisers do not get sued for telling a client not to complete a deal. They simply get sued whenever a client enters a package that goes sour because it is never the client's fault. It's the lender, the factory, the accountant, the lawyer, the business advisor (anyone other compared to the client) that's to blame.
The bottom-line is there are two critical factors in buying an automobile dealership that will help ensure success for the long term: (1) How it is bought; and (2) How it is managed.
Each factor has a story, but those are the two keys. How the dealership is bought and how it is run will determine its long-term success or failure. We say "long-term" because car dealerships provide enough cash-flow that some deals might take five years to fold.
Investing in a Car Dealership
What's the proper way to get an automobile dealership in bad economic times?
In the "good times," buyers were paying premiums for dealerships, in relation to brands, pretty buildings, nice locations, and so forth. The truth is, in good times or bad, dealerships must certanly be valued in the exact same manner: by simply how much the client expects to earn following the purchase. In other words, upon expected ROI (return on investment) -- not the brand, or the building, or the location.
Determining exactly what a store can earn following its purchase encompasses a lot more than math. Regardless how often the "multiple of earnings theory" has been proved wrong, members and associates of the trade still perpetuate the myth that the purchase of an automobile dealership could be that effortless.
As a natural consequence of the ROI method, purchase prices will fluctuate because you might tend to expect to create more during "good" times, versus "bad." Therefore, when one states that the values for blue sky or goodwill are dropping, their statement has nothing related to the "value" of the dealership. Furthermore, there's no information in the foregoing statement to help one decide an acceptable value to pay for a dealership. Rules of thumb are only guides. Guides are good servants, but bad masters.
If a dealer goes under and throws a prospective purchaser the keys to the building and says: "It's yours. I recently want out." That act does not make the dealership worth more or less. The questions a buyer must ask are-- (a)" what's it going to cost me to open the doors?" and (b) "what do I think I will earn after I own the store?" In other words: "What's my expected return on the investment?"
Previously there was a dealer group in Colorado that presented an offer for the present dealer to cover them (the buyer) $2,000,000 to allow them to take-over the stores. The offer was in relation to projections of what the stores would lose while buyer tried to turn them around. The vendor refused and ended-up losing several million more before the stores closed. The dealerships properties were eventually sold to a church.
A good checklist for valuing car dealerships is found in IRS Revenue Ruling 59-60, published by the Internal Revenue Service in 1959. While the ruling (59-60) was intended to outline and review in general the approach, methods and factors to be looked at in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes, the strategy discussed are applicable to valuing an automobile dealership and valuing blue sky in an advantage sale by simply backing-out the amount of the stock valuation due to goodwill/blue sky.
The Five Biggest Mistakes Buyers of Automobile Dealerships Make:
1. Convinced that once they verify earnings they've completed an important task. The fact remains, what owner made or lost does not matter. An array of details and formulas have to be placed on determine what the new owner can net. What rent factor PNUR can the store afford? Do those numbers correlate to the percentage of gross requirements?
2. Overestimating vehicle sales projections. The first question is: "Exactly what do the new owner realistically retail?" We've seen way too many dealerships that went under because the client could not accurately predict potential sales. On several occasion we have seen factories and lenders approve dealerships where the prospective purchasers projected sales volumes that exceeded the volume of the area's historical sales leaders.
3. Famous buyers thinking their names alone can turn-around dealerships or sell cars. We are able to name more unsuccessful, former car dealers which can be famous, than successful car dealers which can be famous. We've one photo that depicts a famous athlete getting a business award from the President of the United States. He went along to the White House and received the award the entire year before the factory closed his stores. Either nobody saw it coming, or nobody cared.
4. Convinced that buying a store at a low or zero multiple of earnings means they got a bargain. The largest misconception of a bargain is once the factory awards a new point. Most people think they got something for nothing. They really did not. Those who do succeed, however, usually succeed because of the timing and the location -- not because of the dealer.
The truth is, it requires about a year to build the service department of a new point, the dealer must capitalize the store as though it were already operating on 8-cylinders. In many instances, a new point suffers through months of losses until, when, it finally becomes a fruitful store. Those losses are "blue sky." In other instances, it is the second owner that produces a chance of it and in a few instances, such as the Englewood store mentioned previously, the idea goes away.
The savvy purchaser understands there's a value to purchasing a dealer that's its number is in the telephone book, a dedicated service base and repeat customers. The key value is that your day following the store is sold you will find people lined-up for service, people buying parts and customers returning to the store. That is worth an additional benefit (blue sky) to the master even if the store has been losing money.
5. Thinking there's some "magic" formula that'll produce a store successful. The only real formula that'll work all of the time is a combination of effort and knowledge of the retail automotive business. Each of those words is definitely an operative word: "retail" and "automotive." Understanding of another business isn't enough.
One last little bit of advice to rookies. When creating changes in the retail automotive business act swiftly. Erasers are created because people make mistakes. We've yet to meet up the one who never used one, although in today's world one might substitute the phrase "eraser" with "backspace" or "delete. Each time a mistake is created, the key is to analyze, decide and act quickly. Don't hesitate to fix errors and bad decisions.
That advice 's been around for thousands of years, both in the proverbs one learns as a young child (such as "A stitch in time, saves nine" and "He who hesitates is lost," and so forth), and in Ecclesiastes 12:12 "But, my son, be warned -- there's no end of opinions prepared to be expressed. Studying them can carry on forever and become very exhausting!"
In summation, do not hesitate to get an automobile dealership in a negative economy, just buy it correctly. Browse the articles described above and act upon them Grand Junction CO.
"A dealership must certanly be bought for just one reason and one reason only -- to create money. It will not be bought because it is near to home, because the client likes the franchise, because someone wants to provide a work for a member of family or, since the building is attractive. A dealership is purchased to make money and, to be able to make money, it must be "bought right". A Practical Guide to Buying and Selling Automobile Dealerships, National Legal Publishing Co. (1989), at page 2-4.
