Automotive and RV Dealerships
We have years of experience in this industry for the valuation of the business, equipment and real estate. Let us help you with our valuation consultation in all areas of the valuation of automotive and RV dealership businesses. Below is a brief synopsis of the industry.
Description of Business
Establishments primarily engaged in the retail sale of new automobiles or new and used automobiles. These establishments frequently maintain repair departments and carry stocks of replacement parts, tires, batteries, and automotive accessories.
General Industry Information
Operations of auto dealerships vary, depending on whether the vehicles for sale are new or used. Large mega-dealers and auto malls are the most common format for sales of new vehicles. At one point, retail establishments that focused on new cars carried an individual line of cars. Recent consolidation at the manufacturing level has resulted in shared marketing efforts, where larger lots are selling several lines of vehicles. Large, well financed dealerships are accounting for a larger share of the new vehicle retail market.
Used-car dealerships do not typically have the relationship with manufacturers that the new car dealerships have. Instead, their inventories are largely obtained from commercial businesses that trade vehicles as a part of operations. Retired fleets of rental cars, trade-ins from customers, and auction purchases of repossessed vehicles are the most common methods of obtaining inventory.
A large segment of the auto dealership industry is dedicated to vehicle financing. Larger dealerships may have in-house financing departments, while others refer clients to loan brokers who specialize in vehicle lending. Low borrowing (interest) rates are a strong positive for this industry.
At the same time, manufacturer’s rates on wholesale vehicles impact the retail auto businesses. Examples of this cause and effect are the employee discounts offered to customers during 2005. As a result of this massive discount program by manufacturers, new vehicle purchases increased, causing a sharp increase in used vehicle inventories, since many customers sold their former cars or engaged in trade-ins.
There are several key leaders in the auto dealership business. AutoNation is the largest in the U.S. Formerly known as Republic Industries, the firm owns about 350 new vehicle sales franchises in more than 15 states and offers no-haggle sales policies and online sales. United Auto Group Inc. and Sonic Automotive Inc. are also large dealership franchises.
Location is important to auto dealership businesses. Good visibility, site capacity (in terms of vehicle parking spaces), and local demographics are items to consider. Many dealerships have become burdened with competition retailing the same manufacturing line in the immediate region. Proximity to direct product competitors is a problem for many businesses. However, being close to auto dealerships selling other vehicle lines can be a definite positive, as the wide variety tends to attract more auto customers in an area.
Red Flags and Risks
Firstly, diligent buyers should consider franchise agreements. Problems of economic cannibalization can occur if similar dealerships are located too close to each other. Buyers should review their franchise agreements to see if their sales area is protected. Franchise terms should be reviewed for expiration and any fees. Buyers can gage the reputation of an auto dealership using several methods. The level of repeat or referral business is arguably the best indicator of customer service and reputation. Historical sales made by sales personnel can be tracked to identify high productivity employees, taking into account complaints and problems tied to their sales. Sale of inventory can be a complicated issue during acquisitions. Buyers should be cautious of the inventory valuation methods utilized by auto dealerships. Rather than relying on the FIFO, LIFO, or weighted average cost of goods sold methods for determining value, buyers should consider the fair market value of the inventory as a whole. Dealerships that offer in-house financing may understate the likelihood of payment defaults. “Bad Debt” from customers is not an issue for companies who outsource vehicle loans to a separate financing entity.
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