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Is it Possible to Sell a Dealership These Days?

5 Nov, 2013 By: Jim Kahrs, Prosperity Plus


The past few years have brought some interesting changes to the merger and acquisition (M&A) market in the office systems industry. Going back to 2009 and 2010, the financial crash in the United States led to a slow down in acquisitions.  Those that had the money to buy businesses were holding on to their money for fear of what the future held. Those that didn’t have the cash on hand to buy found themselves dealing with banks that were suddenly averse to lending.

As the economy began to recover, the M&A world saw another significant change.  Capital gains taxes were raised from 15% to 20%. This meant that anyone selling their business now paid an additional 5% or more to the U.S. government.

Acquisition has, however, been and still is one of the best methods of expansion.  Let’s face it; we are in a stagnant industry. A dealership can expand through diversification and many have. Taking on new product offerings like IT and managed services, pushing further into the printer world with MPS or selling water purification systems to name just a few. However, each of these comes with a learning curve and ramp up time. Acquiring a dealership that more closely matches your business model is probably the fastest and safest way to grow both revenue and profitability.  With all of these changes I’ve been asked if there is still a market for acquisitions.  The answer is a definite yes. If you are considering your exit strategy a sale of the business should be an option you consider. However, you’ll want to understand the process and what drives value to find a good fit and to ensure a real win-win situation for both sides.

So where do you start?

First and foremost, before starting down the path of selling your dealership you need to look at the big picture. This includes looking at what you will do after a sale. Life is basically a game. Your role as a business owner is your position in this game. Too often dealers don’t really look at what it means to sell the business and walk away from this game. As the owner of a business you are much like a professional athlete; if you walk away from the game there MUST be a game to replace it. For most people, simply saying that you’ll retire, play golf or fish just doesn’t cut it. Many who embark on this path find themselves miserable within a few short months. Just look at how many dealers sold their business to IKON or DANKA and then opened a new dealership once their non-compete agreements expired. They missed the game! That said, I implore you to consider thoroughly what leaving the business means and, I  challenge you to map out a real future game that will present the challenge needed to keep you engaged and happy.

Getting to the basics

So what is a dealership is really worth?  What creates value?  Profitability is the single most important factor in almost every sale. Whether they present it as part of their model or not, buyers look at what their return on investment will be.  Many buyers rely almost entirely on profitability to determine a purchase price. In this it is vital to understand the difference between profits as viewed from a management versus a tax standpoint.

Many dealers choose to take advantage of tax savings like accelerated depreciation or run personal expenses or expenses that would not transfer over to a buyer through the business. This is done to reduce the tax burden on the business. If you employ this method of tax reduction it is critical that you document it completely. These expenses are actually profit that you’ve chosen to distribute as expenses and must be presented as such. When valuing a business we recast the income statement to add these expenses back to the net profit. However, I’ve represented dealers whose poor record keeping made this almost impossible and thus cost them tens of thousands of dollars. If you take accelerated depreciation, extraordinary write-offs or choose to run any personal expenses through your business keep a very clean paper trail.

Recurring revenue streams is the next item that impacts dealership value. Very often dealers focus much of their attention on selling equipment. Though this is important, you need to focus as much attention on the recurring revenues that come from service and supplies. A strong portfolio of recurring revenue builds value for a buyer as they can be relatively sure that this revenue stream will continue. A strong equipment sales history is valuable but cannot be guaranteed to continue, particularly when sales reps choose not to join the new company and their revenue contribution evaporates almost immediately after closing a sale.

One of the best things you can do for the future sale of your business is to concentrate on recurring revenues and be sure to hold the profit margins on them. Do not fall into the trap of allowing reductions in service, MPS or IT support prices to get equipment or software sales. You’ll be in a much better position if you reduce the price of the equipment or software and hold the service pricing firm.

Related to recurring revenue streams, multi-year prepayments of service contracts in a lease can be one of the most damaging practices in a dealership.  When you collect three, four or five years worth of maintenance money up front you dramatically reduce the value of your dealership. Buyers will calculate this unearned service liability and deduct it from their offer. I’ve seen situations where the dealership had literally no value due to hundreds of thousands of dollars of prepaid service. If you’re currently collecting multiple years of service revenue up front I suggest you start to wean yourself off of this practice. You’ll be glad you did when the time to sell comes along.

The next item that impacts the value of a dealership is the installed base or what manufacturers refer to as the MIF (machines in the field).  The mix of equipment, MPS, software and IT placements you have in the field will impact the value of the dealership. Focus your attention on building a strong base at all levels. The strongest and most profitable dealerships have a good mix of customer placements. Along with this you must be able to document your MIF. This can be challenging depending on what software you use to run your dealership. Invest some time now to understand how you enter placements and contracts in your system and check to be sure you can track it cleanly as this will pay off when you prepare to sell.

Don’t underestimate the value of your people

People are the key to success in any dealership. Surrounding yourself with the best people will not only help you build profits now it will also add tremendous value to your dealership should you decide to sell it. I have seen many transactions happen almost entirely because of the people involved in the business. In these cases buyers making the acquisition did so to get one or more employees on their team. Along with this you need to have a strong sales team.  As most dealers know, building a sales team is not an easy task. Having a strong sales team not only adds financial value to the transaction but in many cases it brings buyers to the table in the first place.

Now let’s look at your internal systems and structure, the basics of your business that are often overlooked. Having an organized dealership with strong systems in place is a major plus point in any sale. When a buyer comes into the dealership does he or she see an orderly, productive business or a messy, scattered environment?  Savvy buyers know that taking over an unorganized business is a real chore. Time and resources invested in getting a business organized will take away from time that could be used to grow sales and profitability. How you respond to requests from a buyer can also have a tremendous impact on the overall transaction. If you can respond quickly with clean, accurate data the buyer gets a comfortable, confident feeling. If, on the other hand, you need days or weeks to present messy or flawed data you are raising a major red flag.  Buyers get a very uneasy feeling from this and it impacts their willingness to make a strong offer.

Other factors that figure into the decision can be the manufacturers and product lines you represent, territories you cover, customers you control and much more.  Of course your effectiveness with each of these is important. If you represent a manufacturer but are at 20% of your quota you’re not adding value. If you’re authorized for a territory, but have no presence there you are not adding value.  You need to show strength in all areas. Strength adds value.

Determining if it’s the right time to sell and getting the most for a dealership is a matter of balancing all of the these factors. The key thing to keep in mind is that what you do today and over the years to come will determine the value of your dealership. Trying to build value six months prior to a sale is all but impossible. If you’re thinking that you might want to sell your dealership in five to 10 years then start your preparation now. Follow the guidelines above and you’ll have a valuable dealership. Ignore them and you’ll be taking your chances. If you have questions or want help preparing your business for a future sale, contact me.

 

Jim Kahrs is the founder & pres. of Prosperity Plus Management Consulting, a consulting company that specializes in the office systems industry, having worked with hundreds of dealerships to improve their overall results. They offer full M&A assistance to dealer owners; have assisted in the sale of more than 50 dealerships. At 631-382-7762 /  http://jkahrs@prosperityplus.com




About the Author: Jim Kahrs, Prosperity Plus


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