Boost a Dealership’s Value Before Selling11 Jun, 2009 By: Jim Kahrs imageSource
Boost a Dealership’s Value Before Selling
With the recent economic woes we’ve all experienced and their impact on 401K’s, stocks and mutual funds, many dealers are left wondering if their business will be able to support them in retirement. As traditional investment values drop, many dealers will look to a business
sale as their last resort, which raises a number of questions. What is my dealership really worth? What creates value? How can I increase the future value? Well, here is a straight forward, real world approach to understanding and increasing its 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’s vital to understand the difference between profits as viewed from a management versus a tax standpoint. Many dealers choose to 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 expense payments 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 choose to run any personal expenses through your business, keep a very clean paper trail.
Revenue and Value
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, the deal. 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 prices to get equipment sales. You’ll be in a much better position if you reduce the price of the machine 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 equipment base or what manufacturers refer to as the MIF (machines in the field). The mix of equipment you have in the field will impact the value of the dealership. If you have a lot of very small
machines your dealership won’t be worth as much. Focus your attention on building a strong base at all levels. The strongest and most profitable dealerships have a good mix of equipment sizes and types. 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. Understand how you enter equipment in the system and check to be sure you can track it cleanly. This will pay off when you prepare to sell.
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 these cases dealerships 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. Having a strong sales team not only adds financial value to the transaction but often brings buyers
to the table in the first place.
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? Don’t lose a savvy buyer over company disorganization!
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 and days 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.
Now to answer the title question, I see nothing in the industry or business climate telling me that dealers should be looking to sell. The decision should be based on your own short and long term goals. However, if selling the business is in your future, start planning now.
Trying to build value six months prior to a sale is all but impossible. Follow the guidelines above and you’ll have a valuable dealership; ignore them and you’ll be taking your chances.
Jim Kahrs is President of Prosperity Plus Management Consulting Inc. He can be reached at 631-382-7762 or you can email him at: firstname.lastname@example.org.