How Much is a Car Dealership Worth? Valuation Strategies Simplified
Finding a dealership’s true value can get a little challenging, even for the most seasoned professionals.
However, it’s definitely doable if you have a strong grasp of valuation strategies and the many factors influencing a dealership’s worth.
In this guide, we’ll cut to the chase. There’s no beating around the bush, just the simple steps you’ll need to assess a dealership’s valuation properly. Shall we begin?
TL;DR - How Much is a Car Dealership Worth?
Before anything else, let’s have a short run-through of what we’ll discuss in this simple guide:
The bulk of a dealership’s revenue is generated by added services and financing rather than vehicle sales.
Dealerships only make up to 7% profit per sale.
A car dealership's profit margin is usually around $1,500 to 3,000 for each used car.
You can estimate the value of a car dealership with 5 different approaches.
Consider financial factors through financial statements, adjusted net income, asset valuations, and other revenue streams when determining a dealership’s worth.
Assess a dealership’s market position, customer base, and other external factors for an accurate valuation assessment.
Make use of the EBITDA when estimating the value, which you can use together with valuation multiples.
Tangible and intangible assets both greatly influence a car dealership’s value.
Buyers and sellers could encounter challenges involving regulatory compliance and taxes.
How Do Car Dealerships Make Money?
They generate revenue through vehicle sales, but this (surprisingly) isn’t their primary source of income. A former car dealer has explained that the profit margins in car sales are often around 2-3%.
These only increase when selling luxury brands, which can command higher market prices. How do car dealers rake the big bucks if that's the case? It may not seem obvious, but they make money through added services. These include financing, warranties, insurance, and the like.
Some customers might choose to avail of aftermarket products when buying their own vehicle. If they want to customize a specific part of the car, that’s another income source for the car dealer – and it sure is a money-maker.
How Do Car Dealerships Make Money on Financing?
When a buyer opts to finance their car through the car dealer, dealers earn through interest payments. Car dealers benefit from loans with some of the best rates in the market, all thanks to their volume of sales. These are then marked up, resulting in a reliable income source for dealerships.
How Do You Value a New Car Dealership?
To assess the value of a new car dealership, you can explore several avenues: the asset-based approach, income-based approach, market-based approach, valuation multiples approach, and rules-of-thumb approach.
We'll get into the specifics of each method later in this blog.
How Much Do Used Car Dealers Make?
One can expect about a margin of $1,500 to $3,000 when selling each used car. An exclusive survey by Car Dealer reveals that at least 30% of consumers believe that car dealers make more than 20% profit per used-car sale. Still, contrary to popular belief, the average profit is actually lower at about 7%.
How Much Profit Does a Car Dealership Make?
In this section, we’ll refer to the profit as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This value averages 3%, ultimately depending on how a dealer manages its operating costs.
How Much Do Car Dealership Owners Make?
The latest data from ZipRecruiter shows that car dealership owners make the least in Florida, with an average annual salary of $85,513.
Meanwhile, a car dealership owner's salary is the highest in states with higher living costs. Case in point: owners rake an average of $126,922 in New York.
5 Methods Used in Car Dealership Valuation
These are the 5 methods used in determining the valuations of car dealerships:
1. Asset-Based Approach
The asset-based approach focuses, well, on a dealer’s assets – inventory, equipment, and more. This approach uses the market price of these assets as a basis when determining a dealership’s valuation.
A significant limitation of this approach is that it fails to consider intangible assets. These include a brand’s reputation, customer loyalty, and collective employee knowledge.
2. Income-Based Approach
One approach to value a new car dealership is the income-based approach, where you assess a dealership’s earning potential. In this method, you use both the capitalization of cash flow and the discounted cash flow method.
Capitalization of Cash Flow (CCF) Method
Discounted Cash Flow (DCF) Method
Projects future income as a constant annual amount
Evaluates the present value of future cash flows
Ease of Use
Simple calculations needed
Calculations have a layer of complexity
Income remains stable
Requires assumptions about future car sales and market trends
Car dealerships with predictable income
Car dealerships vulnerable to market and economic factors
The core advantage of this approach is that it reflects a dealership’s profitability based on available financial data. Hence, you’ll have a more comprehensive evaluation of a company’s financial performance.
3. Market-Based Approach
When you compare a dealership’s financial metrics to its counterparts, you employ the market-based approach. This method considers the prices at which comparable dealerships have sold. Also, this approach is often used when sufficient data on recent transactions of other similar businesses is available.
4. Valuation Multiples Approach
The valuation multiples approach determines a dealership’s value by comparing it to industry benchmarks. Multiples from similar dealerships are obtained and then applied to the financial metrics of the dealership being valued.
For example, if the industry price-earnings (PE) ratio is 15 and a dealership reports earnings of $2 million, then the estimated value would be $30 million.
5. Rules-of-Thumb Approach
Think of this approach as a shortcut to valuing a dealership – no complex calculations needed! Here's a simple example: if an automotive expert pegs the value at 40% of the $500,000 annual sales, your dealership could be valued at $200,000.
However, taking this approach with a few reservations is important, as these are just estimates. In truth, getting a detailed assessment of a car dealership’s variation will follow a 13-step journey.
How to Value a Car Dealership - Step-by-Step Process
Valuing a car dealership requires a step-by-step process to arrive at an accurate valuation.
By following these steps and using the Exitwise valuation calculator, you can achieve high precision in the valuation process. Read on to find out more:
1. Review Financial Statements
Your first step is to compile and review a dealership’s financial statement. This step will require you to do the following:
Analyze balance sheets, income statements, and cash flow statements.
Identify trends in profit, revenue, and expenses over a time period.
Examine a dealership’s liabilities to evaluate its liquidity and solvency.
Scrutinize any irregular changes in financial metrics.
With these steps, you can better grasp a dealership’s financial performance.
2. Adjust Net Income
Modifying the net income captures a more accurate picture of a company’s profitability. Doing so will require you to take these steps:
Modify the net income to reflect the true profitability of the dealership.
Consider other expenses such as salaries or rent if the property is not owned.
Eliminate one-time expenses to expose a company’s strengths and weaknesses.
Ensure consistency in adjustments across the dealership’s financial statements.
Adjusting net income increases the accuracy of financial metrics as it provides deeper insights into the current operational profitability.
3. Evaluate Assets
By evaluating the totality of a dealership’s assets, you have a better assessment of its financial worth. Here’s how you can accomplish this step:
Evaluate the present market worth of assets, encompassing inventory, real estate, and equipment.
Conduct a valuation of equipment and real estate, considering factors like wear and tear where relevant.
Recognize both tangible and intangible assets that contribute to a holistic value.
Having an excellent understanding of the tangible and intangible aspects of a dealership’s assets showcases its financial strength and potential areas for investment.
4. Analyze Revenue Streams
Car dealerships offer a multitude of products and services, equating to more revenue streams. Narrow these down, then analyze each one carefully through the following steps:
Look into different revenue sources like new and used car sales, service, and parts departments.
Examine the profitability of each revenue stream while considering the seasonality of sales.
Evaluate retention strategies and customer acquisition costs that can affect revenue streams.
By analyzing a dealership’s revenue streams, you gain deeper knowledge into not only its potential sources of income but also its growth areas.
5. Assess Market Position
Before you successfully determine a dealership’s value, find the answer to the question: where does this business stand in the market? To find it, you’ll have to do the following:
Understand the dealership's market share, competition, and brand value.
Identify key competitors and their market positions.
Assess the customer’s perception of the dealership to understand the market position better.
Conduct a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis.
Not all dealerships are equal – one can easily have a superior value to another. That’s why a foundational understanding of this can provide a more exact valuation.
6. Consider Industry Trends
When calculating a car dealership’s value, you have to consider external factors, including industry trends. There are various factors you must watch out for:
Evaluate how current industry trends may impact the dealership's future.
Assess the impact of industry shifts on the dealership’s offerings.
Keep updated on macroeconomic effects on the automotive sector.
By understanding these trends, you can forecast its resilience and adaptability – crucial factors in arriving at an accurate valuation.
7. Calculate EBITDA
The EBITDA is a financial metric frequently used to assess a company’s profitability. Learn more about how you can calculate this below:
Determine Earnings Before Interest, Taxes, Depreciation, and Amortization.
Calculate the EBITDA margin to understand the dealership’s profitability relative to revenue.
Use the EBITDA as a key metric for comparison to industry benchmarks.
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8. Apply Valuation Multiples
Using valuation multiples is a standard method to estimate a dealership’s value. These multiples must be fine-tuned to accommodate the distinct characteristics of a car dealership. Here’s how you can apply this correctly in the valuation process:
Use industry-specific multiples to estimate the dealership's value based on adjusted earnings.
Adjust multiple based on unique dealership characteristics.
Compare valuation multiple to similar businesses to determine relative value.
Consider economic conditions when applying valuation multiples.
Following this method ensures a refined dealership valuation by understanding its relative value within the market.
9. Assess Customer Base
To value a car dealership with high accuracy, you must consider its customers, too. Here’s how you can thoroughly assess its customer base:
Evaluate the loyalty and size of the customer base.
Analyze customer demographics, preferences, and pain points.
Consider the impact of a dealership’s customer reviews.
Calculate the Customer Lifetime Value (CLV) to estimate the long-term revenue potential.
That being said, assessing a dealership’s customer base highlights the dealership’s sustainable and long-term growth prospects.
10. Review Operational Efficiency
Examining the operational and management processes' effectiveness in a dealership paints a clearer image of its valuation. When reviewing its operational efficiency, consider the following:
Look at the effectiveness of management and operational processes.
Consider employee satisfaction and productivity to glean more insights into operational efficiency.
Review inventory management practices to reduce carrying costs.
As you can see, reviewing operational efficiency shows how well a dealership can optimize resources and deliver top performance. However, achieving the highest value for your dealership involves more than internal processes – it requires a skilled M&A team.
If you aim to optimize the value of your dealership, connect with Exitwise! Our team can bridge you with top-tier M&A experts who understand the internal mechanisms of the automotive industry, ensuring that you maximize your dealership’s value.
11. Consider External Factors
External factors can significantly impact a dealership’s valuation. These are the factors that you must consider:
Factor in economic conditions, regulatory environment, and tech advancements.
Analyze geopolitical factors that can affect the supply chain.
Consider environmental trends and the market shift toward eco-friendly vehicles.
Because these factors are often out of a dealership’s control, they help anticipate any challenges and opportunities a dealership may face.
12. Conduct Comparative Analysis
Comparing a dealership with its counterparts can provide valuable benchmarks for assessing its worth. To conduct an in-depth comparative analysis, do the following:
Compare with valuations of similar dealerships if available.
Consider reasons for any disparities in valuation between dealerships.
Compare valuation metrics, financial ratios, and operational performance.
This step is vital as it provides a context within the broad automotive market landscape, giving you a more precise estimate of a dealership’s value.
13. Finalize Valuation
We’ve now reached the final step, and that’s to finalize everything the data we’ve synthesized to arrive at a comprehensive valuation of the dealership. Remember: consider everything so you can clearly justify a dealership’s worth to any stakeholders.
10 Factors Influencing Car Dealership Valuations
Here are the ten factors that influence the valuations of car dealerships:
1. Blue Sky Multiple of the dealership: The Blue Sky multiple refers to the valuation of a car dealership considering the value of both tangible and intangible assets.
2. Revenue streams: More revenue streams contribute to a dealership’s financial stability. Generally, the more stable a dealership is, the higher the valuation.
3. Financial health and profitability: If the dealership’s finances are tip-top, its value increases. A part of this evaluation is its profitability – which says a lot about a company’s financial health.
4. Location and market analysis: A car dealership situated in a prime location might command a higher valuation due to its accessibility to potential customers.
5. Brand and franchise considerations: Brands and franchises associated with a dealership significantly impact its valuation. When it’s reputable brands we’re talking about, a dealership’s value is often perceived to be higher.
6. Automotive Industry Trends: If a dealership is knowledgeable about industry trends and stays aligned with consumer preferences, this can positively influence its valuation. Additionally, its ability to adapt to trends can contribute to higher valuations.
7. Regulatory Environment: The ability to adapt to complex regulatory challenges in the automotive industry is considered valuable.
Currently, the automotive industry is actively switching to more sustainable initiatives. This might require dealerships to comply with environmental regulations to avoid hefty fines.
8. Inventory Management: Efficient management of an inventory is another crucial factor in determining a dealership’s valuation. If the inventory is well-managed and up-to-date, it positively impacts its worth.
9. Management and Operations: A competent and capable management team contributes to the overall value of a dealership.
Plus, a car dealership with streamlined processes for inventory management, sales operations, and customer service will often be deemed valuable.
10. Technological Advancements: Adopting new technologies, such as online car sales platforms, customer relationship management (CRM) systems, and digital marketing can impact traditional dealership models.
Thus, dealerships that are more open to technological change are placed on a higher pedestal.
How to Prepare a Car Dealership for Sale and Maximize Value
When preparing a car dealership for sale, you want to maximize the value as much as possible. To do that, take note of these steps:
Invest in the marketing and branding of a car dealership.
Assess and optimize your inventory levels.
Conduct a compliance review to ensure adherence to industry regulations.
Ensure that your assets (e.g., property and equipment) are in tip-top condition.
Diversify revenue streams.
Conduct a comprehensive financial analysis.
Maximize the sale and value of your business by partnering with Exitwise to find the perfect M&A team that’s tailored to your needs.
We simplify the process, helping you find the most qualified professionals and guiding you every step of the way.
Frequently Asked Questions (FAQs)
These are some of the most commonly asked questions on the valuation of car dealerships:
How does the condition of facilities and equipment influence value?
The condition of your facilities and equipment strongly influences a dealership’s value. Of course, the better the condition, the better the value. By ensuring that these assets are regularly maintained, you enhance the overall value of your dealership.
What impact do customer base and reputation have on value?
Remember that the customer base and reputation are intangible assets with significant value, especially if a dealership is thriving. These significantly increase your dealership’s worth by representing a positive brand image.
What Legal and Compliance Factors Need to be Considered?
Some legal and compliance factors need to be considered when determining the value of a car dealership. Before a business is sold, it must be in good legal shape – absent from any legal issues to boost its value.
Concrete examples of this are avoiding excessive supplier liabilities and steering clear of any disputes with relevant stakeholders. Tax issues may also arise when transferring a company’s assets that aren’t under its name but instead are under the original owner’s name.
What are the common challenges in valuing a car dealership?
The process of valuing a car dealership comes with a host of challenges. You’ll have to assess asset values accurately, understand market dynamics, and account for fluctuating demand – these are all serious challenges you’ll encounter when valuing a dealership.
What are the tax implications of buying or selling a car dealership?
The buying and selling of a business often comes with tax implications. Some of these include capital gains tax and other state taxes. When it comes to taxes, always consult a tax professional to minimize your tax liabilities and maximize financial benefits for both parties.
Conclusion - How Much Do Car Dealerships Sell For?
Let’s revisit our initial question: how much do car dealerships sell for? The answer all depends on a simple 13-step process. You fully understand a dealership's valuation by analyzing every aspect of a car dealership.
Selling a car dealership will require capable M&A team members, and Exitwise is here to find them for you. Our personalized solutions help handle the hiring and managing of dream M&A teams without you breaking a sweat!
That way, you get to sell your dealership quickly and for maximum value – so you get the exit you deserve. Sell confidently and lucratively today. Connect with Exitwise!