Most business valuations are driven substantially by the company's historical financial statements, tempered by other factors such as: location, brand name, supervision and such. In truth and in fact, the dealership's balance sheet represents less than half the data needful to properly value an automobile dealership. The balance sheet is but a starting point from which a estimate of factors must be added and subtracted in order to determine the true value of the assets.
Valuing new car dealerships has to do with projecting hereafter profits and opportunities based upon the "dynamics" of the singular dealership being valued and of the automobile business itself.
Value Used Cars
The Internal revenue assistance recognizes that valuations include more than financial statements: "The appraiser must practice his judgment as to the degree of risk attaching to the business of the corporation which issued the stock, but that judgment must be linked to all of the other factors affecting the value." revenue Ruling 59-60, Section 3.03.
Definition Of market Value
The definition of market value agreeing to the American institute of Real Estate Appraisers' Dictionary of Real Estate Appraisal, is: "The most probable price in cash, terms equivalent to cash, or other no ifs ands or buts revealed terms, for which the appraised property will sell in a contentious market under all conditions needful to fair sale, with the buyer and jobber each acting prudently, knowledgeably, and for self interest, and assuming that neither is under duress." American institute of Real Estate Appraisers, The Dictionary of Real Estate Appraisal. (Chicago: American institute of Real Estate Appraisers, 1984), 194 195.
In revenue Ruling 59-60, the Internal revenue assistance defines "fair market value" as follows: "...the price at which the business would turn hands in the middle of a willing buyer and a willing jobber when the old is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge and relevant facts."
The purpose of revenue Ruling 59-60 is to outline and describe in general the approach, methods and factors to be determined in valuing shares of the capital stock of closely held corporations.
The methods discussed in the revenue Ruling apply to the valuation of corporate stocks on which market quotations are whether unavailable or are of such scarcity that they do not reflect the fair market value.
The Ruling goes on to state that no set method can be devised to determine fair market value of closely held stocks and that the value will depend upon such considerations as:
(a) The nature of the business and the history of the business from its inception.
(b) The economic outlook in general and the condition and outlook of the specific industry in particular.
(c) The book value of the stock and the financial condition of the business.
(d) The revenue capacity of the company.
(e) The dividend-paying capacity. The potential to pay dividends is often more prominent than a company's history of distributing cash to shareholders, especially when valuing controlling interests.
(f) Whether or not the business has goodwill or other intangible value.
(g) Sales of the stock and the size of the block of stock to be valued.
(h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, whether on an change or over-the-counter. With respect to an private dealership sale, the best comparable is the estimate the group business paid or received for buying or selling a similar dealership, not what the group company's stock value or revenue multiple, per se, that is reflected on the stock exchange.
In practice, in arriving at the fair market value of a new car dealership, any different formulas have been used:
1. Return on speculation (or revenue valuation) Formula: The value of a business to a singular purchaser based upon a return on speculation analysis. This value varies from purchaser to purchaser, agreeing to the purchaser's speculation criterion, and it may or may not reflect fair market value. The National Automobile Dealers association (Nada) refers to this value as "Investment Value." A Dealer Guide to Valuing an Automobile Dealership, Nada June 1995, Revised July 2000.
The capitalization rate is determined by the stability of the dealership's revenue and the risk complex in the automobile business at the time of sale, investment, or valuation. This method is highly subjective as the capitalization rate is based upon the singular appraiser's perception of the risk of the business; consequently, the lower the appraiser perceives the risk, the lower will be the capitalization rate and the higher will be the price he would expect a inherent purchaser to pay for the business.
In short, the capitalization rate is the appraiser's idea as to a rate of return on speculation that would motivate a prospective purchaser to buy the dealership. Considerations include those specified in revenue Ruling 59-60, as well as available rate of return on alternative investments.
2. Adjusted Net Worth Formula: Net worth of the company, adjusted to reflect the appraised value of the assets used in the day to day operations of a business, assuming that the user or purchaser will continue to make use of the assets. To this "net worth" value will be added blue sky or goodwill, if any. The "Adjusted Net Worth Formula" is the most tasteless method used in purchasing and selling a new car dealership.
3. Orderly Liquidation Formula. This method values the assets as if all of them had to be sold - not at a "fire sale," but in an orderly manner and without time constraints. Normally, if the dealership is profitable, some value will still be located upon goodwill.
4. Forced Liquidation. The bottom of all values, forced liquidation means that all of the assets must be sold at a forced sale such as an auction, creditors' sale or by order of a bankruptcy court. A bankruptcy proceeding with regard to a new car dealership almost never brings goodwill. This might be the most accepted method if the dealership has no lease (or only a short term remaining on its lease) and cannot, as a practical matter, relocate.
5. Income Formula. The revenue method is basically taking the store's revenue and multiplying it by an appropriated capitalization rate. The trick here is the definition of "earnings." In determining "earnings" a perspective buy could use any composition of the following:
(a) current earnings
(b) average revenue - add the last five years together and divide by 5
(c) weighted median revenue - normally an inverted weight with the current year multiplied by five, last year by four, the year before last by three, four years ago by two, five years ago by one, then adding them together and dividing by 15
(d) cash flow - net revenue plus agreed add-backs such as depreciation, Lifo, personal expenses, excess bonuses and such
(e) forecasted revenue - hereafter projected revenue discounted to present day value.
6. Fair Value. Nada also refers to a third value in increasing to "Market Value" "Investment Value," which it calls "Fair Value." Nada describes "Fair Value" as being "...primarily used when a minority shareholder objects to a proposed sale of the business in assessing liquidating damages." and defines it as: "The value of the minority interest immediately before the transaction to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the transaction and without reference to whether a minority or non-marketability discount."
The Nada guide states: It is not tasteless for auto dealers to run over this singular valuation standard. This author has never used, nor has ever seen this value used with respect to valuing automobile dealerships.
As can be seen in this report, this author in discussing valuations excludes what Nada describes as "Fair Value".
7. The Greater Fool Theory. The National Automobile Dealers association publication (A Dealer Guide to Valuing an Automobile Dealership, Nada June 1995), bemuses, in part: "A Rule of Thumb is more properly referred to as a 'greater fool theory.' It is not 'valuation theory, however." (In its "Valuing an Automobile Dealership: update 2004" Nada dropped the reference to "fool" and plainly states that the theory is ". . . Rarely based upon sound economic or valuation theory," but advises sellers to "Go for it, and maybe man will be unintelligent sufficient to pay [it]."
The considerations for valuing new car dealerships are more complex than those used for valuing most other businesses. Dynamics such as the unique requirements of automobile industry and distributors can limit the estimate of monies that may be paid for a dealership, regardless of what perspective purchasers may offer to pay for the store.
Therefore, the value of a new car dealership varies based upon the needs and potential of the purchaser and, consequently, the same dealership could have two different values to two different purchaser and both values would be correct.
Thus, our valuation of the branch dealership should be determined in the context and limitations of the facts and history of new car dealership sales as delineated herein.
Investing in Car Dealerships - How to Value Them
