Pointe Automotive | Strategic M&A Advisory Services

View Original

Similiar Dealerships. Different Valuation.

David Melton

Similar Dealerships Can Have Huge Value Differences

Can two dealerships in the same industry have very different valuations? In short, the answer is a resounding, yes. Let’s take an example of two dealerships that both have an EBITDA of $2 million but with two very different values. In fact, Dealership One is valued at 4 EBITDA, which prices it at $8 million whereas Dealership Two is valued at six times EBITDA, meaning it has a value of $12 million.

Valuation Difference Checklist

  1. Revenue Size

  2. Profitability

  3. The Market

  4. Growth Rate

  5. Regional

  6. Management & Employees

  7. Capital Equipment Requirements

  8. Systems/Processes

  9. Uniqueness/Proprietary

  10. Intangibles (franchise, manufacturer, brand, etc.)

There are quite a few variables on the above checklist that stand out, with the top one being that of growth rate. The growth rate is a major value driver when buyers are considering value.

Dealership Two, for example, with its six times EBITDA has a growth rate of 50%, whereas Dealership One, with its four times EBITDA has a growth rate of just 12%.

Discovering the real growth rate story means answering some pretty important questions.

  1. Are the dealership’s projections achievable and believable?

  2. Where is the dealership’s growth coming from?

  3. Are there long-term employees currently in place?

  4. Where is the growth originating? In other words, what services or sales are driving growth? Will those services or sales continue to drive growth in the future?

  5. How is the dealership obtaining its customers for the projected growth?

  6. How reliable are the sales forecasts?

Ultimately, finding the difference in value between two dealerships, that otherwise appear similar, usually resides in growth rate. This is a factor that should not be overlooked. It is essential to know a dealership’s growth rate as well as the key questions to ask regarding its growth. If you are going to obtain an accurate valuation as well as understand the valuation between different dealerships, this part of the process cannot be overlooked.