Insights: Article

Blue Sky From A Buyer’s Prospective

By   Tom Goekeler

December 01, 2017

We are often asked the question “What is my Blue Sky?” The answer, as you might guess, is “it depends.” There are many factors that affect the intangible value of your dealership. Obvious factors include which franchises you have, your location and market size, profitability, workforce and competition. These and other factors are important because a prospective buyer will use them to determine an expected return on investment. This analysis is the same for every investment decision, whether you are buying a dealership or a donut shop. Buyers typically pay a price that provides them an acceptable rate of return based on the perceived risks they are taking.

 

Getting Started
The following example and formula can assist you in determining the intangible value of your dealership from a buyer’s perspective.

Table

What Buyers Will Examine
Purchasers will want to see prior year’s operating statements. They will use these to determine what future sales they can expect and what your net profit as a percentage of sales have been. It is important that any unusual or non-recurring items that have affected your profitability be disclosed to the buyer. These “Normalization Adjustments” can make a significant difference in the Blue Sky calculation. Also, if a facility upgrade is needed or will be required of the buyer in order to get factory approval, the buyer will factor that into the equation. Generally, the buyer would amortize the expected cost, net of factory reimbursements, over a 10-year period at their borrowing rate. The Expected Annual Pre-Tax Income would be reduced by the annual amortization.

Expected Return on Investment
The expected return on investment is a very subjective element of the formula. As mentioned above, 25 percent is the historical average for dealerships. This equates to a 4X multiple to get to the total value. However, each franchise and dealership is different. Currently, Mercedes, BMW and Lexus franchises are yielding much higher than average multiples. Non-metro stores generally have lower multiples than metro stores. Public dealership groups tend to pay higher multiples. The variables specific to your dealership and the prospective buyer will affect your multiple.

The final step in the calculation is to reduce the computed Gross Dealership Value by the working capital and fixed assets needed to adequately operate the dealership at the expected volume.

Results May Vary
The formula above is a good tool to help you determine a range of Blue Sky you might expect from a buyer. However, every transaction and buyer is different and the result of the formula may not be what you are offered.  When looking to buy or sell a dealership, contact an experienced professional to discuss a valuation of your Blue Sky as well as other factors that may influence you Blue Sky number.

Latest Insights

July 13, 2018
Article
Here are some idea for giving your new hire a smooth start into your business and alleviating stress for you.
July 13, 2018
Article
The impact of the recent SCOTUS Wayfair decision will continue to have a ripple effect on businesses and state sales tax compliance.
July 9, 2018
Article
The revenue cycle is a complex system and we have historically given much attention to the front-end and back-end while oftentimes leaving the middle functions of the cycle neglected.
July 3, 2018
Article
FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, provides a 5-step framework for determining revenue recognition.
July 2, 2018
Article
As part of the Tax Reform Act of 1986, the “Kiddie tax,” a taxing regime designed to make the transfer of income items by wealthy parents to lower tax paying children less attractive, was implemented.
July 2, 2018
Article
When it comes to your employees, you likely conducted interviews on them when you first hired them.
July 2, 2018
Article
Nearly ten years after the release of the initial exposure draft, FASB issued ASU 2016-02, Leases - The standard may have been issued, but the conversation about this re-write of legacy guidance has not slowed.
June 29, 2018
Article
Banks look at three broad categories when considering small business financing: business cash flow, personal financial strength, and collateral value.
June 28, 2018
Article
You need to be cautious when entering into a bartering relationship and remember to track everything and the key to accounting for bartering is making sure you still record the income earned and expenses incurred.