Dealerships are facing difficult decisions in the wake of COVID-19. As many organizations have closed their doors, potential recreational or luxury spending is projected to decline. How then can dealerships navigate through a time of uncertainty and plan for the road ahead?
Here are a few tips to help your dealership move forward.
Review Your Operations
In time of economic uncertainty, it’s important to understand how to streamline and improve inefficiencies. Common dealership operations areas to be considered include:
Adapting your processes, practices and ideas to position your dealership for growth is important. We recently talked about dealership operations and best practices.
Pay Attention to Your Inventory
Everyone who has worked in or around a dealership knows the business sinks or swims on proper inventory management. Most dealers in operation today have survived and thrived based on their expertise in picking and pricing the right inventory. But maybe it is time to double check that the listing or dashboard you rely on is feeding you accurate information.
The strongest inventory controls revolve around a physical inventory count and reconciliation with a few key components to be effective: segregation of duties, a “blind” count, and frequency.
Segregate Count Duties
Segregation of duties means assigned count individuals should be independent from anyone who has physical access to inventories, such as a salesman or lot porter with access to keys. This avoids a “fox in the henhouse” situation where the person stealing or loaning out inventory is the one relied on to ensure things are present and accounted for.
The count person should also be separate from the one reconciling that count to accounting records. This may avoid someone fudging a count or glossing over a difference because they want to avoid further work. The reconciliation should also be separately reviewed and approved, perhaps by a business manager or controller.
Don’t Use a List
Physical counts should be performed “blind,” meaning the individual makes a list of what is present from scratch, rather than working backwards from what the list shows is present. Therefore, a blind count represents exactly what is on hand at that time. When working from a list, the list tends to lead the count and discrepancies are overlooked, even if the observer has no incentive to hide errors. After completing a proper blind count, the count sheet or record should be delivered to be reconciled.
The reconciling individual should then pull the listing and investigate any discrepancy from the count record. This could identify a paperwork problem, fraudulent activity, or maybe an opportunity to sell off or recycle scrap inventory.
Frequency Is Key
Whatever you do, make it frequent. Depending on your size, the scope may differ between daily, weekly, monthly, quarterly, or annual procedures. You may even benefit from an unscheduled count, so fraudsters have no time to cover their tracks.
The frequency and depth of procedures should be a well-thought-out and intentional decision. But at a minimum, get in the habit of a regular procedure incorporating the elements above.
Understand Your Dealership’s Value
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. Buyers typically pay a price that provides them an acceptable rate of return based on the perceived risks they are taking.
The following example and formula can assist you in determining the intangible value of your dealership from a buyer’s perspective.
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% 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. 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.
Retain Your Workforce
Staffing turnover was already an issue for dealerships pre COVID-19. In fact, the Cox Automotive Dealership Staffing Study found that the average turnover is 39% for dealership employees and 72% for salespeople. Considering the average cost of hiring a new employee is $10,000, it’s now more important than ever for dealerships to retain their talent.
A few ways dealerships can help retain employees include:
Learn more about HR trends in workforce retention
Prepare Your Dealership for the Next Normal
The new level of economic uncertainty we’re facing is directly impacting dealerships. Dealerships who consistently focus on improving strategy, profitability, cash flow and operations are the ones likely to see the impact on their bottom line. Take a critical look at inefficiencies, retain good talent and strategize how to move forward.
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