How Dealerships Can Thrive in a Rapidly Changing Industry

December 12, 2023
man standing in car dealership lot with tablet

Key Takeaways

  • Improving operational efficiencies is the best strategy to prepare for a changing industry.
  • Better management of your inventory and focusing on attracting new staff are essential to success.
  • Understanding your dealership’s value from a buyer’s point of view will help you make meaningful adjustments when necessary.

The automotive industry is constantly changing. Being prepared to adapt and enhance your operations will allow you to successfully thrive. Here’s everything you need to know to set your dealership up for success in a rapidly changing industry.

Review Your Operations

A full accounting review of your current operations will help you see inefficiencies. Building strategies to streamline and improve them will make a difference in the financial health of your dealership.

Common dealership operations areas for you to consider include:

  • Addressing the costs of missing paperwork, including missing power of attorney, incorrect payoff or trade information, missing or skipped titles, and we owe/due bills
  • Establishing deal flow best practices
  • Addressing the items that cause the most pain and potential future expense, especially when it relates to your customer’s experience
  • Tightening up processes concerning accounts payable
  • Improving reconciliation processes and procedures for better cash management

Manage Your Inventory Carefully

Inventory is a key part of your profitability. Most dealers in operation today have survived and thrived based on their expertise in picking and pricing the right inventory. When you take the time to evaluate the listing or dashboard you rely on, it will help your dealership ensure it is reporting accurate information and can flag discrepancies that could suggest theft.

The strongest inventory controls revolve around a physical inventory count and reconciliation with a few key components: segregation of duties, a blind count, and frequency.

Segregate Count Duties

Segregation of duties means assigned count individuals are independent from those with physical access to inventories, such as a salesman or lot porter with access to keys. This helps prevent fraud in your dealership where the person stealing or loaning out inventory is also the one you rely on to ensure all is present and accounted for.

The count person should also be separate from the person reconciling that count to accounting records. This helps prevent a person from making up the count or glossing over a difference because they want to avoid future work. You should also ensure the reconciliation is reviewed and approved separately, either by a business manager or controller.

Don’t Use a List

Physical counts should be performed “blind.” In a blind count, an individual creates a new inventory list from scratch, rather than relying on an existing list. This method ensures a more accurate representation of what’s in stock at that time. When someone works from an existing list, that list tends to influence the count, leading to the potential oversight of discrepancies, even when there’s no motive to hide errors.

After completing a blind count, the count sheet or record should be delivered to be reconciled. The reconciling individual should then cross-reference the count record with the inventory listing and investigate any variances. This process can help identify paperwork issues, fraudulent activity, or provide an opportunity to sell or recycle excess inventory.

Count Frequently

It’s important for you to perform this inventory count regularly and diligently. Depending on your dealership’s 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 you use should be well-thought-out and include intentional decisions. At a minimum, get in the habit of a regular procedure that incorporates blind counts and segregated count duties.

Understand Your Dealership’s Value

Knowing your dealership’s value will better position you to make meaningful adjustments, capitalize on opportunities, and pivot with greater confidence should conditions change. This is not knowledge you should wait to obtain until you’re ready to sell or transition.

Many factors affect the intangible value of your dealership. Obvious factors include which franchises you have, your location and market size, profitability, workforce, and competition. A prospective buyer will use these and other factors to determine their expected return on investment and your business’ perceived value. Buyers typically propose and pay a price that will provide them an acceptable rate of return based on the perceived risks they are taking.

What Buyers Will Examine

Buyers will want to see prior years’ operating statements. They will use these to determine expected future sales and what your net profits as a percentage of sales have been. It’s important that you disclose any unusual or non-recurring items that have affected your profitability to the buyer. Such items are known as “normalization adjustments,” and they can make a significant difference in the Blue Sky calculation.

The buyer will also consider whether a facility upgrade is needed or will be required of the buyer in order to get factory approval. They will factor this into their overall 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.

Dealer owners often use an assessment of their current value to strategize in order to increase that value ahead of M&A activity. If you review and improve upon your operations before you’re being evaluated by a buyer, you can present an entirely different opportunity to them that is worth more.

Expected Return on Investment

The expected return on investment is a very subjective element of the formula. As mentioned in the example, 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.

Focus on Building Your Workforce

Staffing is a consistent issue in the dealership industry, with 55% of dealerships struggling with a low talent supply. A strong workforce guarantees that operations continue smoothly.

Now more than ever, it’s critical for you to attract new talent and make it easy for them to apply. A few ways dealerships can strategize to attract employees include:

Utilize Technology

How people search and apply for jobs has changed dramatically from the past. Most applicants will look on job boards and on your company website for opportunities. Make sure your homepage has a careers section with current openings listed. And utilize social media to create awareness of the value of a career at your dealership.

Create an Employee Referral Program

Incentivizing your employees to tell their community about a job at your dealership can be positive for your HR department and your employees.

Employee referral programs are a common source of quality hires for many dealerships. Take advantage of personal word of mouth by your own staff.

Nurture Community Partnerships

As a valued member of the local community, your dealership has already made important connections. If you haven’t already, consider establishing partnerships with local vocational schools and high schools who have a pool of talent eager to know more about your hiring opportunities.

Prepare Your Dealership to Navigate Any Change

Uncertainty and change, in the economy and otherwise, can directly impact dealerships. Dealerships that consistently focus on improving their strategies, cash flow, and operations are more likely to see a positive effect on their bottom line – or at least that it holds strong through disruption. Take a critical look at inefficiencies, work to attract great talent, and strategize how you’ll move forward as the dealership industry evolves.

Our dealership advisors can help you improve your financial operations and make strategic, data-driven decisions by leveraging technology and developing a digital strategy to assist in solving your top challenges.

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