Steps for Dealerships to Navigate Change

Article

By Glen McMahon

The dealership industry has changed significantly over the past several years. In turn, many in the business have also changed how they operate. For some, it’s meant an entirely new business model. For most, it’s at least meant optimizing processes and systems such that it’s easier to navigate any change.

The economy will continue to fluctuate, and it’s difficult to predict what that will look like in the future. No matter what type of dealership you operate, it pays to be an agile navigator.

Here are some tips to help your dealership continue evolving and plan for the road ahead:

Review Your Operations

In building agility and strength to better manage change and uncertainty, the best starting point is a full review of your operations. This will allow you to identify and understand your inefficiencies, so you can strategize to streamline and improve upon them.

Common dealership operations areas 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

Pay Attention to Your Inventory

Anyone who has worked in or around a dealership knows the business succeeds or fails on proper inventory management. Most dealers in operation today have survived and thrived based on their expertise in picking and pricing the right inventory. It’s important to evaluate the listing or dashboard you rely on to ensure it is reporting accurate information.

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.” This means the individual makes a list of what is present from scratch, rather than working backwards from what the list shows is present. Done in this way, a blind count is more likely to represent exactly what is on hand at that time. When the individual works from a list, the list tends to lead the count and discrepancies get 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 offer an opportunity to sell off or recycle scrap inventory.

Count Frequently

It’s important to perform this inventory count regularly and diligently. 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 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.

Poor gross profits, excess supply and theft are common issues for dealerships’ parts departments. If you’re battling with these issues, your parts department might be more of a drain on your operations than a benefit. The good news is: you can turn it around.

Understand Your Dealership’s Value

Knowing your dealership’s value will better position you to make meaningful adjustments where needed, capitalize on opportunities you’re already successful with and pivot in the moment 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.

You can use the following example and formula to help determine the intangible value of your dealership from a buyer’s perspective.

 

Dealership Example

 

What Buyers Will Examine

Buyers will want to see prior years’ operating statements. They will use these to determine what future sales they can expect and what your net profits as a percentage of sales have been. It is 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.

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.

Two common reasons dealer owners conduct business valuations are that they’re:

  • Preparing for a potential sale
  • Conducting estate planning

What role does a business valuation play in each and how can you set yourself up for success? Learn more.

Retain Your Workforce

Staffing turnover is a consistent issue in the dealership industry. For instance, the Cox Automotive Dealership Staffing Study revealed that 67% of franchised dealers find motivating and retaining quality employees challenging today. The top reasons employees cited for looking elsewhere for employment were better pay, more advancement opportunities and better work-life balance.

It’s critical for dealerships to retain their talent to control costs and maintain a great company culture. A few ways dealerships can strategize to retain employees include:

  • Conduct stay interviews. These allow you to keep a pulse on what’s happening with your employee base. It’s important to understand how your employees are doing and what they need to be successful. Keep them informed about what’s going on at your company.
  • Pay a fair wage. For dealerships, this involves transparency and honesty about true earning potential, especially with your salespeople. It also involves regularly conducting compensation studies and setting expectations for employees so they understand what they’re being paid to do.
  • Provide mentoring and coaching opportunities. Allow your top employees to work alongside new employees or those who are struggling. It not only allows employees to interact with one another in a professional manner, but also encourages camaraderie.

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 strategy, profitability, 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 retain great talent, and strategize how you’ll move forward as the dealership industry evolves.

An outsider’s perspective and expertise can do wonders for your strategy, whether you need to introduce a new technology or an entirely new business model. Our experienced dealership advisors offer a wide range of services, from operational analyses to tax planning and fixed asset services.

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