BUY-SELL Q&A | Valuing concessions In times of uncertainty

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Q: How are concessions valued today?

Haig: This is not an easy question to answer! We focus on evaluation every day. We provide customers and potential customers with an estimate of how much blue sky the Most Motivated Buyer® (the dealer who places the highest value on a dealership or group) would pay them for their dealership in addition to the real estate and other related assets. Each transaction is different, as each dealership has unique attributes that will impact its valuation. The performance, location, price and condition of facilities all have a big impact on the value a buyer is willing to pay. Additionally, and as conditions change, it is impossible to have perfect information on how buyers will bid by the time we come to market. Therefore, our valuations include a low and a high estimate of goodwill. By providing these reviews, our customers and potential customers have a good idea of ​​what to expect.

Before the pandemic, our assessments were extremely accurate. Our customers who sold in 2019 received 98% of the midpoint of the high and low ranges for our blue sky estimates. When you include the values ​​of real estate and other assets, our forecast of the total value our customers would receive was approximately 99% of the midpoint we obtained for them. It’s damn good! Our accuracy came from our involvement in buy-sell for over a hundred dealerships between 2014 and 2019. The economy during this period was very consistent, as was dealership revenue. Stability allows precision.

As the market has changed in 2020, valuations have also changed. When the pandemic hit, the buy-sell market evaporated for a few months. This scared off sellers and gave buyers leverage. When deals started to close again in June 2020, valuations had fallen below 2019 levels. The blue sky stocks our clients accepted in 2020 were 86% of the midpoint we had estimated for them because our estimates were mainly made before the pandemic.

As earnings exploded in 2021, valuations also surged. We knew conditions were improving, so we strengthened our assessment methods. Fortunately, buyer demand was even stronger than expected. The blue sky values ​​our customers accepted in 2021 were 106% of the midpoint we estimated for them.

After seeing the strong results in 2021, we again raised our valuation methodology for the estimates we provided to our clients in 2022. But demand was again higher than we had expected, with earnings having tripled compared to the pre-pandemic era. The blue sky values ​​our clients have accepted so far this year on closed deals were 119% of the midpoint of the estimated range we provided. And for our deals where deals have been accepted but not yet closed, the blue sky amount is 144% of the midpoint of our estimate. Our clients have been delighted with the results of our sales processes over the past few years and we pride ourselves on under-promising and over-delivering, but we also like to be precise.

We share this valuation data to demonstrate that when conditions are stable, it is relatively easy to predict how much goodwill a buyer will pay as long as you have plenty of transaction data to support the valuation. . But when conditions change rapidly, dealership valuation becomes more difficult, even for a company like ours that will be selling fifty dealerships this year.

Due to mixed trends today, the earnings outlook for dealerships is once again uncertain. Some buyers are optimistic and want to acquire dealerships that fit their strategy and will command a high price. Others are cautious and may pull out of the market until conditions stabilize. These different perspectives make it difficult to accurately project today how a buyer would value a dealership 30 days from now. Dealers, accountants, or dealership brokers estimating values ​​today are just guessing. Our hunch is that blue sky values ​​have fallen about 10% from their peak.

The only sure way to determine the highest value for a dealership or group is to initiate a marketing process to surface the Most Motivated Buyer®.

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