If you are in the Raleigh NC area or anywhere in the USA and looking for a valuation on your car dealership contact Lou today or visit our huge resource on business valuation.
For the purpose of this post, the context will be limited to new car dealership franchises, and not used car dealerships. Each function very differently from one another, and the process of appraising them is just as different.
New car dealerships are a challenging business to run, and make money is a variety of ways. In fact, many of the means by which a car dealership generates income is not obvious to the outside observer. While the sale of new cars does create revenue, the profit margins on those sales can be quite low. Instead, dealerships make money through services, accessories, and floor financing.
The method used in order to value this type of businesses is referred to as EBITDA, which stands for “earnings before interest, taxes, depreciation, and amortization”. The simple way of conceptualizing that would be to ask “what does the owner of this business get out of it? That’s not to say it’s just limited to his personal salary, but also profitability. It’s important not to add in any type of add-backs during the valuation process, such as interest from floor financing.
For a rough appraisal of a new car dealership, three to seven time the EBITDA of one years worth of business is measured. For example, a $10 million dealership would likely have an EBITDA of approximately $600,000, which multiplied by 7, for a high end estimate, would value the entire business at roughly $4.2 million.
This is only a hypothetical situation, however, as each dealership is unique, and the small details matter,. For an accurate valuation of the business, an in depth one on one analysis is necessary.