The value of your dealership

Let’s first deal with the Net Asset Value (NAV), also known as Equity. This number is simply your gross assets in the business, minus the liabilities of the business. The majority of a dealership’s assets will be in the form of stock, and most of the liabilities will probably be floor plan and shareholders loans. (I know many of the corporates have treasury functions and allocate loans to their dealerships.)

The goodwill of a dealership is essentially the earnings multiple that will be applied to the profit after tax, and this will be added to the net asset value. It is essentially the risk factor that a purchaser is prepared to accept. Let’s look at an example:

Assets (real value and not book value) - R50 000 000.

Liabilities - R45 000 000.

NAV - R 5 000 000.

Annual Profit After Tax - R1 000 000.

Earnings Multiple – 3.5.

Goodwill - R3 500 000.

Total Dealership Value - R8 500 000.

The earnings multiple is influenced by the following factors:

• Composition of earnings – reliant mainly on new vehicles but other departments are also good contributors.
• Consistency or repeatability of those earnings. A consistent history is an indicator of a solid business.
• Spread of clients means that you are not dependent on a few clients.
• The franchise you hold.
• The location and premises.
• The quality of your database.
• The contractual obligations of the dealership (leases, staff etc).

There may well be other factors as well, but the above-mentioned are the main factors in my opinion. Cash flow generation is also important, and most investors would look at this by using an EBITDA (earnings before interest, tax, depreciation and amortisation). A multiple will also be applied to this number and it may be used to “sanity check” the earnings multiple.

In closing, this is intended to give a simple and broad explanation of the dealership valuation method that is often applied.