How to Read a Dealership Valuation Report
A valuation report arrives. It has a number on the last page, and that is where most owners look first. That is understandable, but it is the wrong place to start. The number is only as good as what sits underneath it. Learning to read a car dealership valuation report from the front, not the back, is one of the most useful things a dealer principal can do before a sale.
If you want one sell-side firm's description of how it builds a valuation, you can read more here. What follows is a general guide to reading any report.
Start a car dealership valuation review with the inputs
Look first at what the report is based on. How many years of financial statements? Which months? Are they reviewed, compiled or internal? A sound car dealership valuation generally uses several years of data. MD Johnson says its own work uses at least three years of financial statements. One strong or weak year can distort everything.
Then read the adjustments
This is the heart of the report. Adjustments convert reported earnings into the sustainable earnings a buyer would expect. Look for:
- Non-recurring expenses removed, such as a one-time legal cost or a facility repair.
- Owner-specific expenses normalized, such as above-market owner compensation.
- Rent normalized, if the owner holds the real estate and the rent is above or below market.
Each adjustment should be explained. If it is not, ask. Buyers will.
Check the real estate treatment
Does the report value the real estate separately? Does it compare the property value to the rent the store pays? MD Johnson lists real estate value versus rent expense as part of its analysis. Blue sky and property should be separate lines, not blended.
Look at how blue sky is derived
Blue sky, the goodwill above tangible assets, is often expressed as a multiple of adjusted earnings. The report should explain why that multiple was chosen: brand demand, market, facility, store performance. A multiple with no reasoning behind it is a guess.
Find the market discussion
A good report says something about current conditions. Buyer appetite, interest rates and inventory all move over time. Industry sources such as the National Automobile Dealers Association follow these conditions, and the report should reflect them.
Look for what is missing
- Facility upgrade requirements from the factory.
- Pending franchise or compliance issues.
- Key personnel risks.
- Concentration in one product or customer type.
Buyers will find these. Better that your report addresses them first.
Now read the number
With the inputs, adjustments and reasoning understood, the final figure makes sense, or it does not. Ask yourself whether a serious buyer would accept each step. If not, the number is at risk.
A word on optimism
A high number is pleasant to read. It is less pleasant when it collapses in due diligence. MD Johnson states it "will NOT give you a pie-in-the-sky number just to sign an engagement agreement." Whatever firm you use, https://mdjohnsoninc.com/dealership-valuation/ a realistic car dealership valuation is worth more than an optimistic one.
Bring your CPA
Your CPA can check the adjustments against what they know of your books. That review often catches issues a seller would miss.
Questions to write in the margins
- Why was this adjustment made, and would a buyer accept it?
- Which year carries the most weight, and why?
- What rent was assumed for the property?
- What would change the blue sky reasoning up or down?
- What did the report leave out on purpose?
Write the answers down. They become your talking points when buyers start asking the same questions.
Short summary
Inputs first. Adjustments second. Real estate third. Then the reasoning behind blue sky. Then the market. Then what is missing. The number comes last.
General information only, not financial advice.