CASE STUDY #4
Dealership Valuation Engagement for Antagonistic Buyout
As a subject matter expert (SME) in dealership acquisition and disposition planning, I have been engaged to perform for you a valuation of a Buick-GMC dealership corporation (also referred to as XYZ Buick-GMC), in which your client may wish to purchase an approximate 50% interest. It is my understanding that the client intends to invest through a stock purchase agreement, and that he plans to acquire a simple majority of the outstanding shares in the dealership corporation. It was my mission to establish a realistic value of the corporation, upon which your client can base a strategic offer to purchase.
The information on which my opinion is based is limited to only the most recent nineteen months of data provided on General Motors financial statements and the knowledge that the dealership is located in the southeastern United States. Therefore, no consideration could be given to the dealership market share and competitive environment, the market demographics, the background and tenure of the dealership staff, or the location and functionality of the dealership facilities.
I first performed a comparative analysis of operational and financial performance on an average monthly basis for the periods of January through December, 2014, versus January through July, 2015. I have further developed an operational and financial pro-forma which displays how the dealership might perform if “best practice” guidelines were applied to the most current monthly sales levels. This data is presented for your review in the attachment labeled “Acquisition Analysis.”
I then performed a valuation of the dealership net worth (excluding Goodwill or Blue Sky) utilizing the dealership’s balance sheet, as reported on July 31, 2015, resulting in an assignment of “Adjusted Net Worth.” This data is presented for your review on the upper sections of the attachment labeled “Valuation Format_GH&A.”
Finally, I formulated my opinion of the Goodwill, or Blue Sky, value of the dealership. This subjective valuation is stated in the lower section of the attachment labeled “Valuation Format_GH&A,” and the methodology for this opinion is presented in a further section of this communication.
The traditional method of valuing a dealership corporation is to combine the Goodwill or Blue Sky (calculated as a multiple of pre-tax profits) with the Adjusted Corporate Net Worth. Following is that calculation for XYZ Buick-GMC:
Estimated Goodwill or Blue Sky Value.....$ 6,291,413
+ Adjusted Corporate Net Worth..................$ 4,810,770
= Total Estimated Dealership Value.............$11,102,183
Details describing the content of these two categories are included in the following paragraphs.
Dealership Performance Analysis (Establishing the Baseline Profitability Level)
One of the first calculations required in the valuation process is to establish an annual baseline profitability level, to which the goodwill (or Blue Sky) multiple(s) will be applied. As referenced in the attached “Acquisition Analysis,” XYZ Buick-GMC appears to be in very good health. Following are some of the positive indicators:
New Vehicle Unit Sales show nearly a 7.0% Year-Over-Year (Y-O-Y) Average Monthly Improvement.
Used Vehicle Unit Sales show more than a 15.0% Year-Over-Year (Y-O-Y) Average Monthly Improvement.
Adjusted Transactional Variable Gross Profit Per Retail Vehicle shows more than a 13.0% Year-Over-Year (Y-O-Y) Average Monthly Improvement.
Fixed Operations Gross Profit shows nearly a 9.0% Year-Over-Year (Y-O-Y) Average Monthly Improvement.
Gross Profit Per Dealership Employee shows more than an 18.0% Year-Over-Year (Y-O-Y) Average Monthly Improvement.
Adjusted Net Profit shows a 47.0% Year-Over-Year (Y-O-Y) Average Monthly Improvement.
Profit Retained as a Percent of Gross Improved by 350 Basis Points to 18.34% on a Year-Over-Year (Y-O-Y) Average Monthly Basis.
Profit Retained as a Percent of Sales Improved by 68 Basis Points to 2.61% on a Year-Over-Year (Y-O-Y) Average Monthly Basis.
Based on these favorable operating trends and results, and lacking any evidence to the contrary, there seems to be no reason not to develop an annualized baseline profitability level from the nineteen months of available financial data. The calculation is as follows:
Net Profit for 12-Months Ending 12/31/14...........$1,340,747
Net Profit for 7-Months Ending 7/31/15...............$1,149,604
Total Profitability (Most Recent 19-Months).......$2,490,351
÷ 19 Months
= Average Monthly Base Level Profitability............$ 131,071
x 12 Months
= Annualized Base Level Profitability.....................$1,572,853
There may be reason to scale this number upwards if the client is confident that the dealership could soon be performing according to “best practice guidelines.”
Developing and Assigning the Total Adjusted Corporate Net Worth (Excluding Goodwill or Blue Sky)
The purpose of this exercise is to recast the balance sheet to determine what it might look like if an asset sale (for inventories and equipment) were executed with a new dealer and the remaining assets were liquidated and the liabilities were all retired. As you will note from the “Valuation Format_GH&A” document, the balance sheet is primarily impacted by a) the recognition of the income tax liability associated with the LIFO reserve, b) applying a factor for potential inventory adjustments, and c) the elimination of Leaseholds as a real asset to the corporation.
Although verification of all noted asset and liability categories should be part of the due diligence process, prior to any actual investment in the dealership corporation, this SME’s best estimate of the Total Adjusted Corporate Net Worth (Excluding Goodwill or Blue Sky) is $4,810,770.
It should be noted that as of July 31, 2015, the balance sheet showed that corporate net working capital exceeds the manufacturer’s working capital requirement by more than $3,500,000. Should the current owner(s) of the dealership elect to distribute some or all of this excess working capital prior to your client’s investment, the Total Adjusted Corporate Net Worth would be reduced by the full amount of the distribution.
Developing and Assigning a Goodwill (or Blue Sky) Value
There are currently numerous sources within the industry that research and report on dealership buy-sell transactions. These sources tend to agree that the current Blue Sky multiple for a Buick-GMC franchise is between 3x and 4x Adjusted Pre-Tax Profits (or “Annualized Base Level Profitability”). I have attached the Second Quarter 2015 report from one of these sources, Haig Partners, which verifies these multiples.
It is the opinion of this SME, based on the Year-Over-Year performance improvements at XYZ Buick-GMC combined with the fact that XYZ Buick-GMC is located in the Southeast U.S. (“Truck Country”), that the 4x multiple be used in this evaluation. The Blue Sky Value is then calculated as follows:
Annualized Base Level Profitability.............$1,572,853
x 4 x Multiple
= Estimated Blue Sky Value............................$6,291,413
The only factor one might use to justify lowering this multiple is the dealership’s current lackluster “Fixed (Service) Absorption.”
Should you have any questions regarding this report or the attachments, please feel free to contact Garry House at (561) 339-0043 or firstname.lastname@example.org.