Exiting your dealership entails many important issues. Maybe you have no successor, so you will sell to an outsider. If you have a family member or trusted employee, perhaps you will provide long-term financing for a buyout.
To help you with these decisions, here are the five most important factors to contemplate when selling your business.
- What is the business worth?
In every case, you will need a valuation. If you plan to take the business to the open market, a less-expensive value estimate will help set the asking price. However, you also want to make sure you receive the highest possible amount for the sale, in a reasonable amount of time.
If you are selling to a known successor, the IRS has specific rules about the valuation’s nature and content to support the price paid. The agency wants to ensure it gets everything it is owed.
- How is the value determined?
It is all about the cash flow! The most important value aspect is cash flow. A business that does not make money is considered a hobby. The hobby’s value is the equipment and materials’ market value.
A business is an investment, and investors expect a return on their investment, cash flow and/or growth. To get the maximum price for your hard work, cash flow should be at or above industry benchmarks as a percentage of revenue over recent years.
Owners often ask, “Is there anything I can quickly do to increase the value of my business?” The honest answer is no.
When investors consider an investment, they look at the return over time, typically the last three to five years, to estimate future earning power. A single month or year might be a positive indicator, but it does not override historical trends. Always be contemplating “that someday” when you will exit.
Is all cash flow created the same?
When estimating value, investors examine two elements: cash flow and the risk involved in attaining future cash flow.
Many factors influence a business’ risk, such as the economy and local demographics, but two nearby dealerships may have very different risks.
For example, one dealership might have long-term skilled employees in place who perform all the key tasks. The owner could go to Hawaii for a month and not be missed.
The dealership down the street might have high turnover, and the owner is the only salesman, so there is no point in opening if he is sick.
Which is the better investment?
When assessing enterprise value, owners sometimes forget about other investment options available to buyers. Investors can buy a dealership, real estate, publicly traded stocks, or other types of businesses.
Private dealerships include floorplan companies with general security agreements, heavy investment in infrastructure, seasonal high-dollar depreciating inventory, and no ready market to sell the business when the owner wants out. Compare that investment with Microsoft shares, and a seller will need a hefty return to entice an investor to buy the dealership. The Microsoft investment has a 10-year return of about 27%, requires no work and can be sold in three days.
- Phone a Friend!
Once you decide to exit your dealership, you must absolutely engage competent, skilled advisors.
Before you talk to anyone, call your accountant and financial planner or wealth manager. Be sure you have a plan to minimize the tax on any transaction. Good advance tax planning can save hundreds of thousands of dollars.
When selling to an outsider, work with a mergers and acquisitions (M&A) specialist who understands the industry’s complexity. Choose someone who truly knows how important confidentiality is to a dealership.
Business brokers may not realize that losing your top tech or top salesperson affects your dealership to its foundation. A coffee shop barista is easy to replace, but skilled dealership employees are hard to find. In addition, an industry specialist should do better at qualifying prospective buyers with the best approval chance from manufacturers and floorplan companies.
If you are selling to an internal buyer, using an M&A professional to mediate through this process can be helpful. Having an arm’s-length mediator to buffer and filter emotionally charged conversations can save families and friendships during negotiations.
Bring your attorney to the table as well. The attorney will be involved in deal agreement prep in an external sale, but when selling internally, consult your attorney before discussions even begin. The talks can be much more complex, addressing options to purchase, earn-outs, stair-stepped acquisitions, floor plan guarantees and more. A skilled attorney will advise you of fair and equitable transfers before the negotiations start.
- Be sure the buyer is all-in.
A wise money advisor taught me that when you enlist an operating partner, make sure that person is “all-in.” When you finance someone to take over your dealership, be sure they invested their net worth in the business.
To say running a dealership is hard work is an understatement. Make certain the new partner has a good reason to come to the dealership every day and work diligently toward succeeding. Handing back the keys and walking away after mismanaging a business is easy if the buyer has no skin in the game.
Recently, I met two partners who bought a dealership. One provided the money and lived far away; the other was a friend who had no money in the deal and would be the new general manager. This GM felt “doing” was not in his job description.
For the first couple years, the GM had a great time spending money and taking vacations. Soon, the dealership was dirty and run-down, experienced constant turnover and lost several opportunities to expand with additional lines. Most original value disappeared.
When forming a partnership, as much as possible, ensure the scales are balanced evenly to protect your investment.
- Plan the next stage of your life.
Before you leave, have a personal transition plan to take you to the next fulfilling chapter in your life.
When I bought my second dealership, the seller showed up every day for two years to “help” the techs in the back. He was a master tech himself, so his help was appreciated, but he clearly was grief-stricken with his identity loss as the local expert.
Be sure you have a plan to take you to the next fulfilling chapter in your life.
The best time to sell is when your business is performing its best. The COVID-19 boom means most dealerships can showcase top results now. In addition, increased federal gift and estate transfer limits, enacted under the Tax Cuts and Jobs Act, make this an opportune time to pass the business to the next generation.
Carrie Stacey is the owner of Stacey & Associates, a company specializing in business valuations, mergers and acquisitions, consulting, coaching and benchmarking geared at dealerships. She is a certified valuation analyst and a licensed CPA in the U.S. and Canada. She spent a decade as the owner and general manager at powersports dealerships in Idaho and Canada. She also worked as general manager at both marine and RV dealerships. Additionally, early in her career, Carrie spent a number of years in professional sales. To reach her contact (208) 290-2289 or go to Staceyandassoc.com.