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How Do Car Dealerships Make Money Pt. III: Determining the Valuation of an Automotive Dealership

How Do Car Dealerships Make Money Pt. III: Determining the Valuation of an Automotive Dealership

Readers note: This post is the third installment of a four-part series exploring investments in the automotive industry. Read our first post, “How do car dealerships make money?” by clicking here and the second post exploring in-person vs. online sales as well as trade-in and auctions by clicking here.

Determining an automobile dealership’s valuation can be a complicated feat due to variances in cost structures from one dealership to another. In general, dealership sales cover various assets, including real estate, inventory, and fixed assets. The primary valuation driver for any entrepreneur who wishes to choose a reputable dealership is brand positioning and awareness. For dealerships offering mass-market brands, Subaru, Toyota, and Honda have the highest instances of brand loyalty across the market. With roughly 60% of car owners choosing the same brand when trading in or purchasing their next vehicle, investing in brands that drive consistent returns is essential to creating value in a dealership. 

Geographic location also plays a vital role in a dealership’s value. Regions with strong demographics result in higher valuations, alongside franchises located in metro areas. Taking market saturation into consideration is also worth time in your due-diligence process as too high a concentration can lower a dealership’s potential profitability. Further, dealers with multiple revenue streams, unsurprisingly, have higher valuations overall.

Ideal Acquisition Targets for Investors

Several high-value attributes make a dealership an attractive acquisition target for investors. Namely, many dealership owners are over 70 years old and can be expected to retire within the next five to ten years. In some cases, owners may not have identified a potential successor in their own family or business and may consider selling their dealership to an outsider.

In light of this, investors should also consider absentee owners who wish to acquire better management for their dealerships as viable options. The reasons absentee owners may be considering taking on investors are varied, but most cases fall into two categories: The first includes those who hope to improve their market share by selling part of their franchise to fund additional reach, new equipment, or advertisements. The second is small-scale dealers interested in selling their company to help diversify revenue streams and lower volatility when they sense an abrupt increase in customer demand.

It is important to remember, however, that as much as you’re completing your due diligence, so are the brands represented by the dealerships you’re pursuing. Before a dealership acquisition can be completed, the represented brands must first approve you as a new dealer. Generally, these panels are interested in ensuring you have extensive knowledge of dealership operations as well as a strong financial background before approving you as a dealer principal. 

In most cases, the best option for getting around this approval process is investing with an existing company that already owns car dealerships. This can be done through the public market sector with publicly traded companies or by investing with privately held companies or private equity groups with a dedicated automotive portfolio.

Investing with the Right Dealership Operator

To create a sound investment strategy within the automotive industry, the dealership operator should be your central focus when deciding with whom to invest. When making an investment decision, among the most important factors to keep an eye out for are the operator’s level of confidence in their dealership and their vision for its growth, as well as your confidence in this vision and their ability to execute it. 

Whether they’re the company’s CEO or just the head operator, dealership operators are the heart and soul of any auto dealership. Operators should have:

  • A demonstrated history of success managing dealership operations
  • Clearly defined goals and outlined plans on how they will be achieved
  • Commitment to the success of the dealership 
  • Time to devote to ensuring dealership goals are reached
  • Realistic expectations about the dealership’s proposed growth timeline

The Potential for Investing in the Automotive Industry

Globally, the automotive industry has experienced vast growth in emerging economies. Automotive companies continually adopt the latest technological advancements, making car dealerships a savvy investment. The most recent industry-halting name in the automotive sector is Tesla, which has released a very successful series of electric vehicles. While going electric may seem like a purely altruistic and eco-friendly goal, it’s also an important business consideration for most investors considering the automotive sector. 

Currently, only a small fraction of overall car sales include electric models, with the traditional gas-powered models dominating the market. Despite the continued prevalence of gas-powered vehicles, electric models are predicted to dominate the market within the next few years, creating a significant transition in the automotive industry. 

With automotive being a growing and necessary societal industry, crafting a robust automotive portfolio is a smart way to diversify investments. Now that you have a more clear answer to the question, How do car dealerships make money?, it is the perfect time to contact our team to learn more about diversifying your portfolio with automotive investments.

This is the third part of our four-part blog series on the automotive industry. Next week we will conclude our posts by highlighting how COVID-19 has impacted the automotive industry. Be sure to check out our previous blog posts as well.

Azhar Hirani blog author
Azhar Hirani

Azhar Hirani manages the private equity sales team, which involves relationship management, advising and educating retail clients on new private investments, analyzing private equity portfolios, and oversight of clients’ invested capital in internal private projects. Passionate about business, marketing, and sales, Mr. Hirani maintains deep expertise in high ticket sales and has a record of success in sourcing capital and acquiring new customers.

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