The Different Values of a Car Dealership

The appraised value of a dealership is not the same as its sale value.

An appraisal just tells the “fair market value” of a store and lets the chips fall where they may. It is a value based upon a mythical willing buyer and a mythical willing seller, with both assumed to be “reasonable.”

In preparing an appraisal for a dealership, the appraiser is required, for example, conform to published rules and guidelines:

The definition of market value according to the American Institute of Real Estate Appraisers’ Dictionary of Real Estate Appraisal is:

“The most probable price in cash, terms equivalent to cash, or other precisely revealed terms, for which the appraised property will sell in a competitive market under all conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under duress.” American Institute of Real Estate Appraisers, the Dictionary of Real Estate Appraisal. (Chicago: American Institute of Real Estate Appraisers, 1984), 194 195.)

In Revenue Ruling 59-60, the Internal Revenue Service defines “fair market value” as follows:

… the price at which the business would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge and relevant facts.

In preparing a prospectus to sell a dealership, the only “rule” to which one must conform is: Do not lie.

A dealer is entitled to ask whatever he/she wants for a store and a buyer is entitled to pay whatever he/she wants so long as the buyer can demonstrate to the factory that the store would be profitable after the purchase. The latter task can be achieved in number of ways, such as paying cash for the real estate and leasing it back to the dealership below its fair market value.

The value placed on the store in an actual sale may take into account such things as a specific buyer’s:

(a) needs and desires for the particular brand being offered
(b) needs and desires for the particular location being offered
(c) abilities to cut costs (e.g., a group vs. single point buyer)
(d) extraordinary abilities to increase sales volumes in sales, service and parts

In appraising a dealership, the appraiser cannot base the appraisal upon the possibility the seller may find the “ideal” buyer for the store. A good example would be a recent dealership sale we helped structure. The store was appraised at 8 times earnings just six months before we sold it at 22 times earnings.* Although millions of dollars apart, both values were correct.

The 8 times earnings was a valid “appraised value” for an average sale and the 22 times earnings was a valid purchase price for this particular purchaser.

If an appraiser, however, were to value a store at the absolute highest value at which it could be sold, he or she would open him or herself up to a lawsuit

In summation, car dealers should think of the disparate values in terms of valuing a used vehicle. The vehicle may book at $10,000, but one may find just the right buyer who would pay $20,000.

Just as it would not be a sound business practice to forecast profits by assuming every vehicle will sell to “just the right buyer,” an appraiser cannot reasonably value a dealership by assuming it will sell to “just the right buyer,”

*Footnote: We never value dealerships by using “multiples.” The multiples referred to above are used because that is the way the final values worked-out and it provided an easy example of the drastic difference that could exist between an appraised value and a sale value.

Auto Novice

Auto Novices is a blog, that was set up in November 2011, which tries to help inform new & old automobile owners about various subjects from keeping their car in good working order right through to tips on buying a new & used motorbikes. GUEST POSTS: If you would like to produce a guest post for this blog then please contact us via the link in the navigation menu at the top of the page.