Pub. 10 2020 Issue 1

20 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com Introduction When it comes to appraising automotive dealerships, there are several unique nuances that come into play. Many industry-speci c factors are to be considered, which all contribute to the value of the dealership’s Goodwill. Also commonly referred to as “Blue Sky,” the Goodwill valuation of a business is used to establish the value of the intangible assets associated with the business such as trade names, franchises and brands, and customer relationships. On the other hand, we have tangible assets, such as, equipment and inventories — assets in which industry standards can be used to establish their value. Tangible assets provide for measurable value during a valuation engagement, but how do we determine the appropriate Goodwill value? Multiples We start with discussing multiples of earnings and their application. While performing a typical business valuation, comparable businesses are commonly used as measurable metrics for determining the value of a business. e auto industry is unique because there is an abundance of historical transactions that allow for such comparisons. is has created a heightened awareness of “Multiples of Earnings” valuations within the auto industry. On the surface, this may seem as simple as applying a multiple to a normalized representation of the businesses’ earnings to establish a nal Goodwill value, but in fact the valuation process is much more complex than that. A proper valuation of a dealership cannot be solely based on the simple application of an earnings multiple, but rather on what a qualified buyer is ready to pay for the business, given the operational facts and conditions. Certainly, comparable transactions within the industry, help provide a scale of value during the assessment. However, it would be quite risky to conclude the analysis by simply applying a multiple of earnings to validate a valuation. A thorough assessment is always required in order to truly provide proper validation of the businesses’ market value. Thus, the true value of any dealership is the highest price a potential buyer would be ready to pay, given the outcome of the in- depth analysis. Buyers Motivations As with other investment decisions, potential buyers are looking for a return on their investment (ROI). e price this buyer is willing to pay is normally determined by their exhaustive analysis of the risk factors and rate of return on their investment. With that said, buyers’ motivations are normally driven by logic, but are also o en driven by emotion. For example, industry buyers What Is the Real Value of Your Dealership?