Dealership Valuations are Challenging Today - Average Profits Remain 2.4x Higher Than in 2019

One of the most frequently asked questions is about how dealerships are valued. Before the pandemic, the answer was a lot easier than it is today. In addition to dealership profits still being so strong, there are differing ideas about where profits will level off in the future.

In the Q3 2023 Haig Report?, we shared where average dealership blue sky values landed at the end of Q3 and provided some insights into what to expect as we head into 2024.

We estimate that the average blue sky value per publicly owned dealership at the end of Q3 declined by 12% compared to year end 2022, so a little over 1% per month.

These declines are not being felt evenly across different franchises or across different geographies, however. Earlier this year, we represented the owner of Al Hendrickson Toyota, helping him sell his dealership for the highest price ever paid for a single franchise. And in the second week of November, one of our clients signed an LOI to sell his Toyota dealership for an even higher multiple, at a price that will set a record for the state in which the dealership is located. Unlike dealerships selling other brands, Toyota stores may have been ppreciating during 2023, due to high demand from buyers who admire the partnership that Toyota has with its dealers. To reflect this development, we have raised the blue sky multiple for Toyota twice this year. Now sitting at a range of 7.0-8.0x, Toyota is among elite company.

In addition to certain highly desirable franchises, we are seeing very strong demand for dealerships in regions that are growing quickly and have pro-business climates. Two Mercedes-Benz dealerships were recently sold in Miami-Dade County for over $700M, including real estate. And we know of other pending sales in FL that will set record high values for the franchises that are involved. Other states are also seeing high prices for dealerships. Texas has long been a state where buyers pay strong prices, and the Southeast, Mid-Atlantic, Mountain States and Southwest are also in high demand.

Some franchises, however, have declined significantly. Sales at Stellantis dealerships have declined steadily since the middle of 2022, unlike other brands that are enjoying higher unit sales as production returns to pre-pandemic levels. There are several reasons for the decline, but one key factor is that Stellantis produced a lot of high trim package vehicles at the same time that affordability became a big issue in the industry, with some Jeep Wranglers priced above $60K, for instance.

Dealership valuations are challenging today, given that average profits remain 2.4x higher than in 2019 and ideas differ about where profits will level off in the future. Some buyers conduct extensive analysis before making offers. Others are estimating future profits as a percentage of current revenue. And still other buyers acknowledge they are essentially guessing what the future will bring for profits. They are bidding on the stores that are a good strategic fit for them, eager to put their excess cash to good use.

We can estimate the change in value for publicly traded dealerships since their earnings are posted each quarter. When we apply the blue sky valuation formula we see buyers using today, we estimate the average publicly owned dealership has a blue sky value of $22.1M, down 12% from year-end 2022.

What is important to remember, however, is that even with this decline, the average blue sky value per store is estimated to be 136% (2.4x) higher than average blue sky value at yearend 2019. Blue sky values are still very strong!

Please note that there are no hard and fast rules on dealership valuations. There are situations where a buyer has decided a dealership is strategically important, so they are willing to pay a big premium to acquire it. There are also situations where sellers who don’t run a comprehensive sales process will not source the Most Motivated Buyer? and end up selling for below market prices.

Read more about this and other trends in auto retail in the Haig Report?.