VOLUME 4

BUSINESS VALUATION
ISSUE 1

M AY 1998

D I G E S T
A publication devoted
to articles on Business
Valuation and related
matters.

B Y JA M E S L. (BU T C H) WILLIAMS,C PA, CVA, CBA

IN T HIS Valuing Automobile Dealerships

IS S U E Overview
Valuing
Automobile
The valuation issues associated with transacted directly between existing dealers.
Dealerships -
Overview ..... 1 automobile dealerships, in many respects, Accordingly, valuations are utilized for due
Option Pricing: mirror those of most corporations. However, diligence purposes to help ensure that a fair
A new approach the automobile dealership industry also price is derived for the entity.
to valuing
projects. .. .. 13. possesses several unique characteristics
3) Sale of Dealership or Franchise
Competitive requiring specialized knowledge by the
Advantage Period: valuation professional. With terminology that As mentioned previously, most
The Neglected transactions involving dealerships and
Value Driver.... 26 distinguishes this industry from others, an
abundance of performance and forecasted franchises occur between existing dealers
data, and a strong reliance on the national and are negotiated directly with one
and local economies, valuing automobile another. This is an extremely competitive
dealerships requires a thorough examination industry requiring continuous attention to
of the dealership by a valuator knowledg- management of resources. Accordingly, the
eable in the industry. selling dealer is well advised to obtain an
accurate determination of worth before
The Business Valuation Digest is a
What are the Major Reasons placing the dealership or franchise in line
publication of The Canadian
for sale.
Institute of Chartered Business
Valuators. It is published semi-
for Valuation?
annually and is
While automobile dealerships can be 4) Divorce
supplied free of charge to all
Members, Subscribers and valued for almost any reason, my 20+ years Individual state laws impact how most
Registered Students of the
Institute. of experience with the industry has revealed dealerships are valued in divorce situations,
Statements and opinions the following purposes for valuation: but the valuation professional is frequently
expressed by the authors and
called upon to educate the court on the
contributors in the articles
1) Dealer Succession
published in the Digest are their
own, and are not endorsed by, nor
unique ownership and operational issues
Because the automobile dealer is the
are they necessarily those of the confronting the dealership owner.
Institute or the Editorial Advisory franchise owner, the various manufacturers
Board.
(General Motors [“GM”], Ford, Chrysler, 5) Litigation
EDITOR:
Blair Roblin, CBV, LLB Toyota, Nissan, Mercedes, etc.) imposed Areas of litigation vary widely. Most
EDITORIAL ADVISORY BOARD: stringent requirements regarding succession litigation matters requiring the utilization of
Mark L. Berenblut, CA, CBV
A. Randal Henderson, CA, CBV
ownership. Valuation of the dealership for a valuation professional involve shareholder
Nora V. Murrant, CA, FCBV estate and gifting purposes is very common, disputes. Accordingly, fair value and fair
John E. Walker, CA, CBV, LLB
and it provides unique issues to the market value opinions are utilized to resolve
All rights reserved. No part of this
publication may be reproduced, valuation professional. these matters of dissent.
stored in a retrieval system, or
transmitted, in any form or by any
2) Merger and Acquisition In addition, valuations are also utilized in
means, electronic, mechanical,
photocopying, recording, or disputes with manufacturers, usually in the
otherwise, without the prior written
Most dealerships (and franchises) are
permission of the CICBV.

For more information, please

contact:
The Canadian Institute of
The Canadian Institute of Chartered Business Valuators
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form of lost profits computations. dealership transaction. In addition, the

valuation professional is often called upon to
6) Income Tax Elections
establish values for purposes of asset
As mentioned earlier, the valuation
allocation in the transaction.
professional is often utilized by the seller or
purchaser in establishing value prior to a

Understanding the Industry

Fortunately for the practitioner, the a sizable investment of resources by the dealership.
automobile industry is one of the largest Proper coordination of this department with the
industries in the world, and a tremendous Service Department can have a large effect on
amount of information is available. dealership profitability. As “front end” (vehicle
While a detailed description of the sales) gross profits have declined in recent years,
automobile dealership is not practical in this the “back end” (parts and service) operations have
article, the major publications and resources become increasingly more important.
are listed in the Appendix to this article . The Finance and Insurance (“F & I”)
However, a brief overview of the unique Department of the dealership is the operation
attributes of an automobile dealership is requiring the least overhead and producing the
useful. largest gross profit, yet curiously is often the area
of the dealership receiving the least attention.
Multiple Businesses in One Directly impacted by demographics and the product
Possibly, one of the most misunderstood lines of the dealership, the F & I income can be
and least appreciated aspects of the very significant.
automobile dealership is the complexity of In addition to the five departments prevalent in
the business. While most companies involve almost every dealership, many dealerships will also
one or two line(s) of business(es), the have a Body Shop Department. While this
automobile dealership is composed of at least department is often linked with the Service
five businesses in one company. The typical Department, the Body Shop Department is also
dealership is divided into several reliant on its own unique factors. The relationship
departments, but in the case of the with the various insurance companies is critical to
automobile dealership, these departments the success of this department, and a major
include very separate and distinct investment in equipment is also required.
management requirements.
Larger dealerships may have separate
Closest in similarity are the New Vehicle departments (or separate companies) for Lease and
Department and the Used Vehicle Rental sales, and they may also have a Buy-Here,
Department, although the methods for Pay-Here lot targeting lower value used vehicle
acquiring and merchandising these two types sales.
of vehicles varies dramatically. In recent
The complexity of managing these varied
years, margins on new vehicles have
functions requires a skilled handling of personnel,
significantly decreased, and the contribution
physical facilities, inventory control, and money
to the gross profit of the dealership has
management. Relationships with the manufacturer
increasingly declined. Used vehicles, on the
and key vendors are also very important to the
other hand, have in recent years increased in
success of the dealership.
gross profit.
The Parts Department includes both retail
Dealership Accounting
and wholesale activities, and it can represent
Unlike most industries, the automobile

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dealership industry is fairly standardized in its of trust with the financial institutions
accounting. As part of the franchise agreement, the financing the vehicles.
dealer agrees to utilize and report to the
2. Liability for Chargebacks
manufacturer under that manufacturer’s standard
accounting system. In providing such, the Chargebacks consist of amounts charged
manufacturer can more accurately measure by the finance and insurance vendors back to
performance in comparing a particular dealership the dealership for contracts terminating prior
with its peers. Each dealership is provided with a to maturity. The dealership earns
Standardized Accounting Manual which describes commissions from the vendors on these
how each type of dealership transaction is to be contracts at the time of sale, and it is charged
reported. Therefore, with very few exceptions, for any loss of income to the vendor when
most dealerships within a particular manufacturing the customer prematurely ends the contract.
family (GM, Ford, etc.) will have substantially Depending on the level of paper
identical reporting of financial information. (outstanding finance and insurance contracts)
Understandably, this comparability provides a associated with the dealership, the
significant tool to the valuation professional. outstanding contingent liability could be
While automobile dealership accounting significant. For example, if a dealership has
substantially follows generally accepted accounting $20 million of outstanding paper and has a
principles (“GAAP”), it does possess several unique historical chargeback rate of 1.5%, a
features of which the valuation professional should contingent liability of $300,000 could be
be aware. A few of the more prominent, unique associated with the value of the entity.
accounting features are:
3. Recording of Parts Prices
1. LIFO Inventory Method Financial reporting of an entity’s assets is
An often employed method of inventory generally reflected by the historical purchase
valuation in the automobile industry is the last-in, price of these assets. As assets are sold, they
first-out (“LIFO”) method. LIFO is adopted to are removed from inventory at those
reflect the matching of revenue and expense, and it historical prices. However, due to the
can result in substantial income tax savings for the tremendous number (generally several
dealership. Due to the significant investment in thousand) of parts in a dealership’s
inventories by the dealership, this method inventory, the ability to properly match this
(depending on the number of years it has been historical prices with the physical inventory
utilized) can reflect a dramatic reduction in the net on hand is virtually impossible.
assets of the entity.
Accordingly, the dealership will generally
The reporting of the LIFO Reserve (a value update its parts pricing computer tape with
often exceeding $1 million) is usually found in one the most recent pricing on a periodic (usually
of two places on the dealership’s balance sheet. One quarterly or semi-annually) basis. Therefore,
method of presentation reports the reserve as a the physical inventory on hand is valued at
contra-asset account reducing the inventory (which the most recent prices.
can include one or all of the following: new
As a result, a dealership which possesses a
vehicles, used vehicles, parts) in the Current Assets
large amount of old or obsolete parts could
section.
have inventory that is reflected on the
Another method of presentation is to record the
financial records at amounts exceeding their
entire reserve in the Equity Section of the balance
fair market value. As a result, when dealer-
sheet. This method is often utilized by the dealer
ships are transacted, it is not uncommon to
preferring to show the dealership assets not
see a reduction in value of 15-50% in the
reduced by the reserve, in order to not appear out
reported book value of the parts inventory.

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4. Departmental Reporting Dealership performance data, usually expressed in

As mentioned previously, most relation to other dealerships within the zone, is
manufacturers provide for departmental attainable by the valuation professional from the
detail in the standardized accounting model. dealer. In addition, the dealer may be a member of
Therefore, the valuation professional can a dealer “Twenty Group”, a facilitated organization
assess the performance of the dealership as a of dealerships (usually similar in franchises and size)
whole, as well as departmentally. A designed to share operational information and ideas.
dealership’s performance by department, Furthermore, the following industry statistical
when viewed in relation to economic and information is available in the Automotive News
demographic conditions, can provide the 1997 Market Data Book, related to:
valuation professional with significant 1) United States Sales History and Forecast
information in determining the entity’s value. 2) U. S. Car Sales History
5. Dealer Reserve Accounts 3) U. S. Truck Sales History

Related to the finance and insurance 4) 1996 Top 15 Makes by Region in U.S.
function of the dealership, most financial 5) Financial Data - Average Dealership Profile
institutions will require the dealership to 6) 1996 J. D. Power and Associates Surveys
maintain reserves to offset potential charge 7) Dealer Census Data Publicly Held Dealer Groups
backs. These reserves are generally
reductions of dealership commissions and Industry Terminology
are often not reflected on the financial
The automobile industry, similar to other
records of the company.
industries, possesses its own unique terminology. In
While these amounts are generally not determining the valuation of the dealership, the
material in nature, they are a result of valuation professional will often be confronted with
individually negotiated arrangements this terminology. The following is a brief listing of
between the dealer and the financial several terms that are often encountered in the
institutions. automobile dealership environment:
In addition to financial institution reserves, • Back end - another name for fixed operations
dealerships will often establish reserves to (parts, service, and body shop) of the dealership.
offset future losses. Examples of these • Blue sky - another name for the goodwill of the
include reserves for losses on used vehicles dealership.
and demonstration units.
• Chargebacks - the unearned portion of finance
income which is repaid to the financial institution
Industry Statistics when customers prematurely pay their loans.
As noted previously, the automobile
• CSI - Customer Satisfaction Index, a
industry is one of the largest industries
measurement of polled data obtained by the
worldwide. Industry data is both volu-
manufacturer to evaluate the customer service
minous and accessible, and the valuation
performance of the dealership.
professional is able to obtain accurate,
• Demo - a vehicle typically driven by sales
contemporaneous information from a
personnel of the dealership which is always
variety of services. A number of these
available for demonstration purposes to
resources are recorded in the Appendix to
dealership customers.
this article .
• F & I - finance and insurance.
The dealership also has a large amount of
• Factory - another name for the franchisor
industry statistics provided directly to it by
(example, Ford, Toyota, etc.).
the manufacturer.

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• Fixed operations - another name for the non impact studies are usually conducted. Costs to
vehicle sales operations (parts, service, and body replace tanks and lifts, along with related
shop) of the dealership. business interruption, can be significant.
• Floor plan - financial institution financing of 2. Franchise Agreement Terms
vehicle inventory, with each floor plan note
The automobile industry is a franchise
secured by a vehicle.
industry, and the terms and conditions of the
• Front end - another name for the vehicle sales franchise agreements can greatly impact
(new and used) operations of the dealership. value. Most agreements contain highly
• Holdback - an amount held by the restrictive language involving transferability of
manufacturer, that is later remitted to the the franchise, with factory approval being
dealership, that is in addition to a new vehicle’s required in most instances. Accordingly,
purchase price. transferability of the franchise is severely
• Rebates - inventory-related compensation restricted.
received from the manufacturer.
3. Franchise Alignment
• SSI - Service Satisfaction Index
During the past decade, and especially in
• Water - a term used to indicate inventory the last two years, the issues of franchise
(usually parts and used vehicles) cost carried on alignment in accordance with the
the financial statements in excess of true value. manufacturers’ directives have increased in
• DOC - Daily Operating Control Report - an importance. GM’s Project 2000 and similar
internally produced summary report, prepared initiatives by virtually every manufacturer,
for management, which details daily and month have impacted dealerships and the vehicle
to-date sales, gross profit, and expense lines they own. In an attempt to strengthen
information by department. the dealer distribution network, the
• Dueling - a practice of maintaining more than manufacturers have recommended desirable
one new vehicle franchise at one common alignments of product lines (e.g., Buick,
physical facility (example, Toyota and Mazda). Pontiac, and GMC trucks aligned together, as
well as Chevrolet with Oldsmobile or
Key Risk Areas Cadillac).
In every engagement, the valuation professional The factories are currently in a process of
is confronted with the need to assess the key risk realignment of these franchises, and many
areas impacting the subject company. Automobile franchises are changing hands. Often, the
dealerships provide several unique risk areas distinct manufacturer is leading this realignment (GM
from the normal business valuation subject. Among has channeling teams throughout the country
those risk areas unique to automobile dealerships devoted to this task) and is occasionally
are the following: subsidizing this process by offering varying
levels of financial assistance.
1. Environmental Issues
In recent years, environmental issues have 4. Viability of Location
become more important. By the nature of the Another factory initiative, also designed to
operations in most automobile dealerships, the strengthen the dealer distribution network,
contingent liabilities can be, and often are, involves the viability of the dealership
significant. Underground tanks, underground lifts, location. As area demographics change, the
chemical contamination, and leakage are but a few manufacturer is looking to have their
of the issues impacting the dealership. dealerships located in the most desirable
In dealership transactions involving real estate, areas for sales of their products.
Phase I and Phase II (if warranted) environmental In valuing a dealership, the viability of the

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dealership in a particular location can 6. Litigation Issues

dramatically impact value. A dealership with a In recent years, the automobile dealer has
location no longer deemed by the factory as become an increasingly larger target for litigation.
being viable would provide several obstacles to Dealerships are being faced with larger incidents of
both a potential seller or purchaser, ultimately class action law suits as well as ever increasing
impacting the dealership’s value. damage claims resulting from their customers. A
5. Factory Relationship thorough evaluation of historical litigation claims, as
well as contemporaneous pending and threatened
As indicated previously, the relationship
litigation, is essential.
with the factory is extremely important. In
addition to the alignment, location, and 7. Economic Issues
ownership issues mentioned above, the factory Because of its high reliance on consumer
relationship can also greatly impact the spending, the automobile industry is very much at
dealership’s ability to be profitable. An risk with respect to economic trends. On a national
example of this is the CSI and SSI programs level, the industry has reacted significantly to such
of several manufacturers. In many instances, historic events as rising or declining interest rates,
the performance of the dealership in CSI and the Gulf War, etc. Locally, the closing or opening of
SSI directly impacts their ability to obtain a major plant, a strike, or a similar economic event
inventory. Vehicle allocations are often tied to could greatly impact a dealership’s performance.
CSI and SSI performance, as well as to
historical sales performance (“turn and earn” 8. Regulatory Issues
inventory programs relate performance to Periodically, certain regulatory issues can impact
inventory provided by the factory). the value of a dealership. For example, the
A dealership is also at the whim of the imposition of the luxury tax and the proposed 1995
factory, and its decisions regarding various tariff against Japan significantly impacted the value
programs. For example, the factory’s rebate of many dealerships.
programs and financing terms can greatly
influence a dealership’s performance and
profitability.

Understanding How Dealerships are

Purchased and Sold
Which Assets are Purchased/
Sold?
Purchased/Sold
New vehicles are generally purchased at their
Directly? FIFO cost from the manufacturer, with adjustments
In most dealership transactions, the assets for holdback and advertising charges, and are taken
negotiated directly between the purchaser and subject to the related floor plan (or an appropriate
seller are the following: substitution). Adjustments to new vehicles are also
1) Vehicles made for demo units.
2) Parts Used vehicles are subject to full negotiation
3) Fixed Assets between the parties and are often not purchased at
4) Blue Sky all, leaving the seller with the responsibility of
selling the used vehicles to customers or to
How Are These Assets wholesalers. Any related financing is also paid off
as the vehicles are sold.

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Parts are valued, oftentimes by taking a physical Thus, a dealership’s assets are generally
inventory at the time of sale, and it is usually paid sold at their adjusted book value, plus Blue
equally by both parties (since it is in each of their Sky represented by the equivalent of 1.5 - 2
best interests). However, the price paid for the parts times the pre-tax, pre-LIFO earnings.
is often negotiated and can range somewhere
between a price of all parts at their current prices What About Stock Purchases/
(as would be recorded on the dealership’s financial Sales?
statements) to a price equivalent to only those parts While stock purchases and sales are
that are returnable to the manufacturer (generally relatively rare, they occasionally occur. With
non-obsolete parts boxed in their original containers the lowering of the capital gains tax, as well
and packaging). as the increase in acquisitions by public
Fixed assets are usually the last tangible assets to companies, it is fair to assume that more
be negotiated, and their ultimate price is negotiated dealerships will be transacted through stock
extensively by the parties. The fixed assets have deals.
usually been depreciated by accelerated depreciation Two major factors influence the prices
methods and oftentimes contain fully depreciated paid in a stock transaction: the LIFO reserve,
items, such as parts bins, furniture, and office and the built-in gains income taxes to be
equipment. Accordingly, the seller almost always “inherited” by the purchaser. In arriving at
believes that the fixed assets are worth more than the adjusted book value of the dealership, the
the book value, while the purchaser looks at the LIFO reserve, in addition to any adjustments
assets as used and worth less than their book value. to reflect the fair market value of the
Blue Sky is a term used in automobile dealerships, underlying assets (for example, an adjustment
and it is another name for the dealership’s goodwill. to reflect the appraised value of real estate
This intangible asset generally consists of the value owned by the dealership), are added to the
attributable to a combination of the dealership’s: book value. Similarly, any downward
a) Earnings capacity adjustments (such as uncollectible receivables,
“water” in the inventories, unrecorded
b) Reputation
reserves for chargebacks and litigation) are
c) Franchises
also made to decrease the book value.
d) Location
Related income taxes associated with these
e) Demographics increases and decreases to the book value are
f) Other factors also given strong consideration. Depending
To quantify this Blue Sky, the industry generally on the intentions of the parties, particularly
looks to the expected pre-tax, pre-LIFO earnings of the purchaser, the negotiated adjustment for
the dealership. Obviously, the most recent income taxes ranges between 0 - 40% of net
performance of the dealership is given the greatest adjustments.
consideration, but oftentimes the average (usually The Blue Sky consideration in a stock
weighted) of the past two or three years is used, transaction is often not incorporated into the
with the ultimate goal being to determine the most stock price paid; but rather, it is negotiated
reasonable level of earnings of the dealership. separately through non-compete, consulting,
Once the earning’s stream is identified, a multiple or rental agreements. This is done primarily
of these earnings is applied, and it is reflective of because of income tax reasons, since the
the other factors listed above. The multiple tends to purchaser desires to maximize the
fall between 1 and 3 times the earnings, with recent
trends falling between 1.5 and 2 times earnings
(higher for more profitable lines, more desirable
locations, etc.).

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Methods for Valuing Dealerships

deductibility of the purchased assets, including dealership’s expected performance, is very
goodwill. important. Earnings of the smaller dealerships tend
to approximate cash flows, and the challenge in this
Does the Purpose Matter?
volatile industry is to arrive at a conclusion of
Absolutely! Returning to some of the the representative earnings.
major reasons for valuation listed earlier in the
Historical performance is extremely important,
article :
but the days of the automotive industry being on a
1) Purchases and Sales predictable, five-year economic cycle are long past.
In situations involving the purchase and sale Historical performance, coupled with the many,
of a dealership, it is important to understand varied economic, industry, and other factors
how dealerships are bought and sold. In an mentioned in this presentation, determines the
earlier section of this presentation, the ultimate conclusion of the earnings stream upon
elements of the traditional asset purchase were which the valuation professional can base an
described. Generally, the dealership is sold for opinion. In addition, this is an industry where
an amount equivalent to the adjusted net assets forecasted earnings are oftentimes available, availing
of the dealership, plus Blue Sky. Blue Sky is to the valuation analyst an ability to compute a
equivalent to a multiple (between 1 - 3 times) value based on various discounted future income
of pre-tax, pre-LIFO earnings. approaches.

Similarly, another asset method of valuing a Market methods, including guideline publicly
dealership involves an excess earnings method. traded companies and market data bases, provide
Similar to the net adjusted assets method, the some measure of comparability for the valuation
professional. A discussion on publicly traded
excess earnings method values the goodwill
companies follows later in this presentation.
(intangible assets) based on earnings in excess
of an industry return on the net adjusted While market data is helpful, the availability of
assets of the dealership. Since the dealership comparable sales is extremely limited. As previously
employs a significant investment in inventories mentioned, the majority of transactions of
and capital assets, this method is a useful way automobile dealerships occur between dealers, and
to determine value. However, care should be very little public information is available.
given to the specific rates of return assigned to Accordingly, most information related to these sales
the tangible assets of the dealership, since is obtained from the dealers themselves, as well as
different dealerships have different asset mixes. brokers and professionals assisting them.

An income approach in valuing a dealership Limited information for transactions involving

poses a particularly difficult challenge because dealerships is available from market data bases, but
the earnings can vary so dramatically. As has the size of the transactions are generally small and
been previously discussed, most dealerships vary widely in their terms and prices.
have a value of at least their net adjusted book 2) Divorce and Litigation
value. A strict capitalization of earnings or a
Applicable state laws generally define the
discounting of future earnings/cash flows may
standard of value, with most valuations using either
not adequately reflect all of the elements of
fair value or fair market value. Asset based and
value in an automobile dealership.
market methods are generally utilized, and the
Accordingly, the development of a proper
major factor of contention between the parties then
capitalization rate provides an additional
becomes the applicability of discounts. Once again,
challenge to the valuation professional.
the courts generally determine which discounts are
As in valuing any business, the choice of an appropriate in the valuation process and whether
appropriate earnings stream, indicative of the

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the premise of value is either liquidation or going certain dealerships and dealer groups.
concern. Do these acquisitions reflect the current
market values of dealerships? In larger
How Does the Emergence of dealerships and dealership groups, they
Publicly certainly should be considered in the ultimate
Traded Companies Impact Value in determination of value. However, in most
dealerships with annual sales under $75
Automobile Dealerships?
million, the applica-
Without question, the emergence of publicly
bility of these publicly traded companies’
traded companies owning automobile dealerships is
transactions have very limited use.
the single most significant development in the past
However, the excitement generated by
few months. In the used vehicle market, CarMax
these transactions has, most assuredly, raised
and Auto Nation made early splashes in the
the expectation levels of most dealers offering
industry, followed by United Auto Group and Cross-
their dealerships for sale. In addition to the
Continent Auto Retailers in the new vehicle market.
publicly traded transactions, another factor
Quickly behind them were Lithia Motors, followed
influencing the sales prices of dealerships is
by the most dominant current participant, Republic
the emerging participation by the factory in
Industries.
aligning franchises in desired locations.
Hardly a week goes by without news of a large
These “Additional” funds are resulting in
dealer group being acquired by one of the publicly
higher asking prices from selling dealers, but
traded companies or news of a new publicly traded
limited increases have been in prices paid for
automobile dealer group being formed. The
dealerships.
multiples of earnings paid for these acquisitions have
While the economy is solid, skepticism in
been considerably higher than those traditionally
the industry is fairly high. The ultimate
transacted in the industry, and this has produced an
impact by the publicly traded companies is
impact on asking prices for most dealerships
still undecided, especially in lieu of the recent
currently on the market. However, many of these
trends in stock prices (declining prices in
dealerships are not being sold, and it is important to
response to disappointing profits). Absurdly
view the facts and circumstances currently in the
high prices are still being paid by these
industry to determine the reason.
companies as they seek to increase their
The rush to go public has been fast and furious,
profitability by acquiring earnings.
with many groups vying for advantage in the stock
Should the prices being paid by the
market. The public’s infatuation with the initial
publicly traded companies be considered?
offerings has been very high, particularly with the
Most definitely! Should they be utilized? Only
addition of Wayne Huizenga into the market. The
in very unique situations, and even then, with
acquisitions of dealer groups have been largely
some adjustments.
strategic ones, with the purchasers seeking to obtain
certain geographic locations, market diversity, and
Common Normalization
franchise diversity. Predominately purchased are
Adjustments
larger dealer groups and larger individual
dealerships, with an emphasis on earnings and When valuing controlling interests in
franchises. automobile dealerships, several normalization
adjustments are generally applicable. Many of
For example, Republic has sought to purchase
these mirror those adjustments prevalent in
large groups and dealerships in its bid to challenge
valuing most closely-held companies, and
the franchise limitations currently imposed by both
include the following:
Toyota and Honda. As mentioned earlier, the
acquisitions are strategic ones and are aimed at 1) Dealer and family member compensation - as
with most closely-held companies, these
can vary greatly from industry standards.
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2) Rent - since many dealerships rent their

facilities from the dealer (or related
parties), the rent factor should be
reviewed.
3) LIFO - this method of accounting is
generally utilized for the income tax level
derived, and it has a financial statement
impact on both earnings and the
balance sheet.
4) Adjustments for water in receivables and
inventories.
5) Real estate and fixed asset values.
6) Dealer perks - a thorough inquiry is
required to uncover many of these which
can include demo units for family
members, etc.; investment vehicles
(vintage antiques), motor homes, boats,
etc.; club memberships; and a host
of personal expenses paid by the
dealership.
7) Assets and liabilities not included on the books
- dealer reserves, contingent liabilities
(chargebacks, litigation), etc.
By utilizing the comparative industry data
that is readily available, inquiries can be
made about variations by the dealerships;
and appropriate adjustments can be made.

S U M M A RY
While many of the traditional approaches
to valuing automobile dealerships apply, it is
vital that the valuation professional fully
understand the intricacies of the industry.
An understanding of the industry under appraisal knowledge to encompass a vast amount of
“normal” conditions is a difficult task; constantly changing information.
however, the current changes bombarding
the automotive business make it especially
challenging to accurately value a dealership.
Daily events impact value, and the valuation This article is based on a paper by James L. (Butch) Williams,
professional is required to expand existing CPA, CVA, CBA, “Valuing Automobile Dealerships” presented
to the 16th Annual Advanced Business Valuation Conference

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Appendix A
Resources and References
held at the Sheraton Palace hotel San Francisco, California on NACVA Wilshire 5000 Listing of Company
October 23, 1997. Sales Prices, NACVA, 1245 East Brickyard
Mr. James L. Williams, CPA, CVA, CBA, is with Williams, Road, Suite 110, Salt Lake City, Utah 84106
Taylor & Associates of Birmingham, Alabama.

GENERAL Data for Market Comparison, The Institute

Uniform Standards of Professional Appraisal of Business Appraisers, Inc., Post Office Box
Practice, 1995, The Appraisal Foundation, 1029 1447, Boynton Beach, Florida 33425
Vermont Avenue, NW, Suite 900, Washington, D. C.
Standard Federal Tax Reports, IRS
20005, (202) 347-7722. A copy of the complete
Valuation Guide for Income, Estate and Gift
standards is available for $25 from the Appraisal
Taxes, Valuation Training for Appeals
Foundation.
Officers, Extra Edition Valuation 81 number
Valuing a Business: The Analysis and Appraisal of 4, January 28, 1994
Closely Held Companies, 3rd edition, by Shannon Standard and Poor’s Register of
P. Pratt (Burr Ridge, III.: Irwin Professional Corporation, Directors, and Executives,
Publishing 1996). Standard and Poor’s Corporation, 25
Valuing Small Businesses and Professional Broadway, New York, NY 10004
Practices, 3rd edition, by Shannon P. Pratt, with The Value Line Investment Survey, Arnold
Robert F. Reilly and Robert P. Schweihs (Burr Bernhard and Company, 711 Third Avenue,
Ridge, III.: Irwin Professional Publishing 1997). New York, NY 10017
Handbook of Business Valuation, Thomas L. West Standard and Poor’s Corporate and
and Jeffery D. Jones, editors (New York: John Wiley Government Bond Yield Index, Standard
& Sons, 1992). and Poor’s Corporation, 25 Broadway, New
Introduction to the Valuation of Businesses and York, NY 10004
Professional Practices, Shannon P. Pratt and Robert Autos - Auto Parts, Current Analysis,
F. Reilly (American Institute of Certified Public December 14, 1995, Volume 163, No. 50,
Accountants CEA program materials, 1995). Sec. 1, Standard & Poor=s Industry Surveys,
Basic Business Appraisal, Raymond C. Miles (New 25 Broadway, New York, NY 10004.
York: John Wiley & Sons, 1984).
Standard Industrial Classification (SIC) Manual,
PERIODICALS
(Washington, D.C.: Executive Office of the Automotive Executive, a monthly
President, Office of Management and Budget, publication of NADA
1987). Services Corporation, a wholly-owned
subsidiary of NADA,
Handbook of Small Business Valuation Formulas and 8400 Westpark Drive; McLean, Virginia
Rules of Thumb, 3rd edition, by Glenn M. Desmond 22102;
(Camden, Maine: Valuation Press, 1994). (703) 821-7150.
Financial Studies of the Small Business, (Winter Haven, Automotive News, a weekly publication of
Fla.: Financial Research Associates, annual). Crain Communications, Inc., 1400
Annual Statement Studies, Robert Morris Woodbridge; Detroit, Michigan 48207-3187;
Associates, 1600 Suite 2300, Philadelphia, PA 19103- (800) 678-9595.
7398 Black Book, a weekly publication of National

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Auto Research, Post Office Box 758; Certified Public Accountants, 1211 Avenue of the
Gainesville, Florida 30503. Americas; New York, New York 10036-8775
Car Dealer Insider, a weekly publication of (1996).
United Communications Group, 11300 Bureau of Economic Analysis, published by the
Rockville Pike - Suite 1100; Rockville, U.S. Department of Commerce, 14th Street, N.W.;
Maryland 20852-3030; (800) 929-4824 x247. Washington, D.C. 20230.
NADA Official Used Car Guide, a weekly DeFilipps’’ Dealer Tax Watch, a quarterly
guide published by NADA, 8400 Westpark publication of Willard J. DeFilipps, CPA, P.C., 317
Drive; McLean, Virginia 22102. West Prospect Avenue; Mt. Prospect, Illinois 60056.
Standard & Poor’s Industry Surveys - Autos DeFilipps’ LIFO Lookout, a quarterly publication
& Auto Parts, weekly publication by of Willard J. DeFilipps, CPA, P.C., 317 West
Standard & Poor’s, a division of McGraw-Hill Prospect Avenue; Mt. Prospect, Illinois 60056.
Companies, 25 Broadway; New York, New Economic Indicators: The Motor Vehicle’s Role
York 20004. in the U.S. Economy, published by the American
Ward’s Dealer Business, a monthly Automobile Manufacturing Association, 1401 H
publication of Ward Communications, a Street, N.W. - Suite 900; Washington, D.C. 20005;
division of Intertec Publishing Corporation, (202) 326-5500.
9800 Metcalf; Overland Park, Kansas Guide to Dealerships, Don E. Ray, Stephen D.
66212-2978; (800) 441-0294.

Periodicals (usually monthly or bi-monthly)

from the applicable state automobile
dealership associations.

P UB LICATIONS,
MANUALS AND
GUIDES
A Dealer Guide to Valuing an Automobile
Dealership, David A. Duryee, an NADA
Management Guide, published by the
National Automobile Dealers Association,
8400 Westpark Drive; McLean, Virginia
22102 (1995).
Auto Dealership Engagement Manual, Tony
L. Argiz, Marc S. Dickler and Don M. Pallais,
an AICPA Integrated Practice System
manual, published by the American Institute
of Certified Public Accountants, Harborside
Financial Center, 201 Plaza Three; Jersey
City, New Jersey 07311-3881 (1995).
Automobile Dealership Accounting, Jacob
Cohen and Carl Woodward, a continuing
professional education course (#735145),
published by the American Society of

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