Baby boomers are now turning 65 at the rate of 8,000 every day, according to AARP. Many dealership owners are among this horde of baby boomers nearing or reaching what has traditionally been considered the retirement age in the United States. Although some are choosing to work beyond age 65, others are turning in their keys.
For most dealership owners, including you, retiring means selling the dealership or passing it on to family members. The key to doing this successfully is implementing a succession plan well in advance of retirement.
Launching the process
Ideally, succession planning should start at least three to five years before you plan to exit the business. It takes time for a good succession plan to evolve, and starting the planning process early will help ensure that your options remain open.
Begin the succession planning process by answering some key questions:
- Will you sell your dealership to an outside buyer, transfer it to employees or managers, or keep it in the family?
- If you plan to sell to an outside buyer, will you focus on the large public buyer groups, a private buyer or a private equity firm?
- If you plan to transfer ownership to insiders, will you use an employee stock ownership plan or management buyout?
- If you plan to keep ownership in the family, have you identified the next generation of leadership and started preparing them for this responsibility?
The answers to these questions will drive much of your succession planning strategy. For example, if you plan to transfer ownership to employees or managers or keep it in the family, you’ll need to identify the next generation of leaders and begin grooming them for this responsibility. It’s never really too early to start this process. In addition to teaching them all the ins and outs of running the dealership, take the time to introduce them to key vendors and representatives from the auto manufacturers.
If you want to keep ownership of your dealership in the family, your strategy also will likely address estate planning issues and ensuring an efficient and tax-advantaged transfer of the business to family members.
M&A activity is strong
If you’d like to sell to an outside buyer, your succession strategy probably will have a different focus. The good news for owners looking to sell in the near future is that auto dealership merger and acquisition (M&A) activity is growing strongly.
According to The Blue Sky Report published by auto dealership brokerage Haig Partners, the total number of private and public dealership acquisitions increased by 69% from the first nine months of 2013 to the first nine months of 2014. In addition, data from Automotive News indicates that the first nine months of 2014 were the most active period for private M&A deals since it began tracking the market in 2010.
If you plan to sell to an outside buyer, you should focus on increasing the value of your dealership in order to sell it at the highest price. The value of an automotive dealership is typically based on a multiple of adjusted pretax earnings plus the market value of assets, plus parts and inventory. (See the sidebar “What are dealership franchises worth?”)
Most buyers today are looking for dealerships with a track record of profitability, strong cash flow and growth potential. They want to know that your dealership will be able to generate enough cash and profits to recoup their initial investment and earn a minimum return on investment within a reasonable period of time — usually two to four years.
It’s worth noting that private equity (PE) interest in automobile dealerships has increased markedly in recent years. This became most evident when Berkshire Hathaway announced last October that it would acquire Van Tuyl Group, the nation’s largest privately owned auto dealership group. The need for auto manufacturers to approve M&A deals can make these acquisitions more challenging, but PE is now a more viable option for dealership sellers than it was a few years ago.
Good economic conditions
The Blue Sky Report states that not only is now a good time for owners of high-performing dealerships to sell their businesses, but that “economic conditions indicate that good times will continue for the foreseeable future.” This makes it imperative to start your succession planning efforts soon, especially if you plan to retire within the next three to five years.
Sidebar: What are dealership franchises worth?
In late 2014, The Blue Sky Report, published by Haig Partners, an auto dealership brokerage, included the following estimates for the typical range of multiples of adjusted pretax earnings buyers will pay for the goodwill or “blue sky” of various dealership franchises:
- Mercedes-Benz 0×-7.5×
- Lexus 0×-7.0×
- Toyota 0×-6.0×
- Ford 0×-5.0×
- Hyundai 5×-4.5×
- Nissan 0×-4.0×
- Buick-GMC 0×-3.8×
- Mazda 5×-3.5×
While each dealership is unique and actual multiples will vary, these estimates can provide a good benchmark to use as a starting point in gauging the blue sky value of your dealership.