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Blue Sky is the intrinsic value of an automobile dealership, which exceeds the value of its tangible assets. This sometimes equates to the goodwill of a car dealership.
Most articles about the blue sky value of new car dealerships cite several earning formulas, such as three times earnings, four times earnings, and so on. The idea that “blue-sky” anything can be determined at any time is absolutely wrong.
even nada National Automobile Dealers Association In its publication the title “A Dealer’s Guide To Evaluating An Automobile Dealership, NADA June 1995, revised July 2000 Bemuse, in part, regarding valuation of dealerships using earnings multiples: a rule of thumb valuation more appropriately referred to as the “more fool principle”. “However, this is not valuation theory.”
In its update 2004, NADA dropped the reference to “foolish” but rarely referred to a number of formulas based on sound economic or valuation theory, adding: “If you are a seller and the rule of thumb is to produce a high If the price does, then it’s not a huge concern. Go for it, and maybe someone will be foolish enough to give you a lot of price.”
A dealership’s blue sky is based on what a buyer thinks it can produce in a net profit. If potential buyers feel it cannot make a profit, the store will not sell. If it can produce a profit, variables such as the desirability of the location, whether the remaining brand will be owned by other existing franchisees, whether the factory will need facility upgrades, and so forth, determine whether the buyer is No. Will buy that particular brand, at that particular place, at that particular time.
I have been consulting with dealers for nearly four decades and have participated in over 1,000 automotive transactions ranging from $100,000 to $100,000,000 and I never The dealership sale price is determined by any multiple of earnings, until all of the above factors are considered and the buyer then decides whether he or she is willing to spend “x” times the buyer’s consideration. . , to buy business opportunities.
To think otherwise would be to subscribe to the principles that (1) even if you think a dealership can make a million dollars, the store is worth zero blue sky because it didn’t make any money last year; and (2) if a store is making $5 million a year, blue sky should pay you 3 times that $5 million, even if you think you won’t make that kind of profit. Both propositions are absurd. If a buyer doesn’t think a dealership is worth the blue sky, what he’s really saying is that he doesn’t see a business opportunity in the purchase and therefore, in my opinion, shouldn’t buy the store.
Each dealership is unique with respect to its capability, location, balance that its brand brings to a dealer group, and facility status. The sale is also unique in terms of whether it is a forced liquidation, systematic liquidation, arms length, insider or a case where a concerned buyer is trying to induce a reluctant seller. Management factors to consider are the length and duration of leases, the possibilities or non-possibility of purchasing the facilities and whether or not the factory wants to relocate the store or open a new store across the street.
It’s impossible to pick a dealership or franchise in the car business out of a hat, multiply its earnings by some mysterious number and predict what the dealership is worth, or what price it will sell for — and it doesn’t matter to you. Talking about Toyota, Honda, Ford, Chevrolet, Chrysler, Dodge or any other dealership. One franchise may be considered more or less desirable than another at any given time, but they are all valuable in the same way.
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