Many experts predict a post-pandemic rise in new car sales. This leads to demand and a great opportunity for new car auto dealership owners who are planning their exit strategy. This review discusses how to sell a new car auto dealership, along with other essential details and tips on valuations and the role of the business broker.
About The New Car Auto Dealership Industry
Original equipment manufacturers (OEM) fall within this industry. For the next five years, there should be relatively high demand due to pent-up demand caused by the recent microchip shortage. Due to this, many experts anticipate strong cash flow and margins over the next three to four years. For many owners, now is a time to sell before demand and margins normalize.
The trend toward more electric vehicles has had a noticeable impact on the industry. However, the industry should remain stable regardless of whether new car auto dealerships produce gas-powered vehicles, electric vehicles, or both. Here is the most recent industry data and projections.
- There are approximately 24,000 new car auto dealerships in the U.S.
- There was a 2.7% annual growth for the new car auto dealership industry from 2018 to 2023
- The new car auto dealership industry generates $1.2 trillion in annual revenue
- The annual profit for the new car auto dealership industry is $21.2 billion
- Experts predict a slight decline in annual growth (-0.1%) from 2023 to 2028
The demand for companies within this industry is relatively select. Buyers must have some level of experience to ensure optimal performance is achieved and avoid not meeting OEM guidelines. Ideally, a new owner should have prior general management or ownership of a new franchise automotive dealership and/or partnership with someone who has an automotive pedigree (Business Reference Guide).
How to Value Your New Car Auto Dealership With a Market Approach
Owners of new car auto dealerships are experiencing higher than usual valuations due to excellent industry demand, cash flow, and margins. Your financial information plays a key role in your market-approach valuation, along with industry multiples. However, your growth potential and workforce quality play a key role as well. The current rule of thumb data includes:
- New car auto dealerships sold between 1.81 and 5.58 times the Seller’s Discretionary Earnings (SDE). Dealers with less than $5 million in net sales sold for approximately 2.94 times their SDE.
- New car auto dealerships sold between 7.84 and 11.32 times the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
- New car auto dealerships sold between 0.14 and 0.57 times the annual net sales
SDE is usually the best metric for new car auto dealers to use when determining their value. Your SDE considers your EBITDA along with additional add-backs such as the owner’s compensation. EBITDA valuations are slightly less predictable, but they may work well for some of the more profitable dealerships.
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How Can I Sell My New Car Auto Dealership? A Step-by-Step Guide
Selling your new car auto dealership involves a multi-step process. You will face a host of complexities along the way. As a result, we recommend preparing your team before you begin the sales process. Depending on your situation, this may include a business broker, attorney, and CPA professional. Specifically, the sales process involves these stages:
- The valuation stage
- The preparation stage
- The marketing stage
- The due diligence stage
- The closing stage
Below is a review of each step in the sales process, from a professional business valuation to closing the sale and transferring ownership to the buyer. Keep in mind, your process may look different depending on the specifics surrounding the sale of your dealership.
The Valuation Stage
You should never list your business for sale until you have determined its fair market value. Fair market value refers to the amount that is considered fair for your company based on recent sales data. Of course, and as discussed above, your valuation should go beyond an analysis of your financial information and rule of thumb data. Your broker can help you determine your value and ensure the intrinsic value of your company does not go unnoticed when considering your value and selling your company.
The Preparation Stage
This is a step that is overlooked far too often. Selling a new car auto dealership is a process, and you must properly prepare to avoid setbacks, fallen-through deals, and the inability to sell for fair market value. During the preparation stage, you will need to gather all the necessary documents. It is likely that you already have many of the documents you need from the business valuation stage. Notably, these documents include:
- Three years (minimum) of your federal tax returns
- Three years (minimum) of your profit and loss (P&L) statements
- Interim profit and loss (P&L) sheets
- Balance sheets
- List of new (and used) car inventory
- List of equipment
- Lease information (if applicable)
- Copy of your insurance policy
- List of employees
The buyer may not request all of the above documents during due diligence. In some cases, they may request additional documents as well. Depending on your unique company details, your broker, lawyer, and CPA may request collecting additional documents during the preparation stage as well.
The Marketing Stage
New car auto dealerships specialize in sales. However, a business sale involves a much different process. When you sell a business, you do not post the company on public websites or take out ad listings. Instead, you utilize private networks and databases. This ensures confidentiality throughout the sales process, so your customers and employees are not notified prematurely of an imminent sale of the company. Since selling a new car auto dealership requires confidentiality, it is essential to work with a business broker who has connections within the automotive industry and can find prospective buyers who are willing to pay fair market value.
The Due Diligence Stage
Due diligence is a time for the buyer to confirm all details that led them to make a purchase offer, such as your seller’s discretionary earnings (SDE), earnings before interest, taxes, depreciation, and amortization (EBITDA), and more. To do so, they will request the documents you have prepared in earlier stages. The buyer may very likely request a walk-through of your auto dealership as well. They will wan to know about all daily business operations. They may request sales performance for existing salesmen and other details they find important about the dealership’s operations.
The Closing Stage
Now it is time to close the sale. This involves reviewing the final documents (including the purchase agreement), attaining final signatures, and transferring ownership to the buyer. You will also confirm that the payment is sent to you at the closing table. Your attorney should be there to help you with closing, and your broker will assist you throughout the closing process as well.
Schedule a Consultation for a Free, No-Obligation Business Valuation
Are you considering selling your new car auto dealership? If so then the business brokers at Sigma Mergers and Acquisitions are here to help. We have helped hundreds of business owners sell throughout the last couple decades. If you would like to learn more and start the sales process with a business valuation, contact us today.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
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