Thinking about Buying or Selling a Dealership?
Is it a good time to sell?
Is it a good time to buy?
The answer to both questions is YES. The retail business is better than it has ever been, though it is also tougher than ever. You can make more money, but the investment required is greater. There is an absolute need for structure and systems. If you have established the ability to make the most of the current market conditions and have developed some key players, this is a great time to expand by acquiring additional dealerships.
The benchmarks are pretty clear. A well run Harley-Davidson dealership should make 11 – 12 % in pre-tax operating profits (EBITDA). A metric dealership should make 7 – 8% (EBITDA). If you find you are not making that return and you lack the energy or desire to force the processes that will bring that about, it is a great time to sell to someone who can reap more and pay you based on the potential of the dealership.
My advice to a buyer is always to base the purchase price on what you are going to do with it. Unit and total dollar sales and some fixed expense information can be used to develop a forward earnings picture. It does not make sense to pay more than 3 times that number and less if there are significant capital expenditures required to bring about the forward earnings estimate. To make the transaction a win X win that number also needs to be 5 times trailing earnings for the seller. The good news is that is often attainable.
Would I be better off to seek a buyer from outside the industry?
Once in a while the “tooth fairy” does appear and somebody shows up with a wad of cash. They inevitably make a small fortune in the business by starting with a large one. The vast majority of time, however, they fade away when they find out that they must personally guarantee significant lines of credit. Lenders and OEMs take a very hard look at neophytes seeking to become dealers. When there was lots of “low hanging fruit” and the retail business was easier, someone new to the business had a lot more time to learn. There really is no such thing as a turn key dealership.
What about selling to my son, daughter or protégé?
The short answer is both YES and NO. Another question I receive is “How do I get out of a sale I made to my kids?” There are a lot of reasons why we want to pass on our business to our kids, but if it is done improperly you are setting them up to fail while setting yourself up for more angst than you experienced operating the dealership. While I have experienced far more bad experiences than good, there are also a number of success stories in the industry. If you want to sell to your kids, I stress the need to do it right.
Assuming junior is not going to give you cash up front, the acquisition has to be in defined increments. Even if your son or daughter or protégé has spent a long time in the dealership, they have inevitably gravitated to the area of the dealership they like best. In the future as Dealer Principal they will not be able to hide there. Make sure they are genuinely prepared. If they fully understand that the boss does more than sit in the fancy office between leisure activities and exotic incentive trips, there is a good chance of success. The closer the relationship, the more you need to delineate in the contract. There is no one boiler plate or template that fits all, but there are some proven structures that work. If you need some expanded information on structuring a buyout for the next generation, please feel free to contact me at 340-719-8591. Funding may even be available for the right participants in the right market.
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Motorcycle Industry Consulting Services
No. 217 Strand Street
Frederiksted, St. Croix USVI 00840
340-719-8591 Main Office
303-697-8514 Laura Lemco