Automobile Dealerships – Valuing Blue Sky

Blue Sky is the intrinsic value of an automobile dealership, over and above the value of its tangible assets. It is sometimes equated to the goodwill of a car dealership.

Most articles regarding the blue sky value of new car dealerships cite a multiple of earnings formula, such as three times earnings, four times earnings, and so forth. The idea that “blue-sky” can be determined by anything times anything is just plain wrong.

Even NADA the National Automobile Dealers Association in its publication entitled “A Dealer Guide to Valuing an Automobile Dealership, NADA June 1995, Revised July 2000 bemuses, in part, with respect to valuing a dealership by using a multiple of earnings: A Rule of Thumb valuation is more properly referred to as a “greater fool theory.” “It is not valuation theory, however.”

In its Update 2004, NADA omitted its reference to “fool”, but referred to the multiple formula as rarely based upon sound economic or valuation theory, and went on to state: “If you are a seller and the rule of thumb produces a high value, then this is not a matter of great concern. Go for it, and maybe someone will be stupid enough to pay you a very high value.”

A dealership’s blue sky is based upon what a buyer thinks it can produce in net profit. If potential buyers think it cannot produce a profit, the store will not sell. If it can produce a profit, then variables such as desirability of location, the balance the brand will bring to other existing franchises owned, whether or not the factory will require facility upgrades, and so on and so forth, determine whether or not a buyer will buy that particular brand, in that particular location, 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 over $100,000,000 and have never seen the price of a dealership sale determined by any multiple of earnings unless and until all of the above factors have been considered and the buyer then decided he, she or it was willing to spend “x” times what the buyer thought the dealership would earn, in order to purchase the business opportunity.

To think otherwise would be to subscribe to the theories that (1) even though you think a dealership could make a million dollars, the store is worth zero blue sky because it made no money last year; and (2) if a store has been making $5 million per year you should pay say 3 times $5 million as blue sky even though you think you will not produce that kind of profit. Both propositions are absurd. If a buyer does not think a dealership is worth blue sky, then what he is really saying is that he sees no business opportunity in the purchase and therefore, in my opinion, he should not buy the store.

Each dealership is unique with respect to its potential, location, balance that its brand brings a dealer group, and condition of facility. The sale is also unique with respect to whether it is a forced liquidation, orderly liquidation, arms length, insider, or a case where an anxious buyer is trying to induce an unwilling seller. There are management factors to consider, length and term of leases, possibilities or non-possibilities of purchasing the facilities and whether or not the factory wants to relocate the store or to open a new store up the street.

In the car business it is impossible to pick a dealership or a franchise out of a hat, multiply its earnings by some mystical number and predict either what the dealership is worth, or what price it would sell for – and it doesn’t matter if you are talking about a Toyota, Honda, Ford, Chevrolet, Chrysler, Dodge, or any other dealership. At any given time one franchise might be considered more or less desirable than another, but they are all valued in the same manner.

Salvage Cars Significance in Automobile Industry

The business of salvage cars and the parts of such cars contribute to a major part of automotive/automobile industry in the US economy. It has provided jobs for thousands of people not only in US but elsewhere in the world. There are uncountable companies today which make their livelihood out of this business. In this article we will see the practical aspects of salvage car business, precautions to be taken while buying such cars and factors that affect the resale value of such cars.

The salvage titled car is one which faces damage in many ways like a natural calamity like flood or earthquake and mainly by a road accident. Such cars are usually rated with a very less value or even of no value by the insurance companies in the US. The factors that affect this value are the current value of the same car in the market. If the expenditure to repair the damaged car is more than half of its current price, it will be declared as salvage motor.

Then how do such cars get buyers? And how did this salvage business flourish?

Over the period of a decade these cars managed to get a good number of buyers, so much so that the business expanded its reign into the internet world. Not only the auto auctions are held in different parts of the country but also conducted in many websites. The resale value of such cars is individually decided by the buyers but generally, the buyers get carried away with the value declared by the insurance companies.

The reason for this is the extent of damage done to the car. Even after the car is repaired and is ready for use, it is viewed with high suspicions regarding the healthy working of the engine. The buyers generally used to prefer used cars over salvage title cars. Overcoming these hurdles, the automobile auctions performed considerably well in terms of specific salvage cars like Ford and Chevrolet. Sometimes the auto auctions even conduct exclusive ford salvage car auctions and Chevrolet salvage car auctions.

The buyers mainly look at the brand names of automobiles in such cases.

The online presence of this business is through certain websites which allow viewers to actively participate in online auctions and online sale and purchase of repaired cars, damaged cars and salvage title cars. There are two ways of doing this business; one is to buy them and have them in the junkyard. They are also called as Salvage Yards. Owners preserve them in a junkyard and buyers just choose a car of their wish and purchase it. Or even take a few parts from salvage cars and pay only for the parts. This type of business is usually termed as You-Pull-It-Yard. The other way of doing is to buy such cars, repair and sell them or even auction them. There are many companies and individual owners doing this work in their websites.

There are websites which sell reasonably cheap and good salvage cars online; which are mostly privately owned. There are also the US government websites which give information of different used cars like http://www.bar.ca.gov and http://www.vehiclehistory.gov. These are maintained by the government so you need not worry about the duplicate content issues.

As much as it is advantageous and profitable business, certain precautions should be taken while purchasing these cars from dealers. Be careful of fraud dealers who fake the authenticity of the repaired cars. Some tips to value the rates are: find out the exact value assigned by the insurance company of that car before purchasing it, compare the value of salvage car with that of a new car of the same model. By doing this, one will clearly know the genuineness of the proposed rates. Some dealers also include the repair cost into the resale cost. Exclude any such repair costs when you buy salvage cars or salvage auto parts; make sure you clearly have an idea of the market rates of all automobiles.

Find out about more dealers and junkyard from the store locator provided in various websites including the two sites mentioned above.