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.

Pros and Cons of Buy Here Pay Here Car Dealerships

Bad credit score may cause hassles for car buyers. BHPH car dealerships offer purchasers with bad credit score access to autos that they could not typically qualify for. Buy here pay here car dealerships will finance your car loan via their dealer. Instead of acquiring approved for a car loan via a lender, purchasers acquire and repay the loan via the buy here pay here car dealership.

There is nothing like the liberty and opportunity that having your own car gives you. For car purchasers with bad credit, BHPH car dealerships might be the only option. If banks have turned you down for a car loan checkout this website to find buy here pay here car dealerships near you. They know that low credit can stand in the way of getting a car, and they are here to help.

Hopes of owning a car can be ruined within instantly after many lenders have declined your car loan application. With the difficult fiscal times that we are upon us in the United States tons of car loan applications are rejected on a daily basis. The banks and finance companies use the credit scores to estimate whether an application is dependable to repay an auto loan. BHPH car dealerships can help high-quality persons who are having a challenging time. Banks and finance companies will not see beyond the credit score in an effort to help a person get a car.

Here are the pros and cons:

Pro: Buy here pay here car dealerships are readily accessible and increasing in popularity and are the quickest growing part of the auto sales market. They can found in all 50 states including: California, Florida, New York, Texas, Pennsylvania, and Illinois. Some cities with the most are: New York, Los Angeles, Miami, Houston, Atlanta, and Chicago have over a dozen buy here pay here car dealerships.

Pro: Buy here pay here car dealerships specialize in car buyers with bad credit. BHPH dealerships get the financial details out of the way first and aid buyers in determining how much you can practically afford to pay for a car. This is more advantageous than typical car dealerships that will first attempt to sell you a car only to discover later that you can’t get a car loan with bad credit.

Con: Buy here pay here dealerships are limiting in that the buyer can only pick from the cars that they have in inventory on at their dealership at that time. The amount of the buyer’s down payment will most likely determine the amount they are able to finance. You most likely have to choose a car that falls inside a particular price range.

Pro: Buy here pay here car dealerships will most likely pledge to finance buyers. This eliminates buyers the time of filling out car loan applications at dealers and being rejected over and over.

Con: Buy here pay here dealerships charge elevated interest rates than a bank would for a car loan. For purchasers with bad credit, BHPH dealerships could be their only source.

So is it an advantageous idea to obtain a car from BHPH dealerships? If you do have bad credit score and you need dependable transportation on a restricted finances then they are just want you need. If you do not have bad credit score buyers will find that a typical car dealer could be capable to offer you a more advantageous choice, a decreased interest rate, and a decreased monthly payment.

3 Things All Dealerships Should Know About Car Buyers

Our previous articles have been largely aimed at buyers, but we would also like to share some insight with all the dealers out there as well. Here are three things all car dealers should know about car buyers:

The media make a good living out of demonizing you.

During any given week, we (buyers) are sure to find several articles on Yahoo! news, CNN, or one of the other news sites that tells us how car dealers try to screw us over. And when we are actually in the car market, we are flooded with "how-to" articles detailing how to avoid your tricks.

The media isn't just making these stories up, though. After all, according to the Better Business Bureau new car dealerships were the 4th most complaint ridden industry in 2009 while used car dealerships ranked 7th. But even still, it seems that whenever it is a slow day on the news desk pumping out another article describing dealers' awfulness is an easy way to produce some content.

Buyers' expectations when they walk into a dealership are that they will get pushed around by a salesman, they will endure time-consuming and uncomfortable negotiations, and that they will overpay for the car that they actually want. And that is just what buyers expect. Buyers are generally not surprised when the vehicle they came to see is no longer on the lot or that the advertised price was an amazing sales deal that just ended yesterday. This tends to cause a lot of unwanted stress and anxiety on the buyer's part. In the car business, dealers call this "burn-out." Nothing is worse for a dealer than a burned out buyer because that buyer will always feel as if they've been taken for a ride.

Although this seems bad for dealerships, I'm not so certain that it is. Because dealers have the ability to change many of the negative perceptions of the buying process, this is an easy way for any dealership to enhance its competitive advantage. Imagine a courteous dealership that genuinely tried to figure out its customers' needs and recommended appropriate models and features. Imagine a dealership that understands that buyers have so many other matters in life and that the car-buying process needs to be quick. Imagine a dealership that trades unpleasant negotiations for transparency. That is the dealership buyers want to patronize.

We Want To Find Our "Go-To" Mechanic

Unless we have an established relationship with the mechanic around the corner, most of us think that we get ripped off every time we bring the car into his shop. The waiting area (if there is one) is small and uncomfortable, the coffee's been brewing since last Christmas, and the mechanic always finds a way to "save me big time" by repairing something before it actually breaks. After walking out of there feeling like a fool one too many times, I'm looking for an alternative.

This reality presents dealerships with a fantastic opportunity. We're hungry to service our vehicles at a place we trust. If we had a great car-buying experience, we're happy to take our vehicles back to the same dealership for regular service for the life of the car – even if it does cost a little extra for an inspection and an oil change.

We offer dealerships this loyalty because they have earned our trust in previous transactions. Instead of selling me a car, you walked me through my options and empowered me to make the best decision based on my needs. Instead of just telling me you "saved me big time" when you replaced the alternator belt, you showed me the belt so that I could see why you needed to fix it. These are small, seemingly trivial actions but they are necessary to gain my trust.

The learning point here is that dealerships must have a holistic approach to customer engagement. The salesman on the floor must understand that the way he treats me directly impacts how much I trust the entire dealership, which directly impacts my desire to service my vehicle at that dealership and my inclination to return to that dealership when I'm searching for my next vehicle.

"You don't earn loyalty in a day. You earn loyalty day-by-day."
JEFFREY GITOMER

In 2010 Chrome reported that brand loyalty continues to slide, with only 35% of buyers responding that they want to purchase a car from the same brand they previously owned (down 4% from 2009). Dealer loyalty is also on the decline with only 24% of respondents claiming that they chose a dealer based on a prior purchase, or someone they knew purchased, from that dealer.

There are a multitude of factors contributing to these falling numbers. The internet, for one, has made it much easier for buyers to weigh the pros and cons of different car brands. The internet also makes it much easier to see the competing offers different dealers are making, reducing the opportunity cost of physically visiting multiple dealers just to get an initial offer.

The internet has also degraded buyers' relationships with dealers to a certain extent. 15 years ago car salesmen served the dual role or educator and salesperson simply because information about different vehicles was not as easily accessible as it is today. The internet is somewhat marginalizing car salesmen by obviating their role as educator. Without that role, buyers understand their relationship with salesmen, and dealerships, as largely transactional – buyers want a car and dealers want to close the deal – without clear mutual understanding. Transactional relationships are the most superficial form of human interaction. Engaging in a transactional relationship implies that the relationship is severed as soon as the two parties are finished extracting value from each other.

Therefore one obvious way to improve loyalty is for dealerships to cultivate relationships with buyers that aren't purely transactional. Instead of dealers thinking about how they can extract the most value from a customer, dealers should be thinking about how they can create the most mutual value from their relationships with buyers.

How does a dealer do this? A good starting point is being honest and fair with every customer. It's really that simple.