Firing On All Cylinders to Make Every Department Profitable

by Mark J. Sheffield, Spader 20 Group Facilitator

Originally published in PowerSports Business, September 2, 2019

Occasionally we’ll receive an email from someone asking questions about selling or buying a dealership. The most common question is: “What kind of multiple should I expect?” And then there those about valuing the parts inventory, pricing used vehicles, valuing maintenance plans, how to tell the staff, and many others. In the current business cycle, there are significantly more sellers than buyers, and there’s lots of reasons for this disparity.

  • A powersports dealership is an asset-intensive business. Returns on the unit and parts inventories are relatively low compared to other potential investments.
  • Our industry provides wants, not needs, and we are very susceptible to downturns in the economy. With the high stocking requirements, we come with a lot of risk, and we are deep into the current growth cycle.
  • The further north you go in North America, seasonality creates large revenue swings, and investors are often looking for a more stable stream of returns.
  • The powersports industry has yet to mature, and too many OEMs are fighting over shrinking market share; in many markets, there are just too many existing dealerships.
  • Many owners feel their dealerships are worth a certain amount, but their current level of profitability (or lack thereof), and 20 years of poor parts inventory management and bad major unit purchasing decisions don’t justify the asking price.

If you are interested in selling your dealership, hopefully you started getting ready sometime around 2013, if not earlier than that. Think of each department in your dealership as a single cylinder in the engine in your car. If you plan to maximize the sales price, then every department in the dealership needs to be a profit center; you must be firing on all cylinders.

Many of today’s owners came from either the sales or finance departments (don’t look over your shoulder, there is no one there) and many don’t have much experience in fixed operations (service and parts). In times past, when the economy was good, a dealership could make a decent net if the sales and finance cylinders were firing, even if the parts and service plugs were fouled out, but that’s no longer the case. Every department needs to carry its own weight, but making that happen requires an owner/GM who either has a deep understanding of how each department operates, or who compensates by deploying strong managers in those other departments.

What’s wrong with the “what multiple of earnings should I expect” question? It has to do with many dealerships being operated more like a hobby than a business. Many owners have done as much as they can to reduce their annual tax liability. They’ve run personal vehicles though the dealership (sometimes for the whole family), travel, kids’ college tuition, vacations, insurance and anything else that can be charged onto the company card. While these tax reduction strategies do have the effect of reducing your annual tax bill (until the next audit), the reduction in profits greatly reduces the value that an outsider is willing to pay for the business. I’ve seen many dealerships where the earnings are close to $0, and at that level, 1000-times earnings are still essentially nothing. If you run your dealership like a business, then we can talk about a multiple of earnings, but if you run your business like a hobby, the only buyers you are going to attract are hobbyists or vultures.

If you think you are going to want to sell your dealership in the next 15 years, then now’s a good time get started on this to-do list.

  • Write off and dispose of old inventory. An astute buyer isn’t going to want it, nor are they going to pay for it. Even at the same sales volume, lower levels of inventory increase the return on assets.
  • Stop running all those personal expenses through the dealership. If you want to earn a multiple of earnings, the first step is to have some earnings.
  • Owners should draw fair wages from the business. If you treat the monthly rent check like a paycheck, an astute buyer is going to recognize that payroll expenses are going to be higher.
  • Develop a strong team. If every position in the dealership is micro-managed, and the owner is the only one who can make decisions, you’ve limited potential buyers to a small group of people who have in-depth knowledge of the industry.
  • Pay for audited financials. Just because your DMS will allow you to make an entry doesn’t mean it’s correct. Having a third party audit your financials at least once a year is a good practice.
  • Pay attention to your reputation. If Google rates you all of 1.7 stars, then the next owner is going to have to have an uphill battle from Day One.
  • Know your market and your business model. When we look at dealerships from the perspective of a buyer, we think about the future. We always see more opportunity in a low volume/high margin dealer than we do with a high volume/low margin dealer. It’s a lot easier to grow the former than the latter, especially as the employees don’t have the bad habit of discounting, and the customers don’t need retraining. Own your market, and make sure your model is sustainable.

If you are thinking about selling your business, then start preparing at least five years out. If you aren’t in one, then join a 20 Group. Be willing to take criticism from your peers. Be prepared to make tough decisions. Commit to a plan and then follow through with it.

In today’s market, there aren’t many buyers. If you want to maximize the sale of your dealership, start planning now, and make sure you are firing on all cylinders.