It’s been a waiting game for dealers hoping to sell their dealerships. But now it’s beginning to look safe again for those who are finally ready to put everything on the table.
Very few auto dealerships sold in the wake of the 2007 financial crisis, as industry sales plummeted and manufacturers withdrew franchises from hundreds of dealers around the country. Industry sales hit a low of 10.4 million units in 2009. Last year, they climbed to 14.4 million units, a gain of nearly 40 percent, according to the National Automobile Dealers Association.

Today, the best operators are hungry to acquire more stores and private equity investors are eager to get in the game as well.
That said, just as homeowners can improve their chances of selling a house with a fresh coat of paint, there are several steps dealership owners can take to make their businesses more attractive to these potential buyers. Let’s review 10 such steps you need to take before putting your store up for sale.

1. Have the right people in place: A proven management team is one of the greatest assets an owner can have when selling a single store or an entire company. Buyers today — particularly private equity firms — do not typically have anyone to run the acquired business. As such, buyers are looking for turnkey deals with a strong management team in place. And sellers will want to make sure that key employees have inducements to remain with the company after the deal closes.

2. Focus on the bottom line, not the top line: Buyers pay for earnings, not revenues, so it is imperative for owners to run their businesses with earnings growth as well as revenue growth as their goals. It’s not uncommon for buyers to pay as much as seven times the prior year’s earnings, so every dollar an owner can gain in operating efficiency has the potential to add seven dollars to the selling price.

3. Eliminate controversial spending: Add-backs — special expenses that sellers include in the deal — can complicate a sale, so it is best to eliminate them from the earnings stream. For example, a seller may have a relative on the payroll who is being paid more than the value he or she is delivering to the organization. Rather than arguing this cost/value issue, it is better to remove the relative from the payroll. This increases the profit the multiple is based on. It also eliminates any debate on how much should be added back.

4. Encourage managers to continue to perform well: Some owners take their foot off of the pedal once they have decided to sell, but this can send the wrong message to the staff. Instead of conveying the impression that “we just want to maintain the status quo,” challenge and provide appropriate incentives to managers to produce their best year yet. It will pay off with a stronger base for whatever multiple is negotiated.

5. Identify abnormal operational problems, and recognize them in one month: Human nature is such that people would prefer to spread a decline in sales or an unexpected cost over several months rather than recognize that event in a single month. Allocating a negative financial result across several months could be a red flag to buyers. It is better to show buyers that the hiccup — such as a decline in sales from a severe storm — was just a one-time aberration and not a recurring problem. Recognize the anomaly in one month in order to isolate and document how the “special event” affected earnings. This will give a seller a much better chance of winning the add-back debate.

6. Negotiate image requirements before selling: Manufacturers are becoming more involved in how dealerships represent their brands. They are requiring owners to have modern facilities that comply with their latest visual identity standards, and they expect owners to pay for any improvements. Sometimes manufacturers participate in the cost, but that’s up to owners to negotiate. Dealerships are easier to sell if owners finalize negotiations with their manufacturers before selling their franchises. Note, though, that the sellers do not have to make the expenditures for agreed-upon improvements, and, in most cases, this is the preferred way to go to avoid cost overruns.

7. Reduce nonessential capital expenditures: Owners can make their selling price more attractive if they reduce nonessential capital expenditures. If it is possible to defer making any major investments in fixed assets before the sale, consider doing so. Obviously, you want to make any critical repairs or replacements, but consider forgoing optional expenditures.

8. Capitalize and depreciate items that qualify for such accounting treatment: Don’t overlook the opportunity to legitimately capitalize and depreciate assets, such as computers and office equipment, instead of simply expensing them, even if they are not major investments. Small purchases can add up during the course of a year. Consult an accounting adviser to determine which types of purchases qualify for such treatment.

9. Make it easy for buyers to understand the value of your franchise: Work with your financial professionals to be able to tell prospective buyers a simple story that helps them understand the value of your dealership. Yours may be one of several acquisitions they are considering, so you want your story to stand out from the others. Clearly document any nonrecurring expenses so they can be added back, and provide all relevant historical trends.

10. Invest in an independent audit: Many owners operate for years without having a financial audit by an independent certified public accountant, and, typically, that’s fine. However, before trying to persuade another party to buy your franchise, it is often prudent to have at least one annual audit, preferably by an accountant or firm with knowledge of auto dealerships. The credibility of the audit report will go a long way toward assuring prospective buyers that you are prepared to sell, and it will expedite the buyer’s due diligence.

Start the Process Early
Selling an auto dealership is a complex and often emotional task. Even if you think you are five years away from retiring, it is not too early to start the process. As economic conditions continue to improve, you might find a buyer sooner rather than later.