Planning for Profit and Value

Whether or not you plan to sell your dealership, your business plan should be designed to increase its value. The industry is riddled with unintended consequences. This refers to the implementation of business practices that might seem smart at the time, perhaps have worked for other dealers, and might even have been suggested or imposed on you by a manufacturer, but that in the end have actually decreased value. Even some of what are generally considered key profitability indicators, like fixed absorption or new technology, can negatively impact value if they are not correctly applied and administered.

Some of the key drivers of value that should be addressed in the business plan:

  • Compensation
  • Market Share
  • Customer Satisfaction
  • Location
  • Real Estate
  • Operational Profitability
  • Succession Planning

Compensation
Some dealers find it surprising that in certain dealerships someone other than the dealer principal is the most highly-compensated employee. This tends to indicate the dealer has handed over control to a successor, who may be a family member. However, is even more significant (in terms of perceived value) if the dealership’s general manager, the highest paid employee, is not a family member. Dealerships are much more valuable if the infrastructure is in place to continue its operating profitability if the owner is no longer there.

Compensation can be a gauge of performance. High performers tend to be highly compensated. Below average wages usually indicate a staff of poor performers, high turnover, and an overall weak operation.

Compensation is affected by various factors, such as cost of living in the area, and those factors must be considered when examining a dealership compensation program. We recommend a formula based on gross profit per employee, or broken down further by department per employee. Still, the analysis is subjective. Some dealers do quite well by overpaying employees. Being known for overpaying attracts the best of breed of dealership employees. One approach to determining appropriate compensation is to look at what it would cost to replace someone in a particular position. Decisions on compensation should be done with an eye toward sustainability.

Market Share
Manufacturers are particularly concerned about market share – and holding dealers accountable. They will pull a franchise for declining market share … or, at least, put significant pressure on the dealer to increase unit sales. Dealers looking to purchase a store will consider market share in their valuation. Minimally, maintaining market share effectiveness has to drive part of any business plan.

Customer Satisfaction
The internet has changed our game. Young buyers look at online reviews to decide where to shop, and they are moved more by negative than positive reviews. Prior to the internet, a customer with good experience would spread the information to an average of 17 people, while an average of 70 people would hear about a bad experience. How far and fast does it spread now? Negative reviews must be kept to a minimum; the customer’s impression is reality. Negative reviews will kill you, no matter how much advertising you do.

Location
Locations change in desirability, and therefore value, over time. If you can’t move, it is critical to stay up with changing trends in your market, and adapt. It might even mean changing the brands you represent. Many dealers are doing well in less than desirable areas by carrying the right products or catering to the unique needs of the buyers in their market.

Real Estate
Whether you own your property and are renting it to your dealership or renting the property from a third party, it is important to pay the appropriate rent. Currently, dealership facilities are renting for about 6 to 8 percent of the current appraised value on a triple-net basis. If you own and charge your dealership too much or too little, the incorrect expense could mask other profitability issues. On the other hand, peers looking to buy will want to ensure an appropriate return on the dollars they invest in the real estate.

Overbuilt facilities will detract from value because no one wants unproductive real estate. You could sell some of the excess ground; but, you cannot sell space inside your excessively large facility. Your manufacturer might encourage you to expand or upgrade your facility, but you have to determine if that will improve dealership value or profits. Building the Taj Mahal of dealerships is rarely a good business decision.

Operational Profitability
The new super-group dealerships are centralizing departments like Human Resources and Information Technology to generate considerable savings. It does not make sense to centralize operations if you have very few locations or if the locations are distant from each other. More important is hiring competent staff. We generally look to reduce departmental head count by about 40 percent before centralizing office operations.

Succession Planning
How you plan for succession will have an enormous impact on value. You’re going to be replaced at some point. Have you identified your successor? Have you established a timeline? Communication is key. Often the person the dealer has in mind as successor has not been told or does not have an idea of when he or she will take over. The person you have identified might not want the job, even if it's a family member. We advise dealers to start the process about five years in advance of their planned retirement. That way, if there is a problem with the identified person, there is time to restart the selection process. Succession planning should be part of your strategic planning and an essential element in your business plan.

Note: We are happy to send you a copy of our series of articles titled, “Ten Steps to Effective Succession Planning.” Just call us at 317-886-1624 or email Valerie Ramun at VRamun@hbkcpa.com.

About the Author(s)
Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA. This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies. Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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