Dealerships in Australia are typically valued at goodwill plus net tangible assets to arrive at their enterprise value. The goodwill component is usually calculated as a multiple of earnings, or NPBT.
Before the pandemic, buyers would use current earnings ± any normalisations when calculating earnings to apply a multiple dependent on many different factors to determine goodwill. In the current (post-pandemic) market, a phrase has re-surfaced due to recent inflated profits – Future Maintainable Earnings (FME). FME is the profit the buyer realistically expects the dealership to be able to consistently deliver in the medium to long term. This interrelationship between current earnings and FME is the driving factor behind the multiples that we are seeing in the market. Higher goodwill values are obtained through the uplift in earnings (driving higher FME), while multiples remain relatively constant.
Multiple of FME
Source: Pitcher Partners Analysis
Buyers and sellers are splitting the benefits of the positive trading conditions we’re experiencing, leading to higher earnings. Sellers that want to cash in on the good times are considering their options, especially when there are no succession plans for the dealership group in place. Meanwhile cashed up buyers from local and international groups are willing to meet in the middle for strategic and quality franchises/locations. The overarching theme is that both buyers and sellers need to be willing to compromise to get the best outcome. There are scarcely any deals where one party is willing to lose out. Its best for each party to come to the table and have an open, honest discussion of the valuation for the dealership where both buyer and seller are happy with the price and achieve the best outcomes for both parties.
Recently, the MIS team at Pitcher Partners are increasingly seeing a change in the structure of deals. It’s a return of the structure where the existing owner/dealer principal (DP) will retain a minority interest in the dealership.
The benefit of this type of deal structure is two-fold. The day-to-day running of the dealership remains in the hands of the minority owner/DP, so the buyer can fund the business’ future growth and does not need to replace the key management team in the dealership. Secondly, the minority owner/DP can cash out a significant portion of the value of the dealership/group in the ‘good times’ and ultimately crystallise the return on what can be multiple generations of investment into the family business.
This structure benefits both buyer and seller, as the seller still has ‘skin in the game’ and therefore has a greater care for the ongoing success of the dealership. The buyer can also leverage the relationships and specifically, the local relationships the seller has built up in the community. This is typically something that is not easily transferable.
Of course, this is not the only deal structure available, with many dealerships still selling 100% of their business in the traditional asset or share sale structure.