Valuation of Automobile Dealerships: Primer and Discussion Stephen D. Kertzman & Charles Seguin Kertzman Valuations Inc. Seguin Advisory Services se segui uinadv dviso sory
About The Presenter Stephen Kertzman, BA (with distinction), LLB, CBV • Stephen is the founder and President of Kertzman Valuations Inc. (“KVI”). Stephen has over 20 years experience exclusively specializing in the areas of financial loss/damage quantification, business valuation and investigative and forensic accounting. Stephen is a member of the Board of Directors of the International Institute of Business Valuators and Chairs both the Audit Committee and By-Laws Committee. • Stephen has been involved in a number of assignments in the automotive industry for a variety of purposes. These have included: - Valuations of automotive and light truck dealerships; - Valuations of automobile parts manufacturing companies; - Analyses of the impact of cessation of vehicle brands, including in respect of the impact on future dealer sales and profitability; - Analyses in respect of the impact of various sales incentives on vehicle pricing and sales; and, - Class action regarding defective vehicles. Stephen Kertzman, BA, LLB, CBV Kertzman Valuations Inc. First Canadian Place, Suite 5700 100 King Street West Toronto, ON M5X 1C7 skertzman@kertzmanval.ca 416.806.4900 se segui se segui uinadv uinadv dviso dviso sory sory Page 2 ap Valuations Limited January 24, 2018
About The Presenters Charles Seguin, CPA,CA • Chuck is the founder and President of Seguin Advisory Services, an exclusive auto retail consulting practice. He has over 30 years experience in dealing with the automotive retail industry from audit and tax perspective as well as advisory services. Chuck is involved with dealership buy/sell transactions, representing both buyers and sellers. Chuck has a strong track record in succession planning and as an expert witness in auto retail matters. • Chuck is also involved with the design and delivery of the Automotive Dealership Management Program, a graduate level program offered by the Automotive Business School of Canada. He is a regular speaker at Auto Industry events across North America and is a regular columnist for Canadian Auto Dealer magazine. He has also authored many reports for the Canadian Automobile Dealers Association and its Provincial counterparts. Charles Seguin CPA, CA President Seguin Advisory Services PO Box 277 Midland, ON L4R 4K8 cs@seguinadvisory.ca (416) 565-9493 www.seguinadvisory.ca segui se segui se uinadv uinadv dviso dviso sory sory Page 3 ap Valuations Limited January 24, 2018
Outline of Presentation • Industry Review: - Industry overview - New vehicles - Used vehicles - Financing - Parts and services - Consolidation • Valuation: - Profit drivers – How Do Dealerships Make Their Money - When Valuation Required - Information requests and sources specific to dealerships - Valuation approaches and methodology - Issues specific to automobile dealerships - Transaction multiples - Tests of reasonableness - Selling a dealership and maximizing value segui se se segui uinadv uinadv dviso dviso sory sory Page 4 ap Valuations Limited January 24, 2018
WHERE ARE ARE TODAY se segui se segui uinadv uinadv dviso dviso sory sory Page 5 ap Valuations Limited January 24, 2018
New Vehicle Sales and Number of Dealership Locations 2001 - 2017 New Vehicle Sales and Dealership Rooftops 2,100,000 3,800 2,000,000 3,600 1,900,000 3,400 1,800,000 3,200 1,700,000 3,000 1,600,000 1,500,000 2,800 1,400,000 2,600 Total Unit Sales Total Rooftops 1,300,000 2,400 1,200,000 2,200 1,100,000 1,000,000 2,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 segui segui se se uinadv uinadv dviso dviso sory sory Page 6 ap Valuations Limited January 24, 2018
Canadian Population Projections by age, by sex Driving Age Zone se segui se segui uinadv uinadv dviso dviso sory sory 7 ap Valuations Limited January 24, 2018
Canadian New Vehicle Sales, Population, Average Household Wages and Unemployment Rate se segui se segui uinadv uinadv dviso dviso sory sory Page 8 ap Valuations Limited January 24, 2018
Interest Rates, Consumer Credit, Loans to Private Sector and Household Debt to Disposable Income se segui se segui uinadv uinadv dviso dviso sory sory Page 9 ap Valuations Limited January 24, 2018
Today’ s dealership landscape in Canada 3,350 dealerships 1,632 owners # of Stores # of Owners 330 425 1,440 500 1,632 655 Single Store 2 to 4 5 to 10 10 to 20 over 20 Single Store 2 to 4 5 to 10 10 to 20 over 20 se segui se segui uinadv uinadv dviso dviso sory sory Page 10 ap Valuations Limited January 24, 2018
What is fueling acquisition growth? • Facilities • FUTURE? • SUCCESSION Market Share • BRANDS • Contin Finance ue to Community • Need to Grow Grow or • Sell • $ • Can’t Compet e Opportunity • Costs are soaring and so is debt! • Very few open points • Goodwill /Blue Sky viewed as a Franchise Fee • Acquisition Discipline in many cases ignored se segui segui se uinadv uinadv dviso dviso sory sory Page 11 ap Valuations Limited January 24, 2018
THE BUSINESS OF A FRANCHISED AUTOMOBILE DEALERSHIP se segui se segui uinadv uinadv dviso dviso sory sory Page 12 ap Valuations Limited January 24, 2018
What is a franchised Auto Dealership? Several businesses under one roof New Vehicles After Vehicle People Sale Finance Services Used Vehicles segui segui se se uinadv uinadv dviso dviso sory sory Page 13 ap Valuations Limited 23 January 2018
New New Vehicles Vehicles Gross margin between 2% and 10% • Brand Specific • New vehicles under 400km • Demonstrator vehicles between 400km and 15,000km • Dealer operates under a DSSA - Specific brand representation vary by OEM and within OEM - Assigned a non-exclusive geographic territory - Tight controls over ownership and management • No franchise fee paid upfront by dealer • No direct royalty fees by dealer • Significant inner-brand competition • Can sell at retail and fleet • Shift to trucks and luxury segui se segui se uinadv uinadv dviso dviso sory sory Page 14 ap Valuations Limited 23 January 2018
Used Used Vehicles Vehicles Margins between 8% and 15% • Very competitive business with limited barriers to entry • Brands provide some support with Certified used programs and off lease vehicle availability • Inconsistent performance from store to store • Lack of availability of quality talent • Difficult to secure quality inventory • Important business from a service department revenue standpoint – vehicle reconditioning se segui segui se uinadv uinadv dviso dviso sory sory Page 15 ap Valuations Limited January 24, 2018
Vehicle Vehicle Finance Finance Gross Margin 4% to 10% • Referred to as F&I ( Finance & Insurance) • For some brands, F&I is the only source of gross profit for the dealership • Some dealers have in-house leasing operations • Most dealers receive a payment from finance company to refer customers in their direction • Largely an online process in Canada and very customer friendly • All the chartered banks and OEM captive finance companies are involved in point-of-sale vehicle finance • Dealership also sells extended warranty contracts, rust control, etching etc. • Dealership receives bonuses based on penetration levels segui se segui se uinadv uinadv dviso dviso sory sory Page 16 ap Valuations Limited January 24, 2018
After After Sale Service Sale Gross Margins Vary between 75% and 35% Service • Consists of vehicle maintenance and repair provided by the dealership’s service, parts and (for some) body shop departments • Key to customer retention and future new and used vehicle sales • Vehicle reconditioning is a strong profit driver • High margin business • Hard to attract talent segui segui se se uinadv uinadv dviso dviso sory sory Page 17 ap Valuations Limited January 24, 2018
Other Businesses Requires Brand approval • Some dealerships operate - Restaurants, snack bars, coffee shops - Race tracks - Museums - Wellness Centres - Accessories - Business Development Centres - Collision Centre Partnerships - Shared Services Centres - Marketing and Advertising Alliances - Event Centres - Condos se segui segui se uinadv uinadv dviso dviso sory sory Page 18 ap Valuations Limited January 24, 2018
INDUSTRY HEADWINDS se segui se segui uinadv uinadv dviso dviso sory sory Page 19 ap Valuations Limited January 24, 2018
Industry Headwinds • Rising interest rates • Changing relationship • Industry dependent upon between dealers and monthly payments brands • Evolving consumer from • Future of auto retailing Baby Boomers to • Ownership and Millennials management succession • Government regulation • Dealership consolidation • NAFTA renegotiation • Dealer agreement • Vehicle electrification redesign se segui uinadv dviso sory Page 20 ap Valuations Limited January 24, 2018
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