When you consider selling your dealership, the first question that arises is, what's it worth?
While the marketplace itself ultimately provides the answer to that question, you can obtain a strong sense of what the total price should be by valuing the various assets of the business. The following are a few guidelines about assessing the value of the assets of your dealership in an asset sale (versus the sale of stock in the dealership corporation):
Fixed Assets
Look at your factory statement to see what your original acquisition costs were and also your current book value. Then, add equipment that may have been expensed such as factory tools or leased equipment. The seller will naturally want to sell near original acquisition cost and the buyer will want to buy at book value. If this price difference (spread) cannot be resolved, a qualified automotive appraiser is retained to appraise the assets. Usually the appraiser's numbers (fair market value) will be somewhere between original acquisition cost and book value.
New Vehicle Inventory
Typically, the inventory is sold at invoice, less holdback. Adjustments are normally made for demonstrators with excess of 3,000 miles and for noncurrent model cars. Occasionally, the advertising charge on the invoice plus any factory credits or rebates can be an issue. The selling dealer needs to realize that if he has collected, or will be collecting, the holdback on the vehicles in inventory, upon escrow closing he will have to pay the full invoice amount (flooring) yet not receive the full invoice amount from the buyer.
Used Vehicle Inventory
This is usually the quickest to resolve. The seller's used car manager and the buyer's used car manager walk the lot. What they cannot agree upon is wholesaled or left on the lot for 30 days on consignment for the buyer to sell and then wholesaled by the seller. The seller needs to examine his used car inventory in advance to see if he will be faced with some losses upon liquidation.
Parts and Accessories Inventory
A physical inventory is normally taken by an outside automotive parts inventory service. Care should be taken in reviewing the packing slips for a proper cut off, and some sample test counts should be made of the physical inventory to double-check the accuracy. Before taking the inventory, you should determine how the inventory will account for the following situations:
- Part number is current but the box is damaged (cannot be returned).
- An old parts number has been superseded, but the superseded parts number is in the current parts catalog.
- Obsolete parts. Attention should be given to what is considered an "obsolete part." Outside of the true obsolete part, a part will not be on the obsolescence report if it has sold once in the past 12 months. Therefore, if a particular part number has 12 items in inventory and you sold three in the past year (four year supply), thought should be given to what to do if the part cannot be returned.
Work in Process and Sublet Repairs
Check with your business manager for the accuracy of these amounts on your factory statement. On the date of escrow closing or month-end, a list of WIP and sublet repairs in progress should be prepared and verified by the seller and buyer. The seller should make a very strong effort to close all repair orders, especially body shop repair orders so he (seller) can retain the profit on these repair orders.
Miscellaneous Inventory and Shop Supplies
Again, a list is prepared of the gas, oil, and grease inventory and any other inventory items not included in the parts inventory. As far as the body shop is concerned, a list of unopened cans of paint, solvent (open and unopened), sandpaper and steel wool (open and unopened) should be compiled. With current mixing machines, opened cans of paint normally do not have value.
Various Security Deposits and Proration of Expenses
Review your prepaid expense account and security deposit account on your statement. Verify the accuracy of your statement and make sure the statement includes all items, including items that may not have been set up on your factory statement. Also, list various expenses paid during the month or quarter etc. that have an economic benefit to the buyer.
Goodwill and Covenant Not to Compete
This number varies depending on franchise, location of the dealership, and past profit of the dealership. You, the dealer, probably have a figure in mind but market conditions will ultimately decide the price. Contact an experienced automotive attorney/CPA who can assist in calculating a goodwill/covenant price.
Now that you have a general idea of what to expect and what you may receive on the sale of your assets, you're probably wondering how much money you will retain.
Since this example is an asset sale, you still retain ownership of your corporation. The proceeds will go to your corporation (items listed above). This will naturally increase your cash position. You'll keep collecting your various receivables (vehicle a/r, parts and service receivables, contracts in transit); then, pay your various liabilities (AP, loans). What's left over in the bank accounts is yours before income taxes.
Lastly and most importantly, you must then consider your income tax consequences from the sale. You need to contact your tax adviser since your tax liability will depend on a variety of issues such as the type of your entity (C corp, S corp, LLC), LIFO inventory, etc.
Some nonaccounting/tax issues will also need to be resolved such as possession of service records and car deals, tax clearances letters, telephone numbers, and the dealership name. Also, at the start of the selling process, an experienced automotive attorney needs to be retained for the drafting of the buy/sell agreement and various legal issues.
In summary, the above items are not an all-inclusive list but do cover the major items. Complete the worksheet below to give you an approximate value of your dealership before payment of liabilities and income taxes.
WORKSHEET
| 1. Fixed Assets |
$ $_______ |
| 2. New Vehicle Inventory (net of flooring |
$ $_______ |
| 3. Used Vehicle Inventory (net of flooring) |
$ $_______ |
| 4. Parts and Accessories Inventory |
$ $_______ |
| 5. Work in Process and Sublet |
$ $_______ |
| 6. Miscellaneous Inventory/Shop Supplies |
$ $_______ |
| 7. Security Deposit/Proration of Expenses |
$ $_______ |
| 8. Goodwill/Covenant |
$ $_______ |
| Amount Realized on Sale |
$ $_______ |
| Current Cash Balance |
$ $_______ |
| Accounts Receivable/Contracts in Transit |
$ $_______ |
| Other Assets |
$ $_______ |
|
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