How to prepare your car dealership for a succession or a sale
Dealership owners beginning to plan for an exit typically look to either a business succession or a buyer. But how do you know which makes more sense for you — and then go about carrying it out?
As you prepare your car dealership for a sale or an internal transition, you’ll need to consider questions like how to boost valuation, develop a succession plan and strengthen performance. Keep reading to learn more.
What are the top exit options for car dealership owners?
Depending on your specific circumstances, there are several variations of succession planning or a sale to an external party that you may want to pursue as part of your preparation to exit your business. Here are the most common:
- Family succession: Dealership owners frequently pass the business down to the next generation within the family — if there is a willing, excited candidate to take over.
- Non-family internal succession: If you want to maintain continuity but don’t have a family member who wants to succeed you, then you can give a trusted employee, like a general manager, the opportunity to take over the business via succession. You could also consider an employee stock ownership plan (ESOP).
- In-market competitor: Another auto dealership owner in your area eager to consolidate market share may want to buy your business.
- Out-of-market buyer: You could pursue a sale to a buyer who is outside of your geographic area. Another dealership owner may want to expand into your market, or a family office or investment firm may be looking to expand or diversify their holdings. You’ll have better luck with this approach if your business can demonstrate exceptionally strong fundamentals.
How do auto dealerships start succession planning?
An internal succession is often the most common exit strategy for dealership owners. Pulling off a succession requires finding the right candidate, developing a succession plan and then giving the future leader opportunities to step into decision-making roles over time to help ensure a smooth transition of responsibilities.
Key steps include:
1. Determine whether you have the right candidate for a succession
Let’s say you, like many owners, want to leave your dealership to one of your children. But before you go about drawing up the paperwork, you need to confirm whether any of them actually want to step into your shoes.
This is a key element of succession that doesn’t get talked about enough. Even a strong, carefully thought-out succession plan will fail if the person who is supposed to become the next leader of a business lacks passion or excitement about taking over.
In some cases, you may want to broaden your candidate pool to include not just family members but also talented employees who have demonstrated drive and commitment to the business. Your general manager, for example, may be a great option to step up into an ownership role.
2. Develop your succession plan
Once you’ve identified a candidate to take over, start working through the details. You need to know how the ownership is going to transfer and on what time frame.
This will include determining whether the transfer will be a sale or an outright gift, as well as whether any transfer will happen all at once or as a series of partial transfers over time. You’ll also need to consider the tax implications of each of these options.
This process can often be emotional and challenging, especially for a succession that occurs within a family. You may wish to engage an advisor to help you navigate difficult conversations about giving up a leadership role and a younger generation that may wish to do things differently.
3. Give your successor growth and leadership opportunities before you exit
Ideally, you should begin succession planning several years before you plan to exit the business entirely. Doing this will give you time to overcome obstacles and, crucially, give your chosen successor time to develop their skills and take on more decision-making responsibilities.
If your successor already has experience working inside your business, there will likely be less of a learning curve. But if you’re passing the dealership on to a child who is excited but inexperienced, a ramp-up period is essential to a smooth succession.
Take advantage of your remaining time working in the business to guide and mentor your successor so that when you do step back, you can do so with greater confidence.
4. Plan out additional transfer steps
The dealership itself is often only one element of a larger business. During succession planning, an owner preparing to exit will also need to consider how and when to transition the ownership of the real estate of the dealership, as well as any ancillary businesses, such as leasing companies.
How do you boost your car dealership’s valuation before a sale?
Selling your car dealership to an external buyer can also be an effective exit strategy. But before you begin negotiating with potential deal partners, you should take steps to boost your car dealership’s valuation, including strengthening your internal team and assessing your financial and operational performance to identify areas where you can improve.
Make sure your team is running smoothly
If you want to sell to an external buyer, you’ll need to be able to show strong operating results. That’s one reason why having the right people in the right positions will go a long way toward making your dealership attractive to potential buyers.
Your new car sales, used car sales, parts, F&I and service departments all need capable, effective managers in place. Prior to beginning the sale process, work with your managers to make sure everything is running well in each department.
Burnout can be a factor here, so watch for signs and give your team the support they need to feel refreshed.
Watch your financials and efficiency
Your financial performance data is one key indicator of how well your dealership is running. Each of your departments has KPIs and benchmarks they should be hitting, so be sure to regularly review that data and collaborate with your team to make improvements when needed.
As a dealership owner, you have access to benchmarks and customer satisfaction ratings from manufacturers as well as dealer 20 groups and outside advisory firms. Pay close attention to these metrics as a tool to understand your day-to-day performance.
If you’re having trouble tracking your financial and efficiency data, you may need to upgrade your internal systems to allow for better tracking. You may also wish to consider joining a 20 group or engaging an advisor to learn more about the performance of your peers at dealerships across the country.
Dealership valuations are currently dropping
While either a succession or a sale could be a good option depending on your specific circumstances, there is a wrinkle here you should be aware of. After spiking in 2022, dealership valuations have come back down to earth.
In fact, industry trends show that dealership valuations, although very strong, are currently dropping. With record COVID-era profitability numbers falling as the inventory shortage fades into history, dealers are back to having full lots — which creates more pressure to sell, as well as higher competition among dealerships in the same market.
Since valuations are significantly impacted by profitability and future cash flows, this makes it all the more imperative that if you do decide to pursue a sale, you get your business in great shape before taking it to market.
How Wipfli can help
We help dealerships improve financial and organizational performance, increase value, strengthen tax strategy and prepare for a succession or a sale. Let’s talk about your vision for your business and how you can achieve it. Start a conversation.
