If you’ve held on to your dealership to enjoy the historically high profits of the last few years but now you’re thinking of selling, the market has changed. Keep that in mind as you prepare to sell. James “J.T.” Taylor, managing director, automotive at Truist Securities, has advice for dealers thinking of selling their business in today’s market.

First and foremost, “there has to be an acceptance that my business value cannot be predicated on the peak earning years,” he says.

Sellers looking at the last six months and making projections for the remainder of 2024 are realizing “there is a real value I am not going to be able to recoup,” Taylor tells Getting to Go!

Don’t upgrade technology and other pre-sale advice

In a recent Truist newsletter, Taylor pointed out some of the headwinds the retail automotive industry faces in 2024, including the still-high average new car price, high used car prices due to a recovering but still-low supply, and high interest rates thus high auto loan rates, which dampens auto sales.

Truist is projecting business to drop by about 22 percent in 2024. It will still be “way above” 2017 through 2019, Taylor says, but a seller’s expectation should be in line with the current market. A seller can’t think, “my buddy with the same franchise got X for his business,” Taylor says. “That was two years ago.”

Once a seller has accepted that dealership valuations aren’t what they were the last few years, here are some things to consider before going to market.

First, technology. Dealerships need to make significant investments in technology to be competitive in today’s market. These investments range from digital sales and marketing platforms to inventory management software.

If you’re a single-point dealership or a group with only a handful of rooftops, investing in technology may not be worth it if you plan to sell. A larger group can count on economies of scale that a small group can’t. “Don’t invest in technology before selling,” Taylor says. “It won’t change the value dramatically enough.”

Then there’s image compliance. Truist cautions dealers who have decided to defer image compliance that the value of the business will be discounted because every OEM will require the buyer to upgrade the facility post-close.

“There would need to be an analysis done of the cost to complete versus the potential discount to make an informed decision (whether or not) to complete the image upgrade prior to selling,” Taylor says.

That was true in 2021 and 2022 and it is true now, he says. Most dealers who have deferred upgrades don’t complete the upgrades prior to sale knowing “they will take a haircut on their exit value,” Taylor says.

Build your bench strength

If you are ever going to sell your dealership, you should be grooming a (younger) successor to your general manager. Too often, Taylor says, the owner and the general manager are the same age and leave at the same time. That lowers the value of your dealership and can even scuttle the deal.

“The number one reason the best buyer gets off of the right deal is they don’t have the right person to operate” the dealership, Taylor says. “If (the seller) have a seasoned GM willing to stay and transition that makes the business more valuable.”

And your bench strength should not stop at the top. “The seller needs to understand if their management team is in place and they have been preparing them to take more responsibility, they are likely to be considered very valuable by the buyer,” Taylor says.

Adopt a partner model

If you want to start boosting the value of your dealership now, adopt a partner model that allows managers to have equity in the business. That boosts a dealership’s value in a sale.

“The best results that we are seeing from our large dealer clients are those that have the partner model,” Taylor says. “If you don’t have that today in your dealership, you should consider it.”

One of the first questions Truist hears buyers ask sellers is “does your operator have equity in the business?” Taylor says.

Such partnership arrangements are a great way to reward talent, he says, and, if they are financially able to partner with the new owner, those people are more likely to stay when ownership changes.

Options if you’re not quite ready to sell

The number one reason dealers are considering selling today is that it is “just time to retire,” Taylor says. But “better than half of dealers we talk to do not have a solid transition plan.”

Maybe that’s because the dealer can’t imagine himself or herself not in the car business. Well, there are more options available to sellers than just listing a dealership with a broker, Taylor says.

Remaining in the business is one. Some buyers are offering the majority owner of a dealership the opportunity to roll over the equity and remain a partner, he says. About a quarter of Truist clients do that, Taylor says.

Those kinds of sophisticated ownership structures are “where a law firm such as Scali Rasmussen comes into play to put together the agreement,” he says.

There are also many ways to structure a dealership sale than just listing it with a broker, Taylor says. That is where having sophisticated advisors pays off.

And while getting the price you think you deserve is important, how much you actually get to keep of the proceeds “is a critical discussion,” Taylor says. “How to structure (a deal) from a tax liability standpoint has gotten significantly more complicated.”

Some dealers should just hang on

The value for most franchises is still very high, but a few brands have lost value. For example, Nissan and Stellantis franchises have dropped in the last 18 months. “It is not the time to sell those brands,” Taylor says.

Volkswagen is “a bit in the same boat but that is nothing unusual. They are the most cyclical of the manufacturers,” he adds.

One brand always rises to the top. “Toyota values have never been higher and are likely to remain that way,” Taylor says.

This article was written for Getting to Go, a buy/sell newsletter from Scali Rasmussen.