Despite the ups, downs and uncertainties of the past year, Rex Collins says many equipment dealerships are more profitable than ever.
“If you’d asked me if dealers were going to be highly profitable when the economy shut down for weeks and months at a time while we were going through a pandemic, I would’ve said you were nuts,” says Collins, a principal with HBK CPAs & Consultants, a dealership solutions group that focuses on transaction work and traditional accounting. “Dealers are continuing to pinch themselves right now because profits exploded this year, thanks to higher gross profits and lower expenses.
“It’s hard to believe, but as we close out the year, dealers are well on their way to having their best year ever.”
According to Collins, roughly 19% of dealers had their best year ever in 2020, and that increase in profitability has served to restart consolidation efforts. Although few people demonstrated interest in buying or selling a store in the immediate months following shutdowns across the country, Collins says that changed in June 2020. And while it may be expected that sales conducted in the second half of 2020 were prompted by issues stemming from COVID-19, Collins says that generally isn’t the case.
“The large number of deals we did in this current environment are conducted for the same classic reasons we’ve always had,” he says. “By and large it’s for age, lack of a family successor or reluctance to make a big new investment. Sometimes it’s factory-mandated upgrades or relocations.
“There’s not a sudden panicky rush to the exits. It’s more the graying of the dealer body. They’ve gotten older, and it’s time to sell.”
Collins says the increase in sales right now is also driven by attractive funding packages on offer from banks, which attracts more buyers to the table. That, coupled with disinterest on the part of some dealers to evolve their business in order to meet the demands of a post-Covid world, makes selling a dealership particularly attractive.
“If you’re looking to sell, it’s not a bad time,” Collins says.
Get Your Dealership in Order Before Putting it on the Market
However, Collins cautions, just because now is a good time to sell doesn’t mean it will be a cakewalk.
“Selling a dealership has become a very complicated and intricate transaction, and a seller needs to proceed carefully through the maze,” he says. “You have one chance to sell this asset. It’s not like you’re selling a tractor on the lot and you’re going to get another tractor. This is the only one of these you’ve got.”
Before jumping into the sales process, Collins advises dealers to analyze themselves and their business, focusing especially on their understanding of their financial statement.
A do’s and don’ts list:
- Analyze your business
- Use benchmarks
- Rush a sale
- Work with a bad buyer if there are other options
“If you sold or purchased a dealership within the last 5 years, you’re going to be more informed than most,” Collins says. “However, so many things have changed in the last 5 years —especially this most recent year.
“If you feel competent overall, there are still going to be some areas where you need to obtain some qualified help.”
Collins says it’s important that dealers make sure their business is presentable to potential buyers.
“You wouldn’t sell your home without running the vacuum cleaner, picking up some things, maybe lighting a candle to make it smell a little better,” he says. “So why would you sell your business without doing a little bit of housecleaning? If you’ve got unrelated assets, liabilities, expenses, get them out of the business. Clean that up — it just makes the discussions a lot cleaner and easier.”
It’s also important to do regular benchmarks on the store to understand what it looks like to a potential buyer, Collins says. He encourages dealers who are looking to sell to take a hard look at the gross profit per employee per month.
“It can shed light on a lot of different things,” Collins says. “Do I have too many employees? Do I have enough gross profit? Am I overstaffed? Do I have family members that are getting a paycheck? What is driving all of this and is it fixable? Can I fix it? Why hasn’t the seller fixed it?
“We need to look at all those things. And if you’re the seller, fix it.”
It’s not just the benchmarking that potential buyers will examine, Collins says. They’ll also want to know about key management figures.
“Is your profitability the result of your presence in the store?” he asks. “If it is, guess what — your value just dropped. When you leave, so does a customer and so does the profit. If that’s the case, I would advise you to start transitioning.”
Work with the Buyer to Value Equipment
Once an interested buyer has decided to move forward with the purchase, Collins says it’s best for the seller to have their representative draw up a nonbinding letter of intent as a starting point.
“I want the buyer and the seller to have agreed on how we’re going to value the big items,” he says. “We’ve got stuff that’ll be converted into our 50-plus page document that the attorneys put together, but I just want a 1- or 2-page document that says what we’ve agreed on, so we aren’t having major discussions and the deal doesn’t blow up.”
It’s important that the seller obtains a deposit of some sort from the buyer, Collins says, to provide compensation for no longer negotiating with other potential buyers while the seller conducts due diligence. He says the deposit can be refundable, but it’s a necessary step to build trust.
Then it’s time to begin valuing the contents of the shop.
“We let the buyer and seller walk through the shop, and we value things,” Collins says. “They end up determining what a fair value is for used equipment in place that’s wired, connected and ready to go. The value of this comes out pretty close to 50% of your original cost. There will be exceptions, like if you’ve got a brand-new shop with all new equipment.”
As for rental equipment, Collins says it’s valued like used equipment, using tools such as the Rouse report.
“All parts are transferred, but typically the purchase price that’s determined is only for those good returnable parts,” he says. “We will oftentimes look at the sales history and if there’s been sale within the last 12 months, 24 months, 36 months, then we reclassify that as a good part. That’s a negotiating point.”
Collins reminds dealers to investigate their state’s buyback statute to understand the criteria for returning goods that aren’t purchased to the manufacturer in exchange for some degree of compensation.
Consider How to Transfer Assets
There are various assets that need to be considered when a purchase price is being negotiated, Collins says. Fixed assets, such as trucks used by the sales team or work trucks with equipment attached to it, can be valued quickly.
“I can get the black book and we can determine the wholesale value of those, and we’re good to go,” Collins says. “Again, we’re generally looking at about 50% of the original costs. That can vary depending on the age and what exactly is on that, or how it’s outfitted.”
Key Steps in the Sales Process
- Require the buyer to pay a refundable deposit before taking the dealership off the market
- Work with the buyer to determine appropriate value of used equipment
- Establish process for transferring assets
- Ask the buyer to assume long-term contracts
As for finance reserves, Collins says those are generally part of the transaction, but they’re transferred at a discount, leaving the buyer on the hook for any of those chargebacks.
“Then you’ve got pool funds,” he says. “If you’re a John Deere dealer, you may have some market funds or advertising funds that can be transferred. Don’t forget those.”
Collins also has customer lists turned over to the buyer — however, in order for that information to be provided in an electronically downloadable format, the buyer has to pay extra.
Once assets are dealt with, it’s time to address potential liabilities.
“If I’m the seller, I don’t like for things to be assumed,” Collins says. “Sometimes that’s my longer-term contracts that I’ve got a commitment on that are going to cost me a lot of money to break. Think about computer contracts or phone contracts. What about our chargebacks for your F&I department, or finance insurance products that you’ve sold? I like to talk about those between the buyer and seller, because I don’t like there to be any confusion by the parties.”
Don’t Get Involved with a ‘Bad Buyer’
Collins cautions dealers who are looking to sell that there may be some hurdles throughout the process.
“Recently used equipment has been the single biggest factor in stopping deals from going forward,” he says. “We’re getting much better with that. Dealers that have a problem know they have a problem, and we get through it.”
Collins says there are tools available to price most of a dealer’s used equipment, which helps. However, he recommends negotiating those things on an item-by-item basis. Then, if both dealers reach an agreement, the deal can move forward.
Sometimes there’s a delay of up to 2 months between the valuation of the used equipment and the final manufacturer approval of the sale. In cases like those, Collins says it’s important to establish up front the items the buyer is purchasing and set a purchase price during that 2-month period.
“The seller calls the buyer and has them participate in the value of the tool,” he says. “If we put something other than the value that the buyer is comfortable with, that will be excluded, and we’ll own it. We’ll have to negotiate at that time.”
Another thing to watch out for is what Collins dubs a bad buyer. This is a person who may have a habit of signing a letter of intent to purchase a dealership and then dragging their feet.
“They take forever to close a deal,” he says. “It becomes a battle to get them to stick to the letter of intent. Furthermore, manufacturers don’t like them because they’ve either sued or been sued by the manufacturer.”
Frequently, Collins says, these people have enough money to get approved for the sale, and if they were the only potential buyer, he would advise his clients to proceed with the sale. However, if there’s another choice to buy the dealership — even one who will pay less money — he advises avoiding the headaches involved with doing business with a bad buyer.
“You’ve got to look at all the intangibles about your buyer,” Collins says. “How do you get that? Talk to the manufacturers. Do your own research. Talk to their advisers. Do some due diligence on your buyer.”
Sales Process Won’t Follow a Set Script
When all is said and done, Collins says a dealer can hope to find a buyer for their dealership within 60 days.
“It can happen sooner than that, and oftentimes it does, but frequently it’s 60 days,” he says. “But then there are those that lay out there for a year. This is not like selling a piece of equipment. There are fewer qualified buyers for a dealership.”
No matter how fast or slow the process moves, Collins reminds dealers that it’s a complicated process.
“Selling your dealership is a very complex transaction,” he says. “It’s impossible to give a cookie cutter approach to valuing any dealership. My best advice for you would be to not retain an awful adviser. You need to get the skills of an adviser who’s got a proven track record in the dealership world, who knows the issues.
“You’ve got one chance to sell this. You need to compile a team that can work together to avoid all the problems that you can, and to be solidified in working together for one common goal.”