Blue Sky is the intrinsic value of an automobile dealership, over and above the value of its tangible assets. It is sometimes equated to the goodwill of a car dealership.
Most articles regarding the blue sky value of new car dealerships cite a multiple of earnings formula, such as three times earnings, four times earnings, and so forth. The idea that “blue-sky” can be determined by anything times anything is just plain wrong.
In the vibrant world of automobile dealerships, where gleaming chrome meets shrewd negotiations, a unique term sparks the curiosity of investors and analysts: Blue Sky Valuation. Unlike the tangible value of inventory and real estate, the Blue Sky represents the intangible worth of a dealership – its goodwill, reputation, and future earning potential. Understanding this elusive variable is crucial for anyone navigating the intricacies of dealership acquisitions, mergers, and financial planning.
So, what exactly is Blue Sky? Imagine a dealership buzzing with activity. Sales teams close deals, service bays hum with repairs, and satisfied customers drive away in their dream vehicles. The Blue Sky value captures the essence of this thriving business, its established clientele, the brand’s local reputation, and the expertise of its workforce – all intangible assets that contribute to the dealership’s profitability beyond its physical possessions.
How is Blue Sky Calculated? Unlike the straightforward equation of counting cars on the lot, Blue Sky valuation is a dance of estimates and multipliers. Here’s the basic formula:
Blue Sky Value = Adjusted Pre-Tax Earnings x Blue Sky Multiple
- Adjusted Pre-Tax Earnings: This figure represents the dealership’s profitability after accounting for certain expenses like rent and financing costs, providing a clearer picture of its earning potential.
- Blue Sky Multiple: This variable, typically ranging from 2 to 4, reflects the market’s perception of the dealership’s future growth and risk profile. Factors like brand, location, market stability, and management expertise influence the chosen multiple.
formula: Blue Sky Value = Adjusted PreTax Earnings x Blue Sky Multiple
The Blue Sky: A Boon or a Bust?
For potential buyers, a high Blue Sky can be a deterrent, reflecting a premium price tag for the intangible potential. However, it also signifies a well-established, profitable dealership with a bright future. Conversely, a low Blue Sky can offer an attractive entry point, but may indicate room for improvement or hidden risks.
Beyond the Numbers: The Human Factor
It’s important to remember that Blue Sky valuation is not a crystal ball. While financial metrics play a crucial role, the human element – the dedication of the staff, the loyalty of customers, and the vision of the leadership – can significantly impact the dealership’s true value. A skilled appraiser will delve beyond the numbers, conducting interviews, analyzing customer reviews, and understanding the local market dynamics to paint a comprehensive picture.
Navigating the Blue Sky: Tips for Investors and Dealerships
- Investors: Thoroughly research the dealership’s financials, brand reputation, and market potential before committing. Don’t hesitate to ask questions and seek expert advice.
- Dealerships: Invest in building a strong brand, fostering customer loyalty, and demonstrating consistent profitability. This not only enhances the Blue Sky value but also lays the foundation for long-term success.
The Final Mile: A Future-Proofed Approach to Blue Sky
As the automotive landscape evolves, embracing emerging technologies, innovative marketing strategies, and a commitment to environmental sustainability will become increasingly important for dealerships. These factors can not only boost current profitability but also contribute to a higher Blue Sky valuation in the future.
Understanding Blue Sky empowers investors to make informed decisions and equips dealerships to maximize their worth. By valuing these intangible assets alongside the tangible, we ensure a thriving automotive landscape where both dealerships and buyers can navigate the road to success, one gleaming car at a time.
Even NADA the National Automobile Dealers Association in its publication entitled “A Dealer Guide to Valuing an Automobile Dealership, NADA June 1995, Revised July 2000 bemuses, in part, with respect to valuing a dealership by using a multiple of earnings: A Rule of Thumb valuation is more properly referred to as a “greater fool theory.” “It is not valuation theory, however.”
In its Update 2004, NADA omitted its reference to “fool”, but referred to the multiple formula as rarely based upon sound economic or valuation theory, and went on to state: “If you are a seller and the rule of thumb produces a high value, then this is not a matter of great concern. Go for it, and maybe someone will be stupid enough to pay you a very high value.”
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A dealership’s blue sky is based upon what a buyer thinks it can produce in net profit. If potential buyers think it cannot produce a profit, the store will not sell. If it can produce a profit, then variables such as desirability of location, the balance the brand will bring to other existing franchises owned, whether or not the factory will require facility upgrades, and so on and so forth, determine whether or not a buyer will buy that particular brand, in that particular location, at that particular time.
I have been consulting with dealers for nearly four decades and have participated in over 1,000 automotive transactions ranging from $100,000 to over $100,000,000 and have never seen the price of a dealership sale determined by any multiple of earnings unless and until all of the above factors have been considered and the buyer then decided he, she or it was willing to spend “x” times what the buyer thought the dealership would earn, in order to purchase the business opportunity.
To think otherwise would be to subscribe to the theories that (1) even though you think a dealership could make a million dollars, the store is worth zero blue sky because it made no money last year; and (2) if a store has been making $5 million per year you should pay say 3 times $5 million as blue sky even though you think you will not produce that kind of profit. Both propositions are absurd. If a buyer does not think a dealership is worth blue sky, then what he is really saying is that he sees no business opportunity in the purchase and therefore, in my opinion, he should not buy the store.
Each dealership is unique with respect to its potential, location, balance that its brand brings a dealer group, and condition of facility. The sale is also unique with respect to whether it is a forced liquidation, orderly liquidation, arms length, insider, or a case where an anxious buyer is trying to induce an unwilling seller. There are management factors to consider, length and term of leases, possibilities or non-possibilities of purchasing the facilities and whether or not the factory wants to relocate the store or to open a new store up the street.
In the car business it is impossible to pick a dealership or a franchise out of a hat, multiply its earnings by some mystical number and predict either what the dealership is worth, or what price it would sell for – and it doesn’t matter if you are talking about a Toyota, Honda, Ford, Chevrolet, Chrysler, Dodge, or any other dealership. At any given time one franchise might be considered more or less desirable than another, but they are all valued in the same manner.
