Know Your Store's Worth

Knowing what a dealership is worth has become a ‘critical’ issue for dealers who face slumping vehicle sales, shrinking profits and continuing efforts to reduce store counts.

So says veteran dealer accountant James L. (Butch) Williams of Dixon Hughes LLC, noting last fall's collapse of the 14-store Bill Heard network offers “lessons for all dealers, big or small.”

A one-time client of Williams' firm, Heard's 14 Chevrolet stores “overbuilt, overinventoried and lost control of cash and cash equivalents at a time when inventory equity no longer is adequate to insure ongoing loans from lenders,” Williams says.

Dealership valuations should be “realistically determined” in preparation for more franchise consolidations and as domestic auto makers shrink their retail networks, Williams says at the annual automotive dealership conference of the Michigan Assn. of Certified Public Accountants in Troy, MI.

He adds: “Dealerships big and small, metro and rural, find themselves with abandoned relationships on vehicle lines of credit that were once rock solid.

“Or, if the relationships continue, the new terms are loaded with alarming interest-rate increases, personal guarantee requests…and financial covenants that strangle the operations of their stores.”

Williams, a Birmingham, AL, dealership CPA for 31 years, stresses that daily bank reconciliations are a “must.”

Dealers should make sure that excess cash is properly insured and dealership management is informed daily of the dealership's cash position and how much cash is needed for each store in a group.

“It could possibly be mid-2010 before some form of normalcy returns to the retail dealership industry,” he says. “The conservation of cash until that time is a consideration for every dealer management team.”

He recommends every dealer maintain a board of advisors that meets regularly to help clients “weather the storm” of the current crisis. The board, Williams said, should include the dealer's CPA, attorney, banker and investment and insurance agents.

Williams advises dealers to keep an eye on additional franchises, especially those coming from China and India.

He singles out the Mahindra & Mahindra truck/SUV line from India and the Brilliance and BYD car lines from China. Each of these auto makers is exhibiting in this season's auto shows as a kickoff for 2010 marketing rollouts.

“Every brand, including Honda and Toyota, is subject to franchise impairment,” he says, “And yet every franchise has franchise value.”

He tells of a California Toyota dealership that lost money yet was offered $20 million for a buyout.

“A Chevy store in Appleton, WI, and a Dodge outlet in Birmingham, AL, where there are five other Chevy dealerships, are profitable and therefore have franchise values. A Buick franchise in Birmingham sold for $750,000 last year,” he says.

“So it behooves every dealer to pay attention to maintain strict standards on cash, credit and consolidation opportunities. If the offers come in and may be too good to refuse, you want your stores to be ready.”

Consolidation has become a hot topic, considering the growth of Buick-Pontiac-GMC and Chrysler-Dodge-Jeep combinations.

Consolidations are not to be feared because the resultant decline in dealership totals in mostly metro areas could lead to improved profits, says Paul Melville, principal in the Grant Thornton LLC dealer advisory firm based in Southfield, MI.

Consolidations pros include the transfer of good working practices; back-office synergies; economies of scale; more vehicle purchasing power, and elimination of competitors.

Consolidation cons are managerial changes; lack of a going-forward strategy; absence of factory support; a tendency to let systems deteriorate; ‘ultra-rapid’ growth and acquisitions made too opportunistically and without the ability to work financially, Melville says.

“Plan the growth inherent in consolidations carefully and execute just as carefully,” he says.

Dealers should continue to focus internally on profit, cash and working capital management “with strong processes and rigid controls,” he added.

“Don't ignore inventory controls,' says Jack Serda, also of Grant Thornton. “Profits do go down the longer a vehicle stays unsold and in stock. Rule of thumb: the first loss, even a day after the unit goes on sale, is more than likely the best loss.” In other words, it's not bound to get better after that.

Melville says key performance indicators in the current sales environment include:

“Absorption targets from after-sales operations help to protect the business in times when vehicle sales and profitability come under pressure, while reinforcing the importance of the after-sales opportunity,” Melville says.

Rigid inventory controls are necessary as dealers find it harder to finance their inventory purchases, says Chip Maher, a National Automobile Dealers Assn. consultant and former Lincoln-Mercury dealer.

“It's unbelievable, but Honda and Toyota stores are turning down production for the first time,” he says. “What's more, Detroit 3 dealers are standing up to their factories' captive-lender demands to stockpile vehicles ad nauseam and switching away from the captives for dumping leasing.”