Appraisal Matters

Automobile dealerships are special purpose properties with their own nuances, quirks and uniqueness.  Similarly, appraising automobile dealerships requires a different set of rules and understanding.  Let’s explore two of the most unique aspects of this property type and how they affect automobile dealership appraisals.

The Factory/Dealer Relationship

Like many factor/distributor relationships, both parties are linked to each other.  Yet the balance is not equal.  One of the dealer’s biggest complaints about the factor is that they do not listen or even inquire into what’s happening on the sales floor.  Although they analyze numbers, there’s no substitute for the hands-on, day-to-day practitioner.  Frequently, automobiles are designed from the factory’s viewpoint of what the consumer wants, and there are too many examples of failed designs that would have been avoided if they had gotten a handle on the pulse of the consumer from the dealer.

One of the largest differences between the automobile manufacturer/distributor relationship compared to that present in other industries is the degree of influence the factory has on the dealer.  One of the most visible influences is on building construction.

• They impose dealership upgrade programs that require dealers to upgrade their facilities and make other changes in order to get the maximum number of new model vehicles (they would otherwise get the minimum, which is one of each new model).
• The dealer has virtually no opportunity to find vendors who can quote lower prices for components.
• The manufacturer’s specifications must be met exactly using their selected vendors, usually at a higher price than can be negotiated locally or substituted with similar components.
• Only one new building plan is offered to the dealer and the plan is designed from the factory with little or no feedback from the dealer.
• When a dealer buys a franchise, unless it is newer (typically less than a decade old), the dealers will be forced to upgrade it to the current design plan.

Multi-group Dealerships

Don Ray of Ward’s Dealer Business has written that approximately a third of all U.S. dealerships are owned by groups that contain three or more dealerships.  It is often difficult to maintain lines of communication between people with similar positions among dealerships and communicating with the upper echelon of the company can be just as demanding.  Some dealers have set up a centralized business development center to coordinate fragmented sales efforts and handle customer telephone calls from a single location, which offers a uniform experience for the customer.   Dealers have to think of the business as a multi-divisional whole, not just a sum of the parts.  The demands on management’s time are definitely greater.

On the other hand, efficiencies in parts and inventory can be realized.  Where automobile lines are similar or identical between two or more franchises, as is common for General Motors brands, not as many cars need to be stocked.  Similarly, not as many parts need to be warehoused.  However, the most important benefit of multiple dealerships is diversification.  Whether a trend runs for foreign or domestic or for economy, mid-range or luxury pricing, a multiple dealership has the ability to cross-subsidize that is not available to a single dealer.  That, of course, translates into lower business risk.

The Effect of the Factory/Dealer Relationship and Multi-group Dealerships on Valuations

The influence the factory has on the dealer frequently has a profound affect on the automobile dealership appraisal.  The widely quoted principal of substitution looses much of its influence because dealerships cannot just “get up and go” or be so easily compared due to the restrictions of the franchise agreement.  There is a “protected” radius whereby another dealer with the same brand is restricted from just setting up shop.  Yet relocating a brand suffers from the same problem.  In effect, these agreements are tied to a particular area, although there is some flexibility in being able to locate nearby… as long as it doesn’t come within the protected area of another dealer with the same brand.

Another factor to consider is that for a dealer to modernize, as may be required by the factory should there be a sale transaction, is a very expensive proposition.  The cost per square foot of modernizing is typically much higher than in an “open” market where a dealer could contract with just about anyone who is qualified and get their materials from many sources because the influence the factory has over the dealer.  Appraisers need to read the terms specified in the franchise agreement to see if there are any triggers that would cause such a large cost.

Multi-group dealerships may have centralized portions of their business and limited or eliminated these functions at any one dealership.  When this occurs, appraisers must consider whether the existing buildings have the space and layout to start them exclusive of this relationship.  For instance, if a dealership requires 2,000 square feet of administrative space as a stand-alone operation but there is only 700 square feet due to most of those functions centralized at “corporate”, where would the additional 1,300 square feet be located?  You may not be able to just add 1,300 square feet to the building without additional construction or expanding onto the sales floor.  Another example is an undersized parts department due to a centralized parts inventory among multiple dealerships with lines that have similar or identical parts.

Essentially, these unique valuation aspects result in additional cost factors that need to be considered in appraising automobile dealerships.

The next part of this series will address dealership operations.

John Simpson, MAI