Blue Sky is the intrinsic value of an automobile dealership, over and above its tangible assets. Thus, 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 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.
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, concerning 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 formulae 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.”
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. But, on the other hand, if it can produce a profit, then variables such as the 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, 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 earnings unless and until all of the above factors have been considered. The buyer then decided he, she, or it was willing to spend “x” times what the buyer thought the dealership would earn 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 skies because it made no money last year; and (2) if a store has been making $5 million per year you should pay to 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 concerning its potential, location, the balance that its brand brings a dealer group, and the condition of the facility. The sale is also unique concerning whether it is a forced liquidation, orderly liquidation, arm’s length, insider, or a case where an anxious buyer is trying to induce an unwilling seller. In addition, 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 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.