What Is A Dealership?
In the context of business sales, a dealership is a business that has an agreement with the owner of a dealership brand to sell a particular product or service. The agreement may or may not be exclusive within a geographic territory. The dealership is typically required or encouraged to purchase raw materials or services from the owner of the dealership brand. A dealership may have limitations on its activities in order to protect the value of the dealership brand and to maintain its status or license as an ‘authorized dealer.’ The quintessential example of a dealership is a used car dealership that is an authorized dealer of one or more car brands on behalf of vehicle manufacturers. Various types of dealerships include ice cream shops, appliance repair or sales companies, and ‘Apple authorized dealers’ that sell Apple products.
Dealership Differs from Franchise
A franchise is a business arrangement between a franchisor and a franchisee which allows the franchisee to exclusively conduct business in a particular geographic territory using the branded products and services provided by the franchisor. Unlike the relative independence afforded to dealers, franchisees are required to follow strict guidelines and standards set by the franchisor in order to maintain the brand’s integrity. Importantly, franchisors require the franchisees to pay ongoing royalties (and other fees) to the franchisor. In return, the franchisor provides ongoing support and assistance to franchisees (which dealers do not receive). Dealerships do not pay royalties and have lower initial fee structures than franchises. Many business owners prefer dealerships compared to franchises because a dealership is not generally burdened by rules, regulations, and restrictions with strict enforcement. Others prefer franchises as they want the ongoing support and guidance provided by a franchisor.
Value of Dealership Brand
The key to valuing a dealership is first analyzing the value of the dealership brand. A dealership’s brand is the reputation, quality, and utility of its unique products or services which offers a superior value or experience to its customers. The resulting goodwill that the brand generates should translate into sales and profits for the dealership. Dealerships are typically valued as a multiple of its annual adjusted owner benefit, or the true economic profit generated by a working owner. The future adjusted owner benefit or free cash flow of dealerships ultimately depends on the dealership brand and whether consumers will continue using its specialized and unique products or services. Buyers will only pay a premium multiple for dealers if they are assured that the goodwill of the dealership brand will be retained or enhanced after the sale.
Due Diligence of Dealership Brand
Prior to making an offer on a dealership for sale, astute buyers will want to assess the value of the dealership brand. To start, they may assess the current and historical financials of the dealership for sale. This includes its tax returns, profit and loss statements, and balance sheets for the prior three years. Further, buyers will want to have some idea of the success (or failures) of other similarly situated dealerships. Understanding the strength of the dealership brand in other geographic markets gives a buyer key insights into whether (and which) consumers are attracted to the brand. Buyers may visit or call other dealerships to try and get a sense of their success or failures. Also, buyers of dealerships may conduct preliminary due diligence of a dealership brand by researching the brand’s price competitiveness, online reviews, and whether the number of overall dealerships are growing in number.
Transferring Dealer Relationship to Buyer
A major component of selling a dealership is transferring the seller’s contractual relationship with the owner of the dealership brand to the buyer. Most dealership contracts expressly allow for a transfer of ownership, so long as the owner of the dealership brand approves the sale. The approval is necessary since the owner of the dealership brand only wants to do business with qualified buyers who will be successful and enhance the overall brand. Qualifications often include related work or industry experience, background checks, and some proof of financial stability. Owners of dealership brands are usually incentivized to approve the sale of dealerships since the buyer will continue purchasing its branded products or services after the sale.
Example of Selling Dealership
- Doug owns an ice cream shop called Delightful Ice Cream which is a licensed dealer of the branded Delightful Ice Cream soft serve ice cream products.
- Doug does not pay any royalties, but must purchase the ice cream ingredients necessary to make the unique type of Delightful Ice Cream branded products from the owner of the Delightful Ice Cream brand.
- Doug is selling his business with a professional business broker, who values his business at $500,000.
- The valuation is based on 4 x the most recent annual adjusted benefit (of $125K), which is a premium compared to the average 3 x multiple received by ice cream and frozen yogurt shops in Florida.
- The premium valuation multiple is because of the growth, stability, and product awareness of the Delightful Ice Cream brand.
- Doug and his broker understand that buyers will pay a premium for the dealership by virtue of the goodwill and value created by the Delightful Ice Cream brand.
- The power of this brand is seen by the growing number of profitable dealerships, and the widespread consumer acceptance and adoption of the uniquely made ice cream products.
- Note that potential buyers of Doug’s business may try to get their own Delightful Ice Cream dealership, but then in addition to other obstacles they would not be purchasing an already existing and profitable business.
Owners of dealerships should understand that the value of their business in large part depends on the value of the dealership brand. This value should add a premium to its selling price through the positive goodwill and benefits of the overall dealership brand. Dealerships have no royalty fees and less restrictions than franchisees, but without the ongoing support and assistance afforded to franchise owners. For buyers who are ok with this arrangement and prefer to re-sell or service branded products, then dealerships make excellent acquisition targets.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.