Sometimes seemingly informed decisions have unintended consequences. A well thought out move designed to increase profitability or enhance operations can wind up having a negative effect on dealership value — and the value of your business is ultimately your most important consideration. Building value requires more than focusing on metrics like fixed absorption or embracing the latest technology.
Often, things like new technology, adding to your showroom footprint, forming a management company or compensative programs can rob you of value. So, what drives value? And what detracts from value? It is vitally important to analyze your business and processes in terms of their role in establishing value. As advisors exclusively to dealers we have been involved in the day-to-day operations of hundreds of dealerships and had the opportunity to gain considerable insight on the factors impacting dealership value.
Gross Profit Per Employee
The first thing I want to know when I begin work with any store is its gross profit per employee. That metric is my way of evaluating the throughput of the compensation spend – that is, is a dollar paid in compensation returning more than a dollar in value to the dealership? Compensation can negatively impact profitability if it’s too low as well as too high. High-performance dealerships tend to have big paychecks on staff because they have high performers, while below average wages often indicate low performing employees and high turnover. As well, differences in the cost of living in different markets, the presence or absence of labor unions, minimum wages laws can all affect how a dealer must approach compensation.
One way to address the issue is to review your roster and compensation regularly. We recommend at least annually, like when you review your healthcare coverage or 401k plan. Focus on the bottom 10 percent of your workforce and, as the saying goes, have them “step up or step out.” You will also have to adjust for market conditions, an expected recession, for example, or more recently the tariffs that are estimated to add about 8 percent to the cost of your products in the coming year.
The internet has been a game changer. Customers who have had a bad experience are much more likely to post their complaints than those who have had a good experience. How a dealer is rated on various websites impacts value as customers increasingly are researching dealerships online, including social media sites. Negative comments can turn buyers away from your dealership or your brand. They can reduce or kill the effectiveness of your traditional advertising spend. Dealers spend a lot money overhauling, upgrading and re-imaging their facilities; consider spending as much effort, money and time overhauling your online image. It takes a long time and can cost a lot of money to rehab a negative image.
Maximize this significant revenue generator by employing the 300 percent rule: offering all the products all the time to all your customers. Determine how to incentivize your employees to make this happen. Prepaid maintenance plans, for example, are key to capturing more service business. As well, setting up your own captive insurance company for your F&I products can increase dealership profitability – and value – considerably.
Population density, affluence, available footprint, whether customers can easily find you, even the ability to turn easily into the dealership – all these factors impact value, as do things like the cost of land, buildings and labor in your market. Performance isn’t always tied to the strength of your brands. More importantly, is there demand in your market for your product?
When credit is tight, some dealers use their own cash to finance operations and acquisitions. Currently, credit is cheap. The amount of capital required to close transactions has been low, giving dealers financial leverage, an opportunity to use credit to increase their return on equity. Not that we’re suggesting that you mortgage everything to the hilt, but you might find ways to fund operations that positively impact profits, help recession-proof your business, and make your dealership more attractive – and valuable – when it’s time to sell. Cheap credit also allows buyers to upgrade to more expensive products.
Technically, the value of your real estate should be the same whether it is owned or leased – and whether you’re renting from yourself or a third party. But it’s not always the case because many dealers don’t charge market-based rents to themselves. And that can be a disservice in terms of value: benchmarks skewed in comparison to your peer group, masking problems in other areas, clouding your profitability picture. Not that a prospective buyer won’t consider such factors. We normalize real estate expense when we value a dealership for purposes of sale.
With interest rates low, some dealers have overbuilt. If you’re looking to add space, consider the return on your investment. What are the true economics of the expansion?
Consider consolidating roles that might not require a full-time employee at each location, such as back office employees, and IT and HR departments. Do you need an in-house attorney? A full-time director of employee benefits? But do the math. Often what starts as cost reduction winds up a resource burn where management company functions take on a life of their own and run too expensively. Does it make sense to centralize operations for fewer than five locations? If it doesn’t reduce head count by 50 percent or more, it typically doesn’t, because you will need to hire a highly paid employee to run the larger consolidated department. If you wind up with the same or more employees after you’ve centralized, you’re probably over-staffed.
Who will take over for you? When? These questions are key to the value of any store. If your successor is on your staff – family member or not – you need to lock him or her down or they might leave for another opportunity. Extend that to locations and departments, because you need successors in all those areas. Make sure your selections want to take over. And give them long lead times: the more critical the position, the longer the lead time. If you give yourself 10 years to groom your successor, and you find you’ve made a mistake, you will have time to find the right person.
These are a few of the items that impact profitability and value that dealers need to focus on. Now could be an especially good time to get these ducks in a row, as many of the key indicators point to uncertain economic times ahead.
This article originally appeared in the NEDA Weekly E-Bytes newsletter on Oct. 8, 2019.
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