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November 13, 2006: Evaluating a prospective dealership purchase

This article recaps a portion of the opportunities that were uncovered by Gart Sutton & Associates (GSA) powersports specialists during consulting visits.
These opportunities are followed by conclusions that address the issues.
In this case, one of the major powersports manufacturers referred a dealer-prospect to GSA for help in creating an acquisition business plan and financial pro-forma. The prospective buyer was trying to determine the viability of the dealership. He had previously paid for two different evaluations of the dealership, but was trying to get a more concrete picture of his potential return on investment.
Dealership Details
The single-line dealership is located in a recovering industrial area that has only seen 2 percent population growth in the past 25 years. There are four other dealerships selling the same product line, and numerous competitive dealerships within an hour’s drive. The current facility is located in a low traffic area, set back from the road and accessed by a packed earth and gravel driveway. The business and facility is connected with a mini-storage facility. They also sell some small equipment lines. It is a family operated business with a single technician. The dealership’s annual revenue was just more than $1 million dollars in powersports products during the previous year.
Key questions
Is the current operation profitable?

There was no computerized dealer management system, so income statements and balance sheets were gathered for the previous three years. Examination of the income statements indicated the powersport business was not currently profitable, a situation supported by previous evaluations.
Can the current operations be profitable?
A careful evaluation of the financial statements revealed the dealership was underperforming against national averages for selling service, parts, merchandise and accessories. Visual inspection of the facility revealed there were few, if any attempts to display any parts, accessories or merchandise in the showroom. Products in the showroom were generally poorly displayed and dusty, or still in boxes.
A financial pro-forma was created modeling the current operations. Within the model, service, parts, merchandise and accessories were brought up to industry standard for both sales volumes and margins.
Can future operations be profitable?
GSA consultants worked with the dealer-prospect to determine his goals and operational considerations to build a financial pro-forma that reflected the desired future operations. Some of the key considerations included: level of acceptable risk, financing strategies, debt structure, possible new locations (and associated debt), area MIC data, area growth potential, local economic conditions, demographics, OEM ownership requirements, number of employees and return on investment goals. Additionally, the consultants traveled to possible locations with the dealer-prospect and discussed pros and cons for each possible location.
Findings
Results from the pro-forma and dealer-prospect interviews:

  • The valuation of the business at $1.3 million was based entirely on the mini-storage portion of the business.
  • The powersports business was not showing a profit even with only three employees and with the owners drawing very little compensation.
  • The client needed to support five employees at a significantly higher level of compensation than the current owner.
  • The current location was not optimal for growing the business.
  • Desirable property locations would significantly increase the debt load.
  • Even though the powersports business was underperforming against industry standards for service, parts, accessories and merchandise, adjusted values plus projected growth were not enough to compensate for higher employment compensation and debt service requirements.
  • Adding a second product line would make the future business profitable by being able to retail an increased number of units along with associated service, parts, merchandise and accessories.
  • The dealer-prospect was risk adverse and the purchase required two large lines of credit.
  • The dealer-prospect was not passionate about the powersport business and was looking to be the primary investor only with two partners.
  • The dealer-prospect and partners were not interested in being in the mini-storage business.
    Conclusion
    The dealer-prospect decided this opportunity was not right for him and his partners based on his acceptance to risk and return on investment. Subsequently, one of the other four local same-line dealers purchased the dealership. psb
    Author, speaker and educator, Gart Sutton has been retained by every major powersport manufacturer/
    distributor. He is a frequent speaker for national motorcycle conventions and state motorcycle dealer association events. Visit www.gartsutton.com

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