Whether you are looking to buy a car dealership or are considering selling your business, having an accurate picture of its valuation is essential. But how much is a car dealership worth? So many factors play into this question. Let’s explore how auto dealerships are valued and what goes into the number. 

What Drives the Valuation of Your Business?

If you own or are buying a dealership, you most likely are interested in what exactly can affect how much a car dealership is worth. Without this information, you can’t get a clear picture of why a particular business is performing the way it is or understand what can be done to boost its  valuation. If you are hoping to eventually sell your dealership, you may want to be thinking strategically about how you can set your business up for success. Here are a few factors to consider: 

1. Inventory

The number and value of the vehicles on your lot will be the primary drivers of your dealership’s valuation. Put together, these vehicles are worth a lot and play a role in the overall picture of your business.⁴ 

2. Multiple Revenue Streams

If your dealership offers other services like repairs, financing, parts replacements, and more, your valuation will likely increase. Since the cost of purchasing a vehicle is high for customers, it’s important to have these other revenue streams that can engage a wider customer base at a variety of price points.⁴ 

3. Brand

This is applicable to Franchise Dealerships. Luxury car manufacturers tend to result in a higher rate of return in the valuation process. So, Lexus will typically have a higher multiple than Ford, for example. The ranking order typically goes Mercedes-Benz, BMW, and Lexus, followed by Toyota and Honda.³

4. Real Estate

This will take into account everything related to the real estate, equipment, and operations of the business within the context of the wider economy and real estate market. If you’ve put in a larger investment into the physical location, you may see a higher return. 

Along these lines, a particular high-traffic location or valuable neighborhood can also boost valuation through the promise of enhanced sales potential. But, during a bad real estate market, you may not get as much for your property as it is worth during a good market.⁴ 

What Is a Valuation Multiple? 

A multiple is a way of measuring a business’s performance by comparing two metrics—or dividing one number from a company’s financials by another. These ratios can then be used by investors to understand a company’s growth and efficiency and ultimately compare multiple businesses to one another.¹ A famous multiple for stocks is P/E or the price-to-earnings ratio. However, different multiples are used when valuing a small business. We will explore the relevant auto dealership valuation multiples below. 

What Types of Multiples Are There?

For each of these options, one could use the value of other small businesses in a similar area, with similar revenue, in the same industry that has recently been sold. Then, you can compare your own business to understand the value range where you may fall. Here are three common auto dealership valuation multiples to know.

Seller’s Discretionary Earnings (SDE)

This multiple is important when determining a valuation. It compares a seller’s discretionary earnings with the value of the company. For a used or new car dealership, the multiple used is typically in the range of 1.38x–4.10x the most recent year of revenue. So, you can calculate it with the following formula²: 

SDE multiple x 12-month revenue = value of the dealership 

Let’s say there’s a dealership that has $300,000 in SDE, and a valuation professional determines that it can transact at 2.5x the SDE. This would mean: 

$300,000 x 2.5 = $750,000 

This puts the valuation at around $1.25 million. Typically, SDE is used to give a valuation to companies that have less than $1 million in SDE.⁵

Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA)

This multiple is typically 1.76x3–5.37x and can be calculated in the same way as above, only using EBITDA rather than SDE. 

So, if a dealership has an EBITDA of $1,000,000 and transacts at a 4.2x multiple, the valuation would be the following: 

$1,000,000 x 4.2 = $4,200,000

Usually EBITDA is used to value mid-sized businesses that have more than $1 million EBITDA.⁵ 

Revenue Multiple (REV)

Finally, the REV multiple is typically within the range of 0.11x–0.31x for dealerships. To calculate, take the dealership's revenue and multiply it by the multiple. So, if a dealership makes $10,000,000 in revenue and operates at 0.17x you would have a valuation of the following: 

$10,000,000 x 0.17 = $1,700,000

Revenue multiples are used less often and are typically reserved for companies that have limited profitability.⁶

Grow Your Dealership With ACV Auctions

As you look to boost your dealership’s sales and revenue, your priority will be filling your lot with the best inventory on the market. ACV Auctions is here to help. Our online platform makes the buying process easy for dealership owners. Each vehicle we list has been individually assessed by an expert member of our team and comes with a detailed inspection report, so you can feel confident in every bid you place. Learn more and reach out to our team today to get started.  

Sources

1. Chen, James. 2020. “What is a multiple? With examples such as P/E multiple.” Investopedia. Retrieved January 16, 2024. https://www.investopedia.com/terms/m/multiple.asp 
2. Peak Business Valuation. 2021. “Valuation Multiples for a Car Dealership.” Peak Business Valuation. Retrieved January 16, 2024. https://peakbusinessvaluation.com/valuation-multiples-for-a-car-dealership/
3. BVR. 2018. “What’s an auto dealership worth?” BVR.  Retrieved January 16, 2024. https://www.bvresources.com/blogs/bvwire-news/2018/03/21/what-s-an-auto-dealership-worth-explore-the-four-primary-value-drivers
4. Taulli, Tom. 2009. “How to value an auto dealership.” Forbes. Retrieved January 23, 2024. https://www.forbes.com/2009/06/30/auto-dealership-valuation-entrepreneurs-finance-taulli.html?sh=5ef91afb7c8f 
5. Morgan & Westfield. “Should I use SDE or EBITDA to value a business?” Retrieved January 23, 2024. https://morganandwestfield.com/knowledge/should-i-use-sde-or-ebitda-to-value-a-business/ 
6. Wall Street Prep. 2023. “Revenue Multiple.” Wall Street Prep. Retrieved January 23, 2024. https://www.wallstreetprep.com/knowledge/revenue-multiple/