It begins with planning
Everyone knows there are fewer customers and fewer dealers – both are getting bigger and mergers/acquisitions are happening each day. Yada, yada – tell you something you don’t know, right?
We are now seeing dealers who merged a few years ago forming even larger dealer groups. If you think your dealership will be involved in a merger or acquisition within the next three years – or even if you don’t – then you need to start planning. Even if you are already a 10-store operator, you can still use these strategies to increase the value of your dealership.
The first thing to acquire is a current valuation of your business. This will provide a starting point or base value for your business. Since you are planning ahead, you will be able to see the fair market value increase in three to five years if you start implementing consistent processes.
In developing the current value of the company, we can make some suggestions (based on a valuation) about how to create value in the coming years. Some of the suggestions would be:
- Increase your inventory turns. Increasing inventory turns usually creates lower inventory value, which could increase your current ratio. By increasing inventory turns, you should also increase your gross profit percentage.
- Reduce certain fixed expenses to increase bottom-line profit.
- Improve management of used equipment inventory.
- Consider paying dividends to reduce the equity. High equity can impair the company’s value when you compare return on equity with industry averages.
- Clean up parts inventory as much as possible. Remove obsolete inventory using the yearly return of parts.
- Set up a management structure and team.
- Consider hiring a used equipment manager.
- Make needed changes to facilities.
There are more strategies to create value for your company in the years before a merger or consolidation. You’ll make changes based on the situation, the company’s balance sheet, ratios, and current conditions of the company being valued. Each situation is unique and no cookie-cutter approach can be applied.
In my experience, however, three issues that can create value for the company are:
- The processes established in used equipment management.
- Development of a management team.
- Increase the true absorption rates for the service/parts departments.
Dealing with used iron
One thing that I have seen work quite well is hiring a used equipment manager. The used equipment manager provides consistency in valuing used equipment by using trade-in guides, auction prices and equipment appraisers to develop the trade-in value.
In most instances, the used equipment manager fixes the value of the used equipment (unless the store location manager overrides the value and is willing to assume the consequences). Each deal and location are treated the same and the information is shared throughout the organization.
Software developed by Iron Solutions can help dealers not only value the trade item, but also provide quotes for sales, build a price for each machine, maintain the margins, and save salespeople significant time. This software will create value for your company by producing increased inventory turns, maintaining or increasing gross profit margin, better use of salespeople’s time, and providing consistency in used equipment trade-in values.
The other strategy that can create value is to establish a management structure and develop a management team that can take the organization to improved profitability. With the size that dealerships are becoming, it’s important to have a stable management team in place and to ensure all the processes of the company are being applied consistently. A strong management structure can enhance the value of the company and increase the bottom line.
Use strategy to increase absorption rate – a true absorption rate
The service/parts departments need to be as profitable as they can since both departments should be covering fixed expenses and contributing to the bottom line. WEDA’s Dealer Institute works with instructors who can help achieve ultimate bottom-line returns for these key departments.
We are seeing more mergers than before. But to insure you get the most ownership percentage possible, start planning now. Intangible value has been in the 1 times earnings before interest, taxes, depreciation, and amortization, all the way up to four times EBITDA for dealerships with high return on equity, return on assets, net income percentage, absorption rate, etc.
Start planning and developing your strategy today. If you wait and maintain current operating methods, your dealership could lose value.
Article Written By Curt Kleoppel
CURT KLEOPPEL, CPA, CVA, is the treasurer of the Western Equipment Dealers Association. He also serves as president of Equipment Dealer Consulting, LLC, a long-term association partner. The consulting group was created to provide financial services to association members. For information, visit www.eqdealerconsulting.com or write to curt@ westerneda.com.