How to Value: Car Dealerships

Industry Description

The Car Dealership industry, as defined by the U.S. Census Bureau, consists of companies primarily engaged in retailing new and used automobiles and light trucks, such as sport utility vehicles, and passenger and cargo vans, or retailing these new vehicles in combination with other activities, such as repair services, retailing used cars, and selling replacement parts and accessories.  (NAICS 4411). The U.S. Census Bureau further sub-divides the industry into new car dealerships (NAICS 441110) and used car dealerships (NAICS 441120).

The following are some basic characteristics of the car dealership industry:

  • Car dealerships had a combined $600 billion in sales in 2021.
  • Car dealerships experience a lot of turnover: there have been 16,658 new dealerships in 2021. That number has been generally consistent for the past several years.
  • Car dealerships ownership is highly fragmented: 93% of owners own 5 or fewer dealerships. This also has not changed much in the past several years.

Car dealership real estate (the land and facilities) are typically sold along with the car dealership business. Car dealership facilities are typically constructed for a specific use and are not readily adaptable to alternative uses.  From a real estate perspective, car dealership facilities are considered special use property, which means that the real estate cannot typically be assigned other uses without substantial reconstruction costs.

Industry Trends

The value of an auto dealership facility generally fluctuates with the strength of the auto sales market and interest rates. 

Prior to COVID, annual car sales have grown steadily at approximately 1.5 and 2..5% per year. In 2020, annual sales dropped approximately 15%. However, that created a buildup in demand, and annual sales grew significantly in 2021. It remains unclear how long it will take for the built-up demand to be cleared and normal growth to resume.

Supply-chain issues, also thanks to COVID, have also been having an impact on car dealerships on the supply side. Computer chip shortages have made it so inventory does not get replenished to keep up with demand. As a result, demand for used cars has increased, as have the profits from used car sales.

Long-term trends in the automobile industry are towards zero-emission vehicles.

Most dealerships do not make significant profits on new car sales. This is because of the ready availability of price information online and related competition. New car sales are generally a break-even affair. Instead, most car dealerships make money by:

  • Selling used cars. Car dealerships frequently accept used cars in trade. These get refurbished and are resold. The margins on used car sales are much better than new car sales.
  • Performing car maintenance
  • Selling car accessories (floor mats, roof racks, etc.)

As a result, new car sales are how car dealerships attract customers who might find it economical to purchase a used car, and as a means to attract customers to their maintenance department.

Total car dealership sales by segment:

  • New car sales – 55%
  • Used car sales – 35%
  • Service & parts – 10%

Key Performance Metrics

In evaluating an car dealership, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions:

  • Use-to-new retail volume ratio
  • Immediate wholesale volume
  • Wholesale loss/profit per vehicle
  • Inventory turnover rate
  • Reconditioning time (used cars)
  • Gross Return on Investment “GROI” – the gross profit on a sale, expressed as a percent of sale price, multiplied by the turn rate

Industry Organizations & Publications

The following organizations publish useful information:

  • National Automobile Dealers Association
  • National Independent Automobile Dealers Association
  • American International Automobile Dealers Association

Guideline Information: Private Purchase Transactions

Many car dealerships are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely-held car dealerships is generally the best source of information to appraise a subject company. However, because there are so many, the multiples are generally too variable to be meaningfully applied without further analysis.

The following are typical appraisal multiples from sale of car dealerships:

  • Revenue multiples between 0.05 and 0.54 times
  • Gross Profit multiples between 0.36 and 2.8 times
  • EBITDA multiples between 1.5 and 13.6 times

In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered.

Guideline Information: Publicly Traded Companies

Most car dealerships are closely-help (i.e., privately owned). However, there are several that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company

The five largest publicly traded companies car dealerships, ranked by market capitalization, are:

  • CarMax, Inc. (KMX) – $16 billion market capitalization
  • Lithia Motors, Inc. (LAD) – $8.9 billion market capitalization
  • Penske Automotive Group, Inc. (PAG) – $7.1 billion market capitalization
  • AutoNation, Inc. (AN) – $6.2 billion market capitalization
  • Driven Brands Holdings Inc. (DRVN) – $4.5 billion market capitalization

The Price-to-Earnings ratios of these five companies range between 14.0 times earnings to negative (not meaningful, the company had a net loss)

Appraisal Rules of Thumb

Please note: you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

Car dealerships are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.