Valuation of Automobile Dealerships: Primer and Discussion Stephen - - PowerPoint PPT Presentation

▶
valuation of automobile dealerships primer and discussion
SMART_READER_LITE
LIVE PREVIEW

Valuation of Automobile Dealerships: Primer and Discussion Stephen - - PowerPoint PPT Presentation

Oct 17, 2022 325 likes •908 views

Valuation of Automobile Dealerships: Primer and Discussion Stephen D. Kertzman & Charles Seguin Kertzman Valuations Inc. Seguin Advisory Services se segui uinadv dviso sory About The Presenter Stephen Kertzman,

slide-1
SLIDE 1

Valuation of Automobile Dealerships: Primer and Discussion

Stephen D. Kertzman & Charles Seguin Kertzman Valuations Inc. Seguin Advisory Services se segui uinadv dviso sory

slide-2
SLIDE 2

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

About The Presenter

Stephen Kertzman, BA (with distinction), LLB, CBV

  • Stephen is the founder and President of Kertzman Valuations Inc. (“KVI”). Stephen has over 20 years

experience exclusively specializing in the areas of financial loss/damage quantification, business valuation and investigative and forensic accounting. Stephen is a member of the Board of Directors of the International Institute of Business Valuators and Chairs both the Audit Committee and By-Laws Committee.

  • Stephen has been involved in a number of assignments in the automotive industry for a variety of
  • purposes. These have included:
  • Valuations of automotive and light truck dealerships;
  • Valuations of automobile parts manufacturing companies;
  • Analyses of the impact of cessation of vehicle brands, including in respect of the impact on future

dealer sales and profitability;

  • Analyses in respect of the impact of various sales incentives on vehicle pricing and sales; and,
  • Class action regarding defective vehicles.

Stephen Kertzman, BA, LLB, CBV Kertzman Valuations Inc. First Canadian Place, Suite 5700 100 King Street West Toronto, ON M5X 1C7 skertzman@kertzmanval.ca 416.806.4900

January 24, 2018 Page 2

slide-3
SLIDE 3

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

About The Presenters

Charles Seguin, CPA,CA

  • Chuck is the founder and President of Seguin Advisory Services, an exclusive auto retail consulting
  • practice. He has over 30 years experience in dealing with the automotive retail industry from audit and

tax perspective as well as advisory services. Chuck is involved with dealership buy/sell transactions, representing both buyers and sellers. Chuck has a strong track record in succession planning and as an expert witness in auto retail matters.

  • Chuck is also involved with the design and delivery of the Automotive Dealership Management

Program, a graduate level program offered by the Automotive Business School of Canada. He is a regular speaker at Auto Industry events across North America and is a regular columnist for Canadian Auto Dealer magazine. He has also authored many reports for the Canadian Automobile Dealers Association and its Provincial counterparts. Charles Seguin CPA, CA President Seguin Advisory Services PO Box 277 Midland, ON L4R 4K8 cs@seguinadvisory.ca (416) 565-9493 www.seguinadvisory.ca

January 24, 2018 Page 3

slide-4
SLIDE 4

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 4

Outline of Presentation

  • Industry Review:
  • Industry overview
  • New vehicles
  • Used vehicles
  • Financing
  • Parts and services
  • Consolidation
  • Valuation:
  • Profit drivers – How Do Dealerships Make Their Money
  • When Valuation Required
  • Information requests and sources specific to dealerships
  • Valuation approaches and methodology
  • Issues specific to automobile dealerships
  • Transaction multiples
  • Tests of reasonableness
  • Selling a dealership and maximizing value
slide-5
SLIDE 5

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

WHERE ARE ARE TODAY

January 24, 2018 Page 5

slide-6
SLIDE 6

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

New Vehicle Sales and Number of Dealership Locations

January 24, 2018 Page 6

2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 1,000,000 1,100,000 1,200,000 1,300,000 1,400,000 1,500,000 1,600,000 1,700,000 1,800,000 1,900,000 2,000,000 2,100,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2001 - 2017 New Vehicle Sales and Dealership Rooftops

Total Unit Sales Total Rooftops

slide-7
SLIDE 7

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Canadian Population Projections by age, by sex

7

Driving Age Zone

January 24, 2018

slide-8
SLIDE 8

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Canadian New Vehicle Sales, Population, Average Household Wages and Unemployment Rate

January 24, 2018 Page 8

slide-9
SLIDE 9

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Interest Rates, Consumer Credit, Loans to Private Sector and Household Debt to Disposable Income

January 24, 2018 Page 9

slide-10
SLIDE 10

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory Today’ s dealership landscape in Canada 3,350 dealerships 1,632 owners

# of Owners

Single Store 2 to 4 5 to 10 10 to 20

  • ver 20

# of Stores

Single Store 2 to 4 5 to 10 10 to 20

  • ver 20

1,632 1,440 330 425 500 655

January 24, 2018 Page 10

slide-11
SLIDE 11

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

  • Can’t

Compet e

  • Need to

Grow or

  • Sell
  • Contin

ue to Grow

What is fueling acquisition growth?

  • BRANDS

Finance Community

  • $
  • Facilities

Market Share

Opportunity

  • Costs are soaring and so is debt!
  • Very few open points
  • Goodwill /Blue Sky viewed as a Franchise Fee
  • Acquisition Discipline in many cases ignored
  • FUTURE?
  • SUCCESSION

Page 11 January 24, 2018

slide-12
SLIDE 12

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

THE BUSINESS OF A FRANCHISED AUTOMOBILE DEALERSHIP

January 24, 2018 Page 12

slide-13
SLIDE 13

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

What is a franchised Auto Dealership?

Several businesses under one roof

23 January 2018 Page 13

New Vehicles Used Vehicles After Sale Services Vehicle Finance People

slide-14
SLIDE 14

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

New Vehicles

Gross margin between 2% and 10%

  • Brand Specific
  • New vehicles under 400km
  • Demonstrator vehicles between 400km and 15,000km
  • Dealer operates under a DSSA
  • Specific brand representation vary by OEM and within OEM
  • Assigned a non-exclusive geographic territory
  • Tight controls over ownership and management
  • No franchise fee paid upfront by dealer
  • No direct royalty fees by dealer
  • Significant inner-brand competition
  • Can sell at retail and fleet
  • Shift to trucks and luxury

23 January 2018 Page 14

New Vehicles

slide-15
SLIDE 15

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Used Vehicles

Margins between 8% and 15%

  • Very competitive business with limited barriers to entry
  • Brands provide some support with Certified used programs and
  • ff lease vehicle availability
  • Inconsistent performance from store to store
  • Lack of availability of quality talent
  • Difficult to secure quality inventory
  • Important business from a service department revenue

standpoint – vehicle reconditioning

January 24, 2018 Page 15

Used Vehicles

slide-16
SLIDE 16

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Vehicle Finance

Gross Margin 4% to 10%

  • Referred to as F&I ( Finance & Insurance)
  • For some brands, F&I is the only source of gross profit for the

dealership

  • Some dealers have in-house leasing operations
  • Most dealers receive a payment from finance company to refer

customers in their direction

  • Largely an online process in Canada and very customer friendly
  • All the chartered banks and OEM captive finance companies

are involved in point-of-sale vehicle finance

  • Dealership also sells extended warranty contracts, rust control,

etching etc.

  • Dealership receives bonuses based on penetration levels

January 24, 2018 Page 16

Vehicle Finance

slide-17
SLIDE 17

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

After Sale Service

Gross Margins Vary between 75% and 35%

  • Consists of vehicle maintenance and repair provided by the

dealership’s service, parts and (for some) body shop departments

  • Key to customer retention and future new and used vehicle

sales

  • Vehicle reconditioning is a strong profit driver
  • High margin business
  • Hard to attract talent

January 24, 2018 Page 17

After Sale Service

slide-18
SLIDE 18

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Other Businesses

Requires Brand approval

  • Some dealerships operate
  • Restaurants, snack bars, coffee shops
  • Race tracks
  • Museums
  • Wellness Centres
  • Accessories
  • Business Development Centres
  • Collision Centre Partnerships
  • Shared Services Centres
  • Marketing and Advertising Alliances
  • Event Centres
  • Condos

January 24, 2018 Page 18

slide-19
SLIDE 19

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

INDUSTRY HEADWINDS

January 24, 2018 Page 19

slide-20
SLIDE 20

ap Valuations Limited

se segui uinadv dviso sory

Industry Headwinds

  • Rising interest rates
  • Industry dependent upon

monthly payments

  • Evolving consumer from

Baby Boomers to Millennials

  • Government regulation
  • NAFTA renegotiation
  • Vehicle electrification
  • Changing relationship

between dealers and brands

  • Future of auto retailing
  • Ownership and

management succession

  • Dealership consolidation
  • Dealer agreement

redesign

January 24, 2018 Page 20

slide-21
SLIDE 21

ap Valuations Limited

se segui uinadv dviso sory

Headwinds (Continued)

  • New entrants
  • Tesla
  • PSA
  • Chinese Brands
  • Brands from India
  • Apple Car
  • Google Car
  • 100’s of cottage brands
  • Disruptors
  • Ride Sharing
  • Car Sharing
  • Vehicle Subscription

23 January 2018 Page 21

slide-22
SLIDE 22

ap Valuations Limited

se segui uinadv dviso sory

Why so much M&A activity? Most historic Canadian acquisitions based more on opportunity rather than strategy

  • Ownership Succession
  • Brands retooling their

dealership networks

  • Some are dealer friendly and

some are not

  • Groups seen as capital rich
  • Lots of uncertainty about the

future of auto retailing

  • Those that see negative want to

take chips off the table

  • Those that see positive only see
  • pportunity
  • Valuations are high and

access to capital for acquirers is easy

  • Unrelated acquirers as well as

internal transactions

  • Some sell dealerships but

retain real estate as their pension plan.

  • Banks offering very aggressive

financing

January 24, 2018 Page 22

slide-23
SLIDE 23

ap Valuations Limited

se segui uinadv dviso sory

January 24, 2018 Page 23

Valuation

slide-24
SLIDE 24

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

CICBV – January 24, 2018 Page 24

Industry Terminology

Source: James L. William, Automobile Dealerships Overview

slide-25
SLIDE 25

ap Valuations Limited

se segui uinadv dviso sory

January 24, 2018 Page 25

Valuation – How Do They Make Money

slide-26
SLIDE 26

ap Valuations Limited

se segui uinadv dviso sory

January 24, 2018 Page 26

Valuation – How Do They Make Money

New Cars Used Cars P+S F+I Revenue 1,652,795 725,430 382,933 130,423 Revenue - % of total 57% 25% 13% 5% Cost of goods sold 1,534,498 678,238 181,674 11,038 Gross profit - $ 118,297 47,192 201,259 119,385 Gross profit - % 7% 7% 53% 92% Gross profit - % of total 24% 10% 41% 25% AutoCanada $Cdn000s

2016 Annual report

slide-27
SLIDE 27

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

What Are We Trying To Value – Automobile Dealerships

  • Net Assets:
  • New Cars – Inventory done at FIFO subject to floor plan liability, discount for

demos, holdbacks, incentives and advertising.

  • Used Cars – Sometimes not purchased and sold by vendor to wholesalers.

Related debt is then paid off.

  • Parts – Appraisal difficult. Negotiation for obsolete parts.
  • Fixed assets – Appraised
  • Franchise right – Intangible asset or part of goodwill
  • Debt deducted?
  • Blue Sky (Goodwill)

January 24, 2018 Page 27

slide-28
SLIDE 28

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 28

New vehicles now typically carry a 3 to 5 year warranty and some customers purchase extended warranties and new vehicle dealers are in the best position to do warranty work. Used vehicle warranties are becoming more popular. Every time a new vehicle dealership sells a new or used vehicle they are in essence creating an ‘annuity’ in their fixed operations department that will yield $350 to $500 of gross profit per year per vehicle for at least three years. Good dealers can increase this to over $600 and extend this to 4 or 5 years. Exceptional dealers can extend this to 8 to 10 years

Parts and Service

Source: Desrosiers Automotive Source: Desrosiers Automotive Source: Desrosiers Automotive

slide-29
SLIDE 29

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 29

Information Requested

  • Financial statements (external, interim and dealership) for the last five years.
  • The dealership’s corporate tax returns for the last few years.
  • Dealership agreement and banking covenants.
  • Inventory data.
  • Other financial information, including historical and projected capital

expenditures, the age of accounts receivable, accounts payables and other liabilities.

  • In addition, employment agreements, leases, buy/sell agreements, floor

plans, contracts with financial institutions, notes to shareholders and forward business plans.

slide-30
SLIDE 30

ap Valuations Limited

se segui uinadv dviso sory

January 24, 2018 Page 30

Review of Financial Statements – Automobile Dealerships

  • Consolidation
  • Distinct businesses sometimes under separate corporations or divisions
  • New Car Sales, Used Car Sales, Parts and Service, Finance and Insurance, Real

Estate, Out of Country Extended Service Contracts

  • Dealership Accounting:
  • New car dealers, usually high degree of assurance as part of the dealership

agreement utilize the OEM’s standard accounting system. Easy to compare similar dealerships

  • Sometimes audit required pursuant to the dealership agreement
  • Issues – Used car inventory and parts sometimes recorded at above FMV
  • Less Assurance – Used Car Dealer, etc.
slide-31
SLIDE 31

ap Valuations Limited

se segui uinadv dviso sory

January 24, 2018 Page 31

Situations When A Valuation May Be Required

  • Sale, divestiture, acquisition, merger
  • Shareholder dispute
  • Commercial litigation
  • Matrimonial
  • Estate freeze and
  • Capital re-organization (Income Tax Purposes)
slide-32
SLIDE 32

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 32

Valuation Definitions

  • What Purpose Is The Valuation – Different valuation definitions typically lead to

different results

  • Fair Market Value (FMV) – Intrinsic Value
  • the price, expressed in terms of cash equivalents, at which property would change

hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

  • Assumed in the long-term price will approach fair market value
  • Typically utilized in reports prepared by CBVs
  • Price may not equal fair market value
  • Usually before consideration synergies (“Stand Alone Value”)
  • Long-term price approaches fair market value
slide-33
SLIDE 33

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

CICBV – January 24, 2018 Page 33

Valuation Definitions - Continued

  • Fair Value
  • Minority oppression cases
  • Canadian Courts have interpreted this be fair market value without

consideration of a minority discount;

  • Other areas – similar to fair market value
  • Liquidation Value
  • Price at which the asset or assets are sold as quickly as possible, such as at an

auction / fire sale.

  • Book value
  • Typically refers to the value reported on financial statements
  • Market value (Relative Valuation)
  • Price at market based on somewhat similar transactions.
  • Relative valuation.
slide-34
SLIDE 34

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 34

What is valuation – Intrinsic Valuation v. Relative Valuation

  • Intrinsic Valuation - CBV
  • Intrinsic valuation relates to the true value of an asset and does not necessarily

reflect price.

  • Cash is king. Present value of existing cash flows. Discount future cash flows for

risk and uncertainty;

  • No cash flows – no intrinsic value (gold, baseball cards, etc.)
  • Stock market – Warren Buffet, Carl Icahn
  • Long-term focus
  • Relative Valuation – CBV, Business Brokerage
  • Based on somewhat comparable transactions valuation ratios.
  • Depends on demand and supply.
  • Pricing of asset.
  • Market bubbles.
  • Business Brokers utilize.
  • CBVs - Reasonableness test on value.
  • Short-term focus.
slide-35
SLIDE 35

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 35

Valuation Approaches – Automobile Dealerships

  • Capitalization of earnings or cash flows (usually on a levered basis, excluding real

estate)

  • Discounted cash flow
  • Net asset value + blue sky – (What “profit” to utilize)
  • Financing / leasing – separate company
slide-36
SLIDE 36

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 36

Valuation Considerations – Automobile Dealerships

  • Dealership Agreement - OEM Association – Franchise
  • High - Porsche, Audi, Lexus, BMW, Honda, Toyota
  • Location
  • Real estate (Segregate, Land Locked, Location) – Status of facility
  • Dependent on general economic conditions and business cycle
  • Impact of higher earnings
  • Synergistic or hypothetical buyers
  • Other Related Companies – Extended service contracts, real estate etc.
slide-37
SLIDE 37

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 37

Valuation Adjustments (Cont’d)

  • Normalized Cash Flows/Earnings/EBITDA/ ETC. Adjustments (Automobile

Dealerships):

  • Management salaries – Owner and family member compensation
  • Related party expenses (Economic rent, related corporations)
  • Redundant assets (real estate, leverage (see dealership agreement), cash and

investments)

  • Unusual items
  • Discretionary expenses – Dealer perks
  • Incentives – OEM (to dealer and to promote sales) (INTERIM PERIOD)
  • Personal goodwill (religious communities - smaller dealerships)
  • New Products – Changes To Operations – OEM*
slide-38
SLIDE 38

ap Valuations Limited

se segui uinadv dviso sory

Valuation of New Vehicle Dealerships Considerations

  • Private Companies
  • Owner and Family

Compensation

  • Fair Market Value Rent
  • Inventory PACS
  • Parts Obsolescence
  • Used Vehicle Valuation
  • Reconditioning Costs
  • Brand Requirements
  • Sustaining Capital Re-

Investment

  • Downloading of brand costs
  • Training
  • Marketing
  • Technology
  • Facilities
  • Brand Bonus Payments
  • Ties to annual brand
  • bjectives
  • Future product pipeline

CICBV January 24, 2018

slide-39
SLIDE 39

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 39

Valuation Issues – Automobile Dealerships

  • Water-In – Sometimes parts and used vehicle inventory is reported too high
  • Liabilities for charge-backs
  • Leverage Adjustments
  • Exclude floor plan liability
  • Dealership agreements
  • Consider Divisions – Sales, Service, Used Car, Financing and Insurance
slide-40
SLIDE 40

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2014 Page 40

Benchmarking

Auto Canada Auto Nation NADA Gross Profit New vehicles 7% 6% 6% Used vehicles - total of retail and wholesale 7% 7% 12% Parts and service 53% 43% 47% Finance and insurance 92% * 100% * n/a

*Certain charges below CGS.

SGA - % of sales 13% 11% 10% 2015 / 2016 Analysis

slide-41
SLIDE 41

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2014 Page 41

Other Industry Risks – PwC Study

slide-42
SLIDE 42

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 42

Transactions - Haig

slide-43
SLIDE 43

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

US Blue Sky Multiples

23 January 2018 Page 43

slide-44
SLIDE 44

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

23 January 2018 Page 44

slide-45
SLIDE 45

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2014 Page 45

Automobile Dealership - Multiples

  • OEM
  • Highest multiples – BMW, Mercedes (USA), Lexus, Porsche Audi
  • High multiples – Honda, Toyota, Chrysler
  • Average – Ford, GM,
  • Low – Other Manufacturers
  • Multiple of units sold or revenue
  • Not conclusive – multiples vary, disciplined approach
  • See previous slides – geography, phase, synergistic buyers,

benchmarking, etc.

  • CICBV White Paper
  • Reasonableness test
slide-46
SLIDE 46

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Differences between Canada and USA

  • LIFO Inventory accounting policy very common in USA
  • State Franchise Laws very strong in the USA and weak in

Canada (National Automobile Dealer Arbitration Program in Canada)

  • In Canada, territories generally 8KM in metro markets and 20km

in rural markets. In USA 10 miles for metro markets and 20 miles for rural markets.

  • One public dealership group in Canada, 7 in the USA, very

small market dominance in both countries

  • Manufacturer direct to customer easier in Canada than USA
  • In Canada, mostly 1 brand per location. In USA, multiple

brands per location is possible.

January 24, 2018 Page 46

slide-47
SLIDE 47

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Some unique Canadian characteristics

  • Off shore F&I
  • Private companies with many NAL transactions
  • Holding Companies, Real Estate Companies, Family Trusts
  • Lots of Debt
  • Inventory related
  • Facilities related
  • Acquisition related
  • Rent usually based on family needs more than FMV
  • Interesting accounting and inconsistent from store to store and

brand to brand

  • Lots of comparative data (be careful)
  • Composites, 20 groups, NADA

January 24, 2018 Page 47

slide-48
SLIDE 48

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 48

Reasonable Tests – Return on Capital

Franchise Economic Justification and Analysis Base annual target projections Input Assumptions / Extrapolations : Cost of equity - Unlevered 12.00% Cost of Equity - Levered 14.00% Pre-tax interest rate on term loan 6.00% After-tax interest rate on term loan 4.20% Effective corp income tax rate 30.00% Sales revenue $50,000,000 Gross profit - % of revenue 20.00% Operating expenses - % of revenue 15.50% EBIT - % of revenue 4.50% EBIT $2,250,000 EBIT(1-T) $1,575,000 EBIT(1-T) - % of revenue 3.15%

slide-49
SLIDE 49

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 49

Reasonable Tests – Return on Capital

Net operating tangible assets - @ cost (ex Inventories that are financed via Floor Plan Loan; and also excluding facility Land and Building) $4,000,000 Franchise - cost $6,500,000 Total capital employed @ BV $10,500,000 EBIT(1-T) - % of capital employed @ BV = ROIC 15.00% Term loan facility - % of Franchise cos t 75.00% Term loan amount - @ BV 4,875,000 $ Equity capital - @ BV 5,625,000 $ Total capital employed @ BV $10,500,000 Return on equity - ROE EBIT 2,250,000 $ Interest expense on term loan 292,500 $ EBT 1,957,500 $ Tax 587,250 $ EAT 1,370,250 $ ROE 24.36% Weights Intrinsic value (FMV) of equity = (EAT / Cost of Equity - Levered) 9,787,500 $ 66.75% Term loan amount - @ BV - (assumed to equate to FMV of Debt) 4,875,000 $ 33.25% Intrinsic enterprise value = Total capital employed @ FMV 14,662,500 $ 100.00% Implied multiple of EBIT = (Total capital employed @ FMV / EBIT) 6.52 Implied capitalization rate on EBIT = (1 / Multiple) 15.35%

slide-50
SLIDE 50

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 50

Reasonable Tests – Return on Capital

Intrinsic enterprise value = Total capital employed @ FMV 14,662,500 $ Total capital employed @ BV 10,500,000 $ Implied Goodwill or "BlueSky"= (FMV - BV) of total capital employed 4,162,500 $ Implied multiple of BlueSky = FMV of Goodwill / EBIT 1.85 Implied multiple of (Franchise + Goodwill) / EBIT 4.74 EBIT(1-T) % of capital employed @ BV = ROIC 15.00% WACC = Total cost of captal 10.74% Excess of ROIC over WACC 4.26% Economic profit = (Excess of ROIC over WACC) x Total capital employed @ BV 447,123 $ Economic Value Added (EVA) = Goodwill value = (Economic profit / WACC) 4,162,500 $ Total capital employed @ BV 10,500,000 $ Intrinsic enterprise value = Total capital employed @ FMV 14,662,500 $ EAT % of Equity capital employed @ BV = ROE (see above) 24.36% COE = Levered Cost of Equity 14.00% Excess of ROE over COE 10.36% Economic profit = (Excess of ROE over COE) x Equity capital - @ BV 582,750 $ Economic Value Added (EVA) = Goodwill value = (Economic profit / COE ) 4,162,500 $ Equity capital - @ BV 5,625,000 $ Intrinsic value (FMV) of equity 9,787,500 $

slide-51
SLIDE 51

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 51

Reasonable Tests – Real Estate (Utilize a 3Rd Party Expert)

Facility (Land and Building) Valuation Input Assumptions / Extrapolations : Fair value gross rent included in operating expenses - % of Sales revenue - (Note 1) 3.00% Gross rent revenue $1,500,000 Assumed FMV cap rate for property - (Note 2) 11.00% Implied FMV multiple of gross rent revenue 9.09 FMV of property $13,636,364 Notes:

  • 1. Lease is assumed to be triple net lease and is also assumed to be

dealt with on a full arms-length basis. Therefore, vehicle dealership ultimately bears the costs of property repairs and maintence, property expenses, and realty taxes. 2.The sale of an auto dealership facility (land and building) most frequently involves the concurrent sale of the business and the

  • franchise. This occurs because auto dealership facilities are typically

constructed for a specific use and are not readily adaptable to alternative uses. From a real estate perspective, auto dealership facilities are considered special use or a special purpose property, which means that the real estate cannot typically be assigned other uses without substantial reconstruction costs.

slide-52
SLIDE 52

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 52

Rules of Thumb

  • What is Comparable?
  • Locations, markets, OEM, Service, Financing. Facilities
  • LIFO v. FIFO
  • TTM v. Average
  • Normalization adjustments
  • Net Asset Value + Blue Sky (2 to 9)
  • Multiple of units sold or revenue
  • 4 to 10 times maintainable earnings
slide-53
SLIDE 53

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 53

Stages To Selling Business – Maximizing Value

1.

Deciding When To Sell

  • Market timing
  • Increasing sales, ratios
  • Planning

2.

Planning

  • Cleaning-up financial statements
  • Making changes that our favorable to buyer
  • Financial ratios and benchmarking
  • Name changes
  • Agreements, leases, banking covenants
  • Key person and management transition;

3.

What’s My Business Worth and Estimating Price

  • CBV v. Business Brokerage
slide-54
SLIDE 54

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

January 24, 2018 Page 54

Stages To Selling Business (Cont’d)

  • 4. Search for buyers
  • Many parties to the table
  • CIMs (with or without valuation)
  • 5. Due diligence
  • 6. Deal structuring
  • Tax – Assets v. Shares
  • If shares, LIFO Reserve and Built-in capital gains
  • Non-compete, tax considerations
  • 7. Closing
slide-55
SLIDE 55

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Questions

January 24, 2018 Page 55

?

slide-56
SLIDE 56

ap Valuations Limited

se segui uinadv dviso sory se segui uinadv dviso sory

Thank you

January 24, 2018 Page 56