Blue Sky is the intrinsic value of a car dealership, above the value of its tangible assets. It is sometimes equated to the goodwill of a car dealer.
Most articles on the blue sky value of new car dealers cite an earnings multiple formula, such as three times earnings, four times earnings, etc. The idea that “blue sky” can be determined by anything by anything is simply wrong.
Even NOTHING the National Association of Automobile Dealers in his post titled “A Dealer’s Guide to Valuing a Car Dealership, NOTHING June 1995, revised July 2000 puzzles, in part, regarding the valuation of a dealer using an earnings multiple: a rule-of-thumb valuation is more correctly known as a “biggest fool theory”. “. “However, it is not a valuation theory.”
In its 2004 Update, NADA omitted its reference to “fool,” but referred to the multiple formula as rarely based on sound economic or valuation theory, going on to state, “If you’re a seller and the rule of thumb produces a high value, then this is not a matter of great concern. Cheer up, and maybe someone will be stupid enough to pay you a very high value.”
A dealership’s blue sky is based on what a buyer believes they can produce in net profit. If potential buyers think it can’t make a profit, the store won’t sell. If it can produce a profit, then variables such as the convenience of the location, the balance the brand will bring to other existing franchises, whether or not the factory will require facility upgrades, and so on, determine whether a buyer will buy that brand at all. particular, in that particular place, at that particular time.
I have been advising dealers for nearly four decades and have been involved in over 1,000 automotive transactions ranging from $100,000 to over $100,000,000 and have never having seen the price of a dealer’s sale determined by any multiple of earnings unless and until all of the above factors had been considered and the buyer decided that he was willing to spend “x” times what the buyer thought the dealer would earn, in order to purchase the business opportunity.
To think otherwise would be to subscribe to theories that (1) even if you think a dealer could make a million dollars, the store is worth zero blue sky because it made no money last year; and (2) if a store has been making $5 million per year, it should pay, say, 3 times $5 million as blue sky, even though it thinks it won’t produce that kind of profit. Both proposals are absurd. If a buyer doesn’t think a dealer is worth blue skies, then what he’s really saying is that he doesn’t see any business opportunity in the purchase and therefore, in my opinion, he shouldn’t buy the store.
Each dealership is unique in its potential, location, balance its brand brings to a group of dealerships, and facility condition. The sale is also unique with respect to whether it is a forced sell-off, an orderly sell-off, remote, insider trading, or a case where an eager buyer is trying to induce an unwilling seller. There are management factors to consider, duration and term of the leases, possibilities or not to buy the facilities and whether or not the factory wants to relocate the store or open a new one on the street.
In the car business, it’s impossible to pick a dealer or franchise out of a hat, multiply your profits by some mystical number, and predict the dealer’s value or what price it would sell for, and it doesn’t matter if you’re talking about a Toyota, Honda, Ford, Chevrolet, Chrysler, Dodge or any other dealer. At any given time, one franchise may be considered more or less desirable than another, but they are all valued the same.