What Are the Key Metrics to Look At for M&A Target Identification?

April 12, 2023

What Are the Key Metrics to Look At for M&A Target Identification?

When you’re in acquisition mode, you may be faced with a wealth of choices. In the current climate, plenty of business owners in the automotive industry, particularly those ready to retire, are putting their companies on the market. These dealer principals can have many reasons for selling, including:

  • They are reaching retirement age
  • The lack of a suitable family member to succeed them
  • The ongoing high costs of running a single dealership or a small group
  • A desire to avoid the steep upfront costs of transitioning to electric vehicles (EVs)
  • Not wanting to make the investment to enable a competitive online buying process
  • Desiring to cash out while valuations are at an all-time high

However, the best move is typically not to buy out whatever local auto retailing business will give you the best deal. A more analytical approach, as explained below, will usually produce a better final result.

Many factors must be considered

There are a number of interlocking factors to consider when shopping for a new acquisition.  Prioritizing them is a matter of assessing your own unique situation. Some of these are:

  • Are you seeking an increased presence in certain geographic areas?
  • Do you want to own additional stores that sell specific brands?
  • Are you after mass-market brand volume?
  • Do you want luxury-brand profits?
  • Would you like to cover the entire market, from top-level luxury down to affordable vehicles?
  • Are you seeking an undervalued rooftop that you can increase the profitability and value of?
  • Do you want to be an EV leader?
  • Is your strategy a combination of several of the above-mentioned considerations, or is it something else altogether?

Once you have your priorities in order, the process of selecting the right acquisition can continue.

Some of the metrics to consider

Let’s take a closer look at some of these issues:

Geographic positioning

It’s both challenging and exciting to try to do business in an area that is new to you. This new geographical region could be truly greener pastures and make your profit potential skyrocket. In order to increase the odds of a great result from regional expansion, you should perform some careful analysis.

This starts with an understanding of the geographical market into which you wish to expand. It’s one thing to buy a dealership within your local market, where you are well aware of the demographics, population trends, and brand coverage gaps that may exist there. It’s quite another to expand into a new market, which requires an awareness of its challenges as well as its benefits, such as:

  • Demographic profile and income levels
  • Population growth trends
  • Leading dealers in volume, profitability, and customer satisfaction

Once you have a complete understanding of this new market’s fundamentals, you can analyze where the best opportunities may lie for your specific strategy. Combining this with your existing experience with your current brands, as well as your fellow dealers’ experiences with other brands and who your new local competitors will be, you can make a determination of which franchises would be the best choices in this particular market. 

If you plan to purchase a dealership in a large metropolitan area, and this is your first big-city location, be aware that factory approval may be difficult to accomplish. Manufacturers prefer that owners of these high-volume points have an existing – and successful – track record of operating at this scale. If you don’t possess this specific experience, you are likely to be more successful, factory-wise, with a small city dealership or one in a rural location. 

Market share for particular goods and services

You will also want to analyze what your new dealership’s potential is in a variety of different areas, across all of the business units that the dealership represents. Some of the questions that could be part of this analysis include:

Sales growth potential: Is the market saturated with the dealership’s franchised brand(s), or is there room for growth?

EV acceptance levels and factory support: What is this area’s potential for electric car sales? What is the manufacturer’s present situation with regard to supply of needed technological parts? What does the dealership franchise’s EV pipeline look like, right now and for the next few years? How is the factory assisting dealers with the EV transition? What are the costs involved? Is the area’s EV charging infrastructure currently sufficient and can it adapt to increasing numbers of EVs on the roads?

Service department performance: Is the dealership getting its fair share of service business? Is it generating an acceptable amount of profitable major repair volume vs. low-ticket oil changes? 

Parts department performance: Can the Parts Department’s contribution to overall profitability be improved? Are accessories a significant profit center for the store?

F&I department performance: How well is the F&I Department doing? Are their offerings competitive and of high quality?

CSI scores: How does the dealership compare to its peers in this all-important yardstick?

Value of real estate

While real estate values for a given area can be determined to some extent through analysis of recent property sales, there are other factors that must be considered when it comes to purchasing a dealership. 

Is the overall footprint large enough to achieve your financial goals? Do the sales, service, or parts departments need to be enlarged to achieve better performance? Are there ways to inexpensively reconfigure the existing space for improved efficiency? Will the manufacturer want you to upgrade the facility after you move in? The answers to these questions can affect what you should pay for the dealership’s real estate.

EBITDA relative to similar companies

Establishing an appropriate valuation for a dealership you are thinking of purchasing is a key part of the process. Because various dealerships use many different financial structures, methods of depreciation, and taxation rates, the concept of EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) lets you make an apples-to-apples decision about which business offers the best return on investment for the price being asked.

The valuations of auto dealerships are typically based on a multiple of EBITDA. Normally, a higher EBITDA should translate to a higher dealership value and a higher selling price. Naturally, there will usually be some negotiation between the seller and buyer regarding the final number.

Unique value propositions

This covers aspects of the prospective dealership that make it unique among its peers in the market, aspects that can add value to the purchase and perhaps justify a higher asking price. 

Is it a high-end exclusive brand with high recognition like Ferrari, Lamborghini, Rolls-Royce, or Bentley, with unique, expensive vehicles and a large market area to draw from? Is it an established high-volume EV retailer, complete with high-speed Level 3 chargers already installed? Does it have an off-road course on the property, where four-wheel drive vehicles can be put through their paces? Special features like these can command a premium.

DCG knows its way around the automotive M&A chessboard

DCG is a seasoned M&A firm whose expert automotive M&A specialists help clients on both sides of the table to make the most informed decisions, based on all the available data. We understand that you want a good deal, structured to your needs. But you also need that acquisition to fit in with the goals and aspirations you have for your entire automotive business. 

DCG Acquisitions has an impeccable reputation and a long track record of proven results, because we’re committed to service beyond the sale. The DCG Acquisitions team has personally closed billions in transactions to date. Our experienced team of experts manage efficient, high-return acquisitions.

Contact DCG Acquisitions to speak directly with an automotive M&A specialist and learn how our expertise can help you get the most out of your next dealership transaction.