Which is better for my dealership sale?
Selling your automotive dealership is a complex transaction, so it helps to have a solid understanding of every step in the process.
One of the first and most crucial steps is deciding how to structure your transaction. To make that decision, you’ll have to choose between two main types of business sales — an asset sale or a stock sale.
The structure you choose will help determine several aspects of your sale, including tax implications, the types of buyers you attract, the profit model of the dealership’s new owner, and of course, negotiations.
So what’s the difference between an asset sale and a stock sale, and which should I pursue in my dealership sale?
Before we answer that question, first note: if the dealership for sale is structured as a limited liability company (LLC), a sole proprietorship, or a partnership, then the transaction can’t be a stock sale because the legal business entity does not contain stocks. So your decision is made — you’ll be making an asset sale — and you can move on to your next step, a business valuation (see below).
If your business is a C-corporation or a sub-S corporation, then you have options. You can structure the transaction as either an asset sale or a stock sale.
Asset Sales and Valuations
Asset sales are more common than stock sales, and they’re more complex.
In an asset sale, you can maintain ownership of your business’s legal entity, while the buyer purchases select assets of the dealership. (If you also sell the legal ownership of your business, this is called an entity sale, which takes place on top of all considerations of an asset sale.)
To complete an asset valuation, add up the value of every piece of the dealership, including tangible assets, intangible assets, liabilities, and net working capital. This method can provide the most precise picture of a dealership’s value, and buyers often prefer it because they can optimize the value of each asset toward future tax benefits.
Let’s break down the main factors you’ll need to consider:
- Tangible Assets — These include real estate (if you own your dealership property), vehicle inventory, parts inventory, technology, and all other physical items at your dealership. You can find a low-end value of any asset by determining the price you’d liquidate it for. Find an asset’s high-end value by determining your ideal selling price. You can then negotiate the sale of your tangible assets within this range.
- Intangible Assets — Now determine the value of all your business’s non-physical assets. These will often include “goodwill” assets like intellectual property or the power of your brand name, as well as profitability (usually averaged over the past three years, against the industry average). You might also factor in “blue sky” or “start-up” value, which includes the money it took to establish your business, like budgets spent on marketing, your website, staff training, payroll, etc.
- Liabilities — You’ll have to subtract any liabilities from the total value of the sale, but you have some options for how to handle this. Among them are— minimizing liabilities before the sale, for example by selecting the right insurance terms or streamlining contracts with outside vendors. You might also hold onto liabilities and use the proceeds from your dealership sale to settle them later on.
- Normalized Net Working Capital — A certain amount of capital, needed to run the business post-sale, is also usually part of an asset sale. The process for agreeing upon an appropriate value is fairly nuanced, so it’s best to enlist the expertise of someone with experience negotiating asset sales.
A stock sale is less common than an asset sale, but there are several reasons a buyer might be better suited for one. Stock sales also typically involve less work for the seller because the process is more cut-and-dry.
Remember, in order to transfer ownership through a stock sale, your dealership has to be structured as a stock-bearing entity, like a C-corporation or sub-S corporation. In a stock sale, the buyer directly purchases stock to obtain all or part of the dealership business. This automatically includes a stake in the business’s legal entity.
The assets and liabilities purchased in a stock sale are similar to the dealership assets bought in a sale of assets. However, they don’t require several separate transfers of assets because they’re accounted for through the stock in the corporation.
A stock sale leaves less flexibility to optimize for the buyer’s ongoing tax considerations, but it can have tax benefits for the seller and makes it much easier to determine the value of the sale based on the corporation’s market value.
Which Method Should I Pursue?
When to go with an Asset Sale
Again, asset sales are more common. Most dealership buyers prefer asset sales for two reasons. First, the buyer purchases the assets on a “step up in basis.” This means that the buyer and seller can agree on high-end values for tangible assets, which depreciate quickly thus delivering tax benefits to the buyer during the first several years of ownership. In negotiations, these can be offset by agreeing on low-end values for intangible assets, which depreciate more slowly.
Second, in an asset sale, the buyer can purchase assets “a la carte” (as agreed upon by the seller). This means the buyer can obtain the dealership’s most sought-after assets without having to take on less desirable assets or legal liabilities.
As a result, the buyer typically doesn’t need to devote as much time to due diligence in confirming the dealership’s value, compared to what would be necessary in a stock sale.
When to go with a Stock Sale
When the Buyer Faces Certain Obstacles
A stock sale may be better when the buyer is experiencing difficulties getting approved as a dealer-operator by an auto manufacturer. In this case, the buyer can purchase a partial equity stake in the dealership, and agree to manage the dealership. If they’re successful, the buyer can convince the manufacturer over time that they meet their criteria. Once the manufacturer fully approves the buyer, then the buyer can complete the stock purchase and fully take the reins of the business.
For a Large Transaction with a Well-Financed Buyer
A stock purchase agreement (often with asset-related provisions) may work well when selling a dealership to well-financed buyers like private equity firms or family offices.
For example, a private equity firm may want to purchase a group of dealerships. If, as the seller, you can’t find an acceptable owner-operator for your dealerships, you can engage that private firm to purchase a partial stake in your dealership during the interim, through a stock sale.
This way, you can maintain your own partial ownership stake and continue to operate the dealerships. Meanwhile, you’ll get a payout for the stock that is sold. When a suitable owner-operator is identified, he or she can purchase your remaining shares and begin to operate the business.
The Value of an Experienced Team
DCG Acquisitions has a wealth of experience in all aspects of automotive M&A transactions.
If you’re interested in learning how our team can help you get the most value out of your dealership purchase or sale, contact us to speak directly with an automotive M&A specialist.