What to think about when buying a business
I’ve often felt that leaders in the retail automotive space are the most entrepreneurial people in business. They are self-motivated and driven, communicative and resourceful.
Most importantly though, their ability to be nimble in the face of adversity is what really sets them apart from the average person. We have seen this in spades throughout the COVID pandemic.
Dealerships have not only survived, they have thrived; growing in profitability, size and capacity. The acquisition market remained hot throughout the first quarter of 2022 with multiples on premium brands averaging six to eight times EBITDA.
The continued strength of the retail automotive space is really a testament to this entrepreneurial spirit. Leaders are constantly looking to grow their business. The best in class are always exploring new opportunities—whether that means acquiring new dealerships or complementing an existing business with an ancillary-type venture.
Let’s explore the things you should consider when analyzing a new business:
Current financial markets and economy: Consider the general state of the economy with specific focus on the sector you are looking to participate in. Is it strong and growing, or weak and bearish? How will interest rate increases impact your opportunity? This factor will be more important for those needing acquisition financing and inventory return expectations, so ensure you consider this factor from a broad perspective.
Financial strength of the business: Consider the stability and consistency of the earnings you are analyzing. You are trying to determine if the number you are looking at is a “normal” representation of what this business can actually achieve.
Don’t be afraid to ask hard questions. If you see a large spike or drop in earnings you need to do the work to understand why. This will have a direct impact on the acquisition price.
For volume-based businesses, such as automotive dealers, you also need to consider that high-volume businesses generally attract higher multiples than low ones—even if they generate the same net profits. This is what I call the “momentum” factor. There is an unexplained energy that exists in a dealership that is constantly busy—the hustle and bustle is infectious and creates momentum that could lead to bigger and better profitability in the future.
Your front-line manager, not the executive team, will drive the success of the business from a customer and strategy perspective. While owners take the risk, it is really the team below them that will make the gears turn properly.
Location, location, location: Dealerships located in high growth, business-friendly areas will demand a premium compared to those that are located in desolate rural places. The real question you need to ask is, can you create a synergy with the acquired entry, assuming the location won’t change in the near future?
Management team and employees: Inheriting a quality management team is the real “game changer” in your business venture. The wrong people will surely lead you to failure.
Your front-line manager, not the executive team, will drive the success of the business from a customer and strategy perspective. While owners take the risk, it is really the team below them that will make the gears turn properly. Without them, you will fail. Full stop. To that end, you must not only consider the employees you are acquiring, but more importantly, what your strategy is to retain them.
Real estate: In major Canadian markets, such as Toronto and Vancouver, real estate ownership creates a natural hedge against poor operating results. It is therefore more valuable to buy a business that owns its land and building than one that doesn’t. While you may not be a real estate mogul, the possible financing and leveraging opportunities are endless when you own an asset that is guaranteed to increase in value over time.
Reputation: Dealerships with strong brand reputation will attract the biggest multiples. That is because of the uphill battle one must climb when you are trying to alter customer perception of your organization. It’s very tough to change what people think of you. You’ll need to spend a lot of time and money to win back customers and this might not be a battle you can win. Before signing the agreement, speak to a sample of the dealership’s customer base to gain insights on where improvements need to be made. Then draft your plan of attack.
The “You” factor: This is one that buyers often overlook. You need to know what you are bringing to the table and determine how this addition will fit in your business structure—even more importantly, how you will fit with it!
What can you and your team offer this business that will help them take off—is it financial resources, strategic leadership, external relationship, synergies or complementary services? This list can be long or short.
The key is for it to be derived from “truth.” Be factual and honest. Do a SWOT analysis of yourself and remember to document it. This will lead to a solid action plan and setting yourself up for success.
None of the items discussed above should be new to you—this is Business 101. It’s simply a logical approach created when one uses a critical thought process.
This is why you pay consultants the big bucks —to develop a systematic, step-by-step way of thinking that will improve the likelihood of your success.
The key takeaway here is that you need to think before you act. You can not enter into a new business without doing the preliminary deep thinking. Plan before you act. Remove your gut from the equation. Ask the right questions. This will give you the best chance of winning.
Good luck on hunting for your next venture.