Sell-Side Diligence: Essentials for a Successful Dealership Sale

Sell-Side Diligence 

Essentials for a Successful Dealership Sale

By David Zawitkowski

In the last issue of SPARKS, we reported that U.S. dealership transactions continue to grow, with more sellers coming to market as dealership owners pursue go-big deals to achieve critical mass. If you are a seller looking to ensure a favorable transaction, here are some important considerations:

Start Preparing Early 

We cannot stress this enough. Before you start shopping for a Buyer, take the necessary time to prepare a set of financial statements and an attractive investment thesis. Rushing through this process will surely become a disadvantage and will likely result in lost opportunities, errors, and possibly lost value. Your aim is to accurately present your dealership’s value today, and show its potential value in the future.

Build a Team of Experienced Deal Professionals 

When we represent our buy-side clients, we sometimes sit across the deal table from accountants and attorneys that do not have extensive automotive transaction experience. This can cause the deal to move slowly, as the other side plays catch up with the more experienced team. When you prepare your deal team, make sure that the professionals you choose have a record of accomplishment with successful automotive dealership transactions, and strong dealership client references.

Organize Data Ahead of Buyer Diligence

We recommend organizing an extensive data pack prior to buy-side diligence. A sharp buy-side diligence team will ask for lots of detailed information. Having most of this ready will allow you to focus on running the dealership during the diligence process.  We recommend being prepared with at least the following:

• Monthly trial balances for the last two fiscal years and the year-to-date period
• 12^th and 13^th month dealer financials for the last two fiscal years and reconciliations between the two
• Income tax returns for the last two fiscal years and tax entries from your accountant, that bridge the tax return to the internal financial statements
• Complete set of accounting schedules from your dealer management system for the last two fiscal year-end periods

Provide Thoughtful, Well Supported EBITDA Adjustments

Nothing erodes trust more than aggressive estimates that turn out to be misleading or inaccurate. Take the time early on to create precise calculations vs ballpark, high level, estimates. Buyers will eventually ask you to calculate it precisely, so do not use an estimate that may ultimately make you look bad, erode trust, or terminate your deal. Common Management addbacks include:

• Owner/family compensation (above market, nonworking family members)
• Management fees and packs
• Owner/family discretionary spending
• Overpaid employees (i.e. GMs or long-tenured staff)
• Normalized rent (market rates / use cap rate multiplied by appraised real estate value)
• Include outside income like re-insurance, JMA kick-backs, warranty commissions, others
• Normalize for related party transactions
• Non-cash expenses: LIFO, demo write-downs, used car reserves, VIP plan reserve
  
  

Even if you are not ready to sell, you ought to start thinking about ways to prepare for a favorable transaction should the opportunity arise.  Citrin Cooperman's Automotive Dealerships Practice professionals can help you get started.