Having a good understanding of the current value of your dealership is more critical than ever. Dealers have been facing a tsunami of factors impacting their business and its growth — dealer market consolidation, manufacturer price increases, changing interest rates and commodity pricing, to name a few. When growth shuts down, the valuation changes, making it all the more important. These and other observations for dealers were offered by two experts from a national consulting accounting firm who recently presented a webinar to the Farm Equipment audience.
The pair of CPAs, Marc Johnson and Ryan Herman, from the consulting accounting firm, Pinion, work with ag dealers across the country, having just finished a visit to a midwest dealer prior to their discussion, and shared a range of actionable insights.
In the webinar, “What’s Your Valuation Strategy in Today’s Market,” Johnson and Herman covered a broad range of important factors for dealer owners of all ages to consider with valuations: various methods dealerships can employ; when and how regularly to utilize them; and how to have confidence in knowing how much the business is really worth, both now and in the future. Also key is realizing that valuing the business is not a one-and-done exercise.
Depending on the dealer’s goals, using the appropriate valuation strategy is vital to getting the most for you and your business. The speakers emphasized that, strategically speaking, the value of your dealership should be something you not just know, but actively plan for, aim toward and continually measure and monitor.
Quoting Louis Pasteur, Johnson emphasized, “Chance favors the prepared mind,” reinforcing how annual valuations benefit dealers in myriad ways, setting them up for any range of eventualities. Whether one partner wants to retire, passes away, or another opts to sell off his/her share of the business, or the owners choose to sell, the presenters say knowledge is power.
Specifically, Johnson says there are five scenarios for which dealerships should understand their current value: Generational and/or Employee ownership transitions and succession planning; Mergers and Acquisitions; Buy-Sell Agreement Planning; Understanding true ROI and ROE; KPI Performance metrics based on value.
Working with dealers’ teams through decades of dramatic change, Johnson enjoys helping equipment dealers across the country as they grow in size, complexity and value. Throughout the year, he proactively counsels business owners on financial and tax matters in order to position them well for growth and business succession. As they reviewed a market analysis over the past 5 years, they emphasized that dealer consolidation has really made the size of dealers grow.
As co-presenter for the valuation strategy webinar, currently available on demand, Ryan Herman creates forward-thinking estate and business plans for family businesses in the equipment dealer industry. Herman spoke to the levels of value involved in a valuation. Those include: Strategic buyer, typically a small group willing to pay a premium for synergies, can cut costs, change management, entity structure, etc.; a financial buyer, whether a private equity group, minority shareholder or publicly traded stock; and a hypothetical buyer, which is defined as fair market value and standard with a large pool of buyers.
Understanding 3 Key Valuation Levers
“If we don’t know our value (as a dealer), that’s where we see dealers get in trouble,” says Herman. The discussion included a deep dive into the 3 different approaches to valuing a company, as well as the three valuation levers: growth, cashflow and risk. He notes that where growth happens, capital may not necessarily keep up. For example, equity may slip for different reasons. As for cashflow, there may have been a one-time hit, or a change in inventory may have an impact. He notes similar issues with regard to risk as the third lever.
On growth, one of several reasons for a valuation is estate taxes, as these are sure to change in the coming year due to a changing Administration, regardless of the outcome. Herman says, “If you didn't get your dealership given away or substantially given away by the end of 2025, and that number changes, we need to understand it is going to be a very short time between now and then, and we're going to need to understand your valuations until we do something about it.”
Another reason is growth. “When growth happens, like it has the last couple years, your capital might not have kept up. One of the biggest conversations we're having with dealerships right now is their equity computations and why their equity has slid 5 and 10%. It's because their inventory has gone up in value. They're selling a whole lot more inventory, their expenses have gone up, etc. That growth is expensive and they might not have been ready for that capital-wise.”
An additional valuation lever is cashflow. Says Johnson, “Capital is one thing, cashflow is another. You might be well capitalized, but your cashflow might have one-time hits in there or multiple-time hits where you're going through succession planning. Maybe you’ve got to buy some owners out. You might be going through a period of transition. If you think about the balance sheets at the end of 2022 when you were out of inventory vs. the end of 2023, what did your inventory look like then? You might have burned all of your cash plus some because your inventory doubled and tripled in carrying costs during that time frame.
Herman then turned to risk. Certainly a dealership today — at the size they are, with interest rates where they're at, and commodity prices the way they've been going — is much more at risk than a dealer was in 2019. And not only are they more at risk, they've got more at risk. Understanding what your valuation is with those levers is very important.
Another valuable component to understanding the value of a dealership is the Quality of Earnings Report, QoE, says Herman. “Especially ahead of upcoming negotiations, we highly advise getting ahead of this.”
The Role of Valuation in Managing the Dealership
Addressing how to use the valuation to manage a dealership, the speakers recommend that owners should ask a few important questions. How far away are our principles from a transition, whether retirement or death? How long before we've got to do something? If your buy-sell agreement doesn't say specifically when that needs to be, we generally know that somebody is going to want to start slowing down at 62, 65 or 70. And so how far away from that are they? The other question you might ask is, based on the way we've grown or not grown over the last few years, based on what our valuation has done the last 5 years, would I still buy it today? It's a real question to ask, particularly when you're going through succession planning.”
An area that business owners understand better when they know the true value vs. the book value is volatility. That helps dealers to determine when they ought to pivot, because there are definite times in there when you can see a change coming. Interest rates are a prime example.
For the benefit of both the dealer business and stakeholders, Johnson and Herman reinforced that owners should think about the following: obtaining an annual valuation and monitoring company performance; reviewing buy-sell agreements and valuation implications annually; funding life insurance policies on key persons; and investing in legal services relating to managing will, trusts, etc. Additionally, for the sake of shareholders’ benefit, think about preparing and maintaining personal wills consistent with desires for the future, and periodic updates to personal estate planning.
On these final recommendations, moderator Kim Schmidt asked whether there was a certain time of year that is best. Should it be done when doing your taxes, or another time of year?
Herman answered that most of their clients either have an audit or reviewed financial statement, and it’s preferable to do the valuation right after, so they know audited third-party review numbers are being used.
“That way there's no question of, ‘Well, is this actually accurate information?’ So if you have those third-party numbers you're basing everything off of, that's normally the good cutoff, at least in terms of financials. Also, then you don't want to wait too far into the year to where it's November, December, and you're looking at the prior year. Normally that March, April timeframe feels like a good time to have that conversation.”
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