12 • April 2024 • Powersports Business

BY BRAD STANEK AND PAULINA MATEL CONTRIBUTING WRITERS

We have clearly reached an inflection point in the powersports industry . The economy has held up better than many of us expected , but higher interest rates and general uncertainty have slowed the powersports business after years of unprecedented profitability . What does that mean for the value of your dealership ? Is the window closing on exit opportunities ?

George Chaconas , senior partner of the National Harley-Davidson & Powersports Dealerships Division of Performance Brokerage Services , told us on a recent webinar we hosted that he ’ s seeing more sellers than ever entering the market . Meanwhile , he says buyers are slowing their pace of acquisitions because dealer profitability is down , they have more sellers to choose from and higher interest rates are having a negative effect on dealership valuations and related real estate . Despite all of this , it ’ s not all bad news for dealers looking to sell .

OPPORTUNITIES REMAIN FOR BUYERS AND SELLERS

Chaconas believes now can still be a good time to consider exiting . A lot of money remains on the sidelines and today ’ s buyers tend to have strong balance sheets . That bodes well for sellers . Meanwhile , it ' s a great time to be a buyer , Chaconas notes , because there are far more dealerships available than there were during the pandemic when dealers wanted to keep riding the wave of money , rather than exit . “ Now our dealer clients are normalizing to those numbers , so it ' s still very tricky to value these businesses ,” he says .

Chaconas is advising buyers to do their own pro formas so they can “ back into a number that they ' re comfortable with ” based on the ROI they ’ re mandated to get .

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“ We feel 2024 will still be a very active year and we ' re excited to help both buyers and sellers ,” Chaconas says .

NEAR-TERM ECONOMIC FORECAST AND IMPACT ON DEALERSHIPS

Paulina Matel , CFP , Financial Advisor for the Stanek-Haack Group at Morgan Stanley states that Morgan Stanley ’ s outlook for 2024 leans toward a soft landing prediction with only a 30 percent chance of recession . “ We ’ re expecting muted GDP growth with inflation continuing to fall amid a more accommodative monetary policy from the Fed ,” Matel says . “ Typically , that would mean lower interest rates starting at some point in 2024 ,” which generally bodes well for both buyers and sellers .

Matel cautions dealers not to count on a huge economic rebound to ignite dealer profits and valuations like the industry saw in 2021 or 2022 . “ Your value will have to come the traditional way ,” Matel says , “ from a solid marketing plan , from adding lines acquisitions and from other things you may have more control over internally as an owner .”

And if the markets soften , Matel suggests that dealers build out their pro forma financial statements . “ This will allow you to compare your dealership ’ s worth today to what it might be worth a few years out . Then you can determine whether it makes sense for you to stay at the helm for a few more years .”

DEALERSHIP VALUATION CONSIDERATIONS

Chaconas ’ colleague , Courtney Bernhard , a partner at Performance Brokerage , says buyers , sellers and advisors alike are finding it challenging to make valuation calculations today . This is because the Covid-year numbers are in the middle of the five-year period buyers typically use to assess a seller ’ s “ normalized ” performance . She believes buyers are putting less weight on performance during Covid−19 and realizing the market is normalizing . So , most buyers are looking back as far as 2018 to get a better sense of a dealer ’ s historical performance , according to Bernhard .

“ There ’ s both an art and science to valuing dealerships ,” Bernhard says . “ We ’ re taking into consideration many factors that affect a dealerships performance , past and present when preparing our valuation and know that a buyer will also do their own pro forma . Chaconas went on to say that multiline dealerships are still doing very well but “ we are beginning to see pressure from the OEM ’ s for dealership performance and to bring the dealership to image compliance .”

In my experience , a dealership ’ s value is composed of several key buckets including cash , multiple of cash flow , short-term assets such as inventory , furniture , fixtures and equipment and liabilities . Then it ’ s a matter of determining how those different components fit together .

When it comes to goodwill , Bernhard says you must consider the value of a dealer ’ s location , reputation and franchises under one roof . “ Once we arrive at the goodwill number and come to an agreement on it , then everything else falls in line ,” she says . “ When talking to dealers about goodwill , they sometimes have an arbitrary number in their head that they may have got from a local broker who may not have much if any experience in pricing dealerships . Everything has inherent value – furniture , fixtures and equipment , plus other assets sitting on a depreciation schedule . Each dealer depreciates those items differently . These are things we can negotiate .”