The Dealership Is Only Half the Balance Sheet

When dealer principals think about the value of their business, most naturally start with the dealership itself. Earnings, blue sky, franchise value, inventory, working capital and operational performance tend to get most of the attention.

They should.

But after more than 40 years around dealerships, I’ve learned that some of the most important financial decisions often sit on the other side of the conversation.

The real estate.

For many dealer principals, dealership property is one of their largest assets. In some cases, the equity in the real estate may represent millions of dollars of family wealth. Yet it is often treated separately from the dealership rather than as part of the overall capital strategy.

I think that is a mistake.

The Dealership and Real Estate Are Connected

A dealership facility isn’t simply a building where the business happens to operate.

The value of the property, the debt against it, the rent being paid by the dealership, how the property is owned and how much equity is tied up in it can all affect the operating business.

Consider a dealer who purchased a property 20 years ago and has very little debt remaining. The real estate may have appreciated substantially while millions of dollars of equity have accumulated.

That sounds like a great position to be in—and it usually is.

But it also raises a question:

Is that capital being used in the best possible way?

There isn't one answer.

For one dealer, owning the property debt-free may provide exactly the security and income stream the family wants. Another may decide that accessing a portion of that equity provides the capital needed to acquire another dealership. Someone else may eventually separate the real estate from the dealership transaction and retain it for long-term rental income.

The key is understanding your options before you need them.

Rent Matters More Than Many Dealers Realize

Rent between a dealership and a related real estate entity can sometimes become little more than an accounting entry.

But eventually, that number matters.

A rent that has remained artificially low for years may make dealership earnings look stronger while suppressing the apparent income and value of the real estate. Excessive rent can have the opposite effect.

Neither necessarily gives a dealer a clear picture of what is really happening economically.

This becomes especially important when preparing for a sale, refinancing real estate, bringing in partners, completing estate planning or evaluating a sale-leaseback.

Waiting until a transaction is underway to address the rent structure can limit your choices.

Capital Should Have a Job

Dealer principals are accustomed to managing capital inside the dealership. They understand working capital requirements, floorplan, inventory and the cash needed to operate and grow the business.

Real estate equity deserves the same attention.

Suppose a dealer has $15 million of equity sitting in dealership properties and an opportunity arises to acquire another franchise.

Should the dealer borrow against the existing real estate? Finance the new property separately? Bring additional cash into the transaction? Consider a sale-leaseback? Leave the existing properties untouched?

Those aren't simply real estate questions.

They are capital allocation questions.

And the right answer depends on where the dealer is headed.

A 45-year-old dealer looking to acquire three more stores may view capital very differently from a 68-year-old dealer thinking about succession, income, and preserving wealth for the next generation.

Same assets. Very different objectives.

Think About the Exit Before the Exit

This becomes even more important when a dealer begins thinking about eventually selling.

Ideally, planning starts years before the dealership goes to market.

What will happen to the real estate?

Will it be sold with the dealership? Retained and leased to the buyer? Sold separately? Could a 1031 exchange be appropriate? Is the current rent supportable? Is there debt that should be refinanced or paid down? Are dealership and real estate ownership aligned with the family's estate and succession plans?

Those decisions can involve a substantial amount of money.

They are also difficult to optimize when they are being made in the middle of a dealership transaction.

That's why I believe dealer principals should periodically look beyond the income statement and ask a broader question.

Not simply:

What is my dealership worth?

But:

Are my dealership, real estate, and capital structured to give me the most options?

Because the dealership may be the business that created the wealth.

But it may only be half the balance sheet.