3 ways to calculate what a car dealership is worth — and valuation mistakes to avoid

Wondering what a dealership might be worth in a sale — or what it would take to buy a new store?

Here’s an overview of three ways to calculate a dealership’s value and some mistakes to avoid, according to Will Mustian, a partner at accounting firm Forvis Mazars, which has significant auto retail experience. He discussed the topic during a Colorado Auto Dealers Association webinar in late June and in a follow-up interview with Automotive News.

How to calculate dealership blue sky value.

Asset valuations: Historical approach looking solely at real assets

The asset approach determines a dealership’s value simply by considering how much the hard assets — cash, cars, real estate, for example — are worth, Mustian said during the webinar. The calculation uses tangible items and ignores the concept of blue sky — a dealership’s intangible value including goodwill.

The asset values recorded on a dealership’s books can serve as “a reasonable proxy” for its fair market value, but “there can be times when it is certainly not reflective,” Mustian said.

For example:

LIFO: Dealers often use last in, first out inventory accounting, which defers income for tax purposes. This often means inventory recorded on a dealer’s books doesn’t reflect fair market value of those assets, and a valuation would need to add in the LIFO reserve found elsewhere on the balance sheet, Mustian said.

Leasehold improvements: It’s common for dealers to split their stores into operating and real estate companies, Mustian said. The operating company often pays for real estate improvements and records them as assets. But an appraisal might view those improvements as real estate assets.

“You don’t want to either double count the value of the leasehold improvements by including it both places, or undercount the value by removing the leaseholds from the operating company if they’re ... not being captured in the real estate company,” Mustian said.

Hidden liabilities: Dealerships face a risk of finance and insurance product charge-backs and could have obligations such as free oil changes for customers. Not all dealers will record those liabilities, Mustian said.

Asset-only dealership valuations were common decades ago but today are “generally the exception,” Mustian said. However, the approach is still “very helpful” because it’s one part of the market valuation method now common in the industry, Mustian said.

Market approach: Asset, plus blue sky

Market valuation approaches vary, but a common format conducts the traditional asset estimate but adds a blue sky multiple of earnings to reach a dealership’s true value, Mustian said.

For example, a dealership with $1.5 million in assets and a blue sky multiple of four times $1 million in earnings would be worth $5.5 million.

A dealer would calculate that blue sky amount by multiplying a store’s earnings by a number reflecting the business’ desirability in factors such as its vehicle franchise, Mustian said. The average 2025 multiple across more than a dozen vehicle brands ranged from three to 10, according to data Mustian cited from buy-sell advisory firm Haig Partners of Fort Lauderdale, Fla.

A blue sky multiple also grows or shrinks based on a dealership’s strength in factors such as geography, market share, customer satisfaction and fixed operations revenue, according to Kerrigan Advisors, a dealership sell-side firm in Incline Village, Nev., Mustian cited.

Income approach: Focus on future earnings or cash flow

A valuation model focused on business income has started to appear more frequently in buy-sells, Mustian said.

This income approach usually relies on either the discounted cash flow or capitalized cash flow methods of valuing a business, Mustian said.

Discounted cash flow projects future income for five years and then “into perpetuity,” Mustian said. But it’s rare for dealers to have completed a five-year profit-and-loss forecast, and those who do tend to be overly optimistic, Mustian said.

The capitalized cash flow method, which is more common, draws on several years of historical financial statements to estimate a future cash flow rate, Mustian said.

These historical earnings analyses often use a five-year span, Mustian said in an interview. But conditions were abnormal after the COVID-19 pandemic in 2020, and the “peak boom years” of 2021 to 2023 — when dealerships had low inventory and high profits — are not considered indicative of how a dealership would naturally perform, he said.

“We typically see 2024, 2025 and 2026 is the new normal as of today” for valuation purposes, Mustian said.

The income approach can demand balance sheet adjustments, such as removing one-time revenue or expenses or considering the difference between the buyer and seller’s owner’s compensation and management fees.

“It’s very important to not just take the earnings or cash flows that are reported on the dealer statement,” Mustian said on the webinar.

The income approach also might undervalue a store, Mustian said. This is often the case for dealerships that are “underperforming or below certain profitability benchmarks for other dealerships,” he said. A buyer might feel they can improve the store’s income and offer a higher price, he said.

This problem can arise with the market approach, too. Mustian told Automotive News he recently encountered a dealership where significant discretionary spending lowered its profit.

A blue sky multiple applied to earnings would yield “a value that is much lower than you would anticipate on the market,” he said.