What Dealer Principals Should Know About Blue Sky Multiples
Blue sky multiples are the most quoted and least understood numbers in dealership sales. Owners hear them at dealer meetings, read them in trade coverage and repeat them to family. This page is a working reference on what multiples mean, why they vary, and how to think about dealership blue sky value for your own store. You will not find a multiple quoted here, and that is deliberate.
For one firm's explanation, MD Johnson, Inc. covers dealership blue sky value on its own page. The notes below are general.
Definitions
- Blue sky: goodwill value above tangible assets such as inventory, parts, equipment and, where included, real estate.
- Multiple: a shorthand some buyers use to relate blue sky to earnings, usually adjusted pre-tax earnings.
- Adjusted earnings: earnings after normalizing non-recurring expenses, owner items and rent.
Why a single multiple misleads
- Brand. Different franchises attract different buyer demand.
- Market. Population, competition and growth matter.
- Store specifics. Fixed ops strength, facility condition, staff and CSI history.
- Buyer fit. A buyer who already owns stores nearby may see more value than one who does not.
- Earnings base. A multiple applied to the wrong earnings figure gives the wrong answer.
Two stores of the same brand can sell on very different terms. A published range is context, not a price.
What drives dealership blue sky value in practice
Earnings quality
Buyers trust earnings that are consistent and documented. MD Johnson says it reviews at least three years of statements. One strong year surrounded by weak ones invites skepticism.
Real estate and rent
Below-market rent paid to an owner's property company inflates store earnings. Buyers will restate it to market. MD Johnson lists real buy-sell advisor for dealers estate value versus rent expense as part of its review.
Facility obligations
Pending image or renovation requirements are costs a buyer will factor in.
Factory relationships
The OEM must usually approve the buyer. A store with a healthy factory relationship is easier to transfer.
Checklist before you think about a multiple
- Gather three years of statements plus year to date.
- List add-backs with documentation.
- Restate rent to market if you own the property.
- Note any facility requirements.
- Review fixed ops absorption and trend.
- Ask your CPA to check the adjusted figure.
Questions to ask an advisor
- What earnings figure are you applying a multiple to, and why?
- Which buyers might value this store more than average, and why?
- What would move the number up or down?
- How close have your opening valuations been to final prices?
On the last question, MD Johnson reports that its original valuations have historically been within 5% of the selling price. Ask any advisor for the same kind of evidence.
Common mistakes
- Quoting a multiple heard secondhand for a different brand or market
- Applying a multiple to unadjusted earnings
- Ignoring rent and facility costs
- Choosing an advisor because their number was highest
The last mistake is the most expensive. A high opening figure can win your signature, but buyers will test it against your statements in diligence. If the number cannot survive that review, the result is usually a re-trade late in the process, after you have granted exclusivity and lost leverage with other buyers. A lower, well-explained figure that holds is worth more than a high one that collapses.
Tax note
How blue sky is allocated in a sale can affect taxes. The IRS overview of selling a business explains how business asset sales are generally treated. Your CPA should advise on allocation.
General information only, not tax, legal or financial advice.
Recap
A multiple is a shortcut. Dealership blue sky value is built from your earnings, your market, your facility and your buyer pool. Start there, and the multiple becomes an output rather than a promise.