When the COVID-19 outbreak was declared a national emergency on March 13, nonessential businesses were closed by government order, which triggered a national recession. As a result, gross domestic product (GDP) declined by 5.0% in the first quarter of 2020.[1] In early July, the Congressional Budget Office (CBO) issued an economic forecast that predicted that GDP would decline by 5.8% for 2020 before rebounding to increase by 4.0% in 2021. The forecast also predicted that GDP will recover to pre-pandemic levels by the middle of 2022.[2]
It’s still uncertain, however, how long the recovery will actually take. Many individuals have lost jobs, with unemployment rising from 3.5% in February to 14.7% in April before dropping slightly to 13.3% in May, according to the U.S. Bureau of Labor Statistics.[3] Consumer confidence measures turned negative in March and April as consumers lost jobs and were uncertain about the economy.[4] The CBO’s forecast for the unemployment rate at December 2020 is 10.5%, and while its 10-year projections do not show employment recovering to pre-pandemic levels, unemployment is predicted to gradually decline to 4.4% by the end of 2030. [5]
Declining GDP, high unemployment and reduced consumer confidence all negatively impact the automotive industry. Experts predict new vehicle unit sales will fall from 17.1 million in 2019 to 13.5 million in 2020.[6] Haig Partners, a brokerage firm that assists dealerships in the buying and selling process, reports that every franchise, with the exception of Kia, reported a decline in new unit sales for the first quarter of 2020 compared to the first quarter of 2019. Dealer profits are also expected to be down in 2020, but dealerships are generally resilient and recovery is expected. Profits from used car sales and the service segment could help mitigate lost profits from less new vehicle sales.
Many dealers are wondering about the impact of the COVID-19 outbreak and to their dealership’s blue-sky (goodwill) value. Because of the uncertainties, blue-sky value would in general, seem to have declined at this point. A review of six publicly traded automobile dealerships indicates that market capitalization declined by nearly 50% from December 31, 2019 to March 31, 2020. However, market capitalization of these same dealer groups is down by an average of only 6% from December 31, 2019 to July 17, 2020.
In late June, Haig Partners released The Haig Report Q1 | 2020 Trends in Auto Retail and Their Impact on Dealership Values, wherein it reported on 13 dealership transactions that have been affected by COVID-19. Of the 13 transactions, two were cancelled, three dealerships maintained the same value as pre-COVID-19, and eight reduced their blue sky values by an average of 10%.[7]
In general, it seems that potential buyers of a dealership don’t want to offer the same amount as they did before COVID-19 hit; but sellers might not want to sell at a lower number, and may be able to wait until things improve if the offer is too low.
The value of any business considers future earnings and expected cash flow. The value of blue sky at an automobile dealership similarly takes into consideration future growth expectations and risk factors. Determining what is expected in the future during these challenging times can be difficult, and expectations may be dealer and franchise specific. When will a dealership return to “normal” levels of earnings? Earnings were down for many in March and April, but have rebounded somewhat in May and June.
Valuing a business requires significant judgment in determining the correct approach and assumptions. Christy Samek is a senior manager with Schneider Downs who specializes in valuing automobile dealerships for estate and gift tax planning purposes, which are required to be at fair market value and consider both the perspectives of the buyer and the seller. Since values may have declined, it might be an appropriate time to consider estate planning. If you need help determining the value of your dealership, please contact her at 412-697-5415.
[1] Hopkins, Kevin R. “National Economic Report: May 2020.” http://keyvaluedata.com. Retrieved July 14, 2020.
