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Resolving Value Disconnect between Buyers and Sellers of Auto Dealerships

In my previous post “2017 in Review: Trends in Retail Auto Mergers and Acquisitions,” I highlighted an all-too-familiar and continuing trend: the battles between buyers and sellers over valuation — battles that arise from what I like to call the “value disconnect.”

Sellers, who naturally want to get top dollar for their dealerships, are often reluctant to admit annual sales increases or operational efficiency haven’t been the same as in years past. Buyers, who naturally want to pay as little as possible, use this fact in an attempt to negotiate a lower price. Bringing the two sides closer to a reasonable valuation of a given dealership can be one of the biggest challenges in the negotiating process.

Unfortunately, finding a phrase to reflect the source of this friction (the phrase “value disconnect”) is far easier than pining down its causes or finding a “go to” tactic to combat it. In this post, I examine the causes of the value disconnect, separating the causes attributable to the seller from those attributable to the buyer, and I offer guidance on how to address these common sources of friction.

Value Disconnect Causes: Seller

Sellers tend to inflate the valuation of their dealership for several very understandable reasons, most notably the following:

  • An inability or reluctance to take a cold hard look at their own business and see operations as they are instead of as they would like to think they are. The seller looks at operations through rose colored glasses, adopting a revisionist view of the value of the business that does not align with the current reality of the market.
  • Valuing the business based on the blood, sweat and tears invested in the business instead of on its performance.
  • Looking at what “the other guy” (another seller) got and assuming that this business is at least as valuable, but likely more so.
  • Optimism that the industry will do better in the future, so the buyer should pay a premium to get into the business now.

Value Disconnect Causes: Buyer

Buyers tend to lower the valuation of a dealership due to misperceptions and fears, such as the following:

  • A skewed view that the seller cannot be doing a great job, so the actual value is lower than the price the dealer is asking. The assumption here is the seller is in a position of weakness based merely on the fact that they are looking to sell. The buyer perceives that the seller’s decision to sell is an inherent admission that the dealership is worth less than the asking price.
  • The natural inclination toward conservatism. Buyers do not want to overpay, and they want to have some cushion in their investment in case they cannot operate as they truly believe they can.
  • Buyer may not fully understand the dealership operations, either because they are a new entrant to the industry or unfamiliar with the geographic market.

Resolving Value Disconnect

As you can see, value disconnect is driven primarily by misperceptions, false assumptions, and emotions. This accounts for why combatting this pervasive and persistent disconnect is an ongoing challenge. If buyers and sellers were to base their valuations on facts and figures, their valuations would be more closely aligned, and negotiation would be a matter of crunching numbers.

To reduce or eliminate value disconnect, think of it less as a valuation issue and more as a human relations issue:

  • Try standing in the other person’s shoes. The recommendation here is not for you to cave in and concede to all demands, but to use empathy to more fully understand the issues. Engaging in compromise is virtually impossible if the parties are polarized. A little empathy for the other side can be a significant first step to ratchet down any frustration and encourage the other party to see issues from your perspective.
  • Restart from a place of understanding. As a buyer, if the seller is basing the value of the dealership more on the blood, sweat and tears invested in the business instead of on the value of its current operations, try to find ways to express an understanding of and appreciation for what was invested to build the business. As a sign of respect for what has been built, you may consider keeping the name of the business or retaining employees.
  • Avoid the trap of thinking that a seller must sell or that the choice to sell indicates weakness. People sell businesses for many reasons other than financial need. Look to identify what may be the driver of the sale, so that you are better able to connect on that topic. The seller may be looking for a new challenge, adapting to a life-changing event, or losing the drive to continue to improve and operate the business.
  • Work to focus on the dynamic of why you want to purchase the business and on your strengths. Do not identify your strengths by projecting inadequacies on the seller. There certainly may be issues with the way the seller is operating the dealership, and those issues certainly present opportunities for you (the buyer), but be wary of presenting seller deficiencies as a reason to discount your valuation.
  • If you are selling, work to understand why you are selling. Avoid the trap of thinking that you have no choice, even if your situation is forcing you to sell. Identify whatever choices you have and then be proactive in making those choices. If you choose to sell or must sell, embrace the inevitability and work to make the selling process as rewarding as possible. Remember why you are selling and focus on that end goal. Keep in mind that whatever comes after the sale has value, too, even though the buyer is not necessarily paying for it.

When you encounter value disconnect, keep these suggestions in mind. When you arrive at the edge of this valuation chasm, look for these bridges.

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Disclaimer: The information in this blog post is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Stephen Dietrich, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

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About the Author: Stephen Dietrich is an attorney and author who has a passionate interest in the human side of business. His distinctive combination of legal and business knowledge, human insight, and dedication to clients makes him uniquely qualified to help corporate leaders and other C-level executives navigate high-value mergers and acquisitions, restructure transactions, and manage day-to-day operations. Through this blog, Stephen shares his extensive experience and unique personal and professional insights in the hope of stirring thought and dialogue that leads to ever deepening insights and understanding. For more information, please visit www.StephenDietrich.com

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