Post-COVID-19 Dystopia—What’s Happening to Multiples
There’s no doubt about it, with the economy being turned on its head, price points and consumer behavior is shifting, and purchases of dealerships are seeing changes as well. But what’s happening?
The feds have been steadily increasing interest rates over the last few months and SBA rates are tracking right along with it. In May, SBA rates were 4.5% and are now hitting 11% and may go higher. With this increase, the overall value of a business, let’s say a dealership, for example, will be affected. So, what is the effect when it comes to multiples (selling price/earnings)?
Let’s start out with a quick rewind.
Earnings During COVID-19
When COVID-19 first came into the picture, dealership earnings went through the roof. Unit sales were doubling, and inventory was being sold before it even hit the lot at whatever price they asked. As supply catches up, the days of dickering will return. So, what does that mean in terms of multiples? If earnings decrease, and the selling price stays the same, that means multiples actually increase… likely to happen?
Let’s dig a little deeper.
Interest Rates Take Effect
Even if earnings stay the same; with interest rates sitting at about 11%, acquisition financing loan payments will be taking a much larger bite out of the target’s earnings. When it comes to buying / selling a dealership, payback time will become much longer if selling price stays the same.
Will buyers be willing to wait longer to be paid back their investment, or will they demand to pay a lower price for the same earnings? It is yet to be seen, but likely prices will come down some.
So, with the economy in turmoil, what can you do as a dealership owner to maintain salability and the highest selling price possible?
Best Practices
Keep that bottom line UP!
Selling unit inventory got easy in the pandemic; anything a dealer got their hands on sold immediately, sometimes before it hit the lot.
To keep that bottom line up, business owners need to get back to basics. Look for ways to improve shop efficiency, keep product margins up, monitor and mitigate discounting, and find additional streams of income maybe you haven’t tapped before.
Reality
The last two years have been exhausting, so perhaps you’ve considered selling. At Stacey International LLC, we are looking beyond the immediate present upheaval to evaluate and set selling prices based on where interest rates are likely to settle as inflation comes under control.
If you want to sell in the next 5 years, it may require a change in expectations of the proceeds from your sale. If margins drop and bottom line follows, even if multiples stay the same, selling prices will settle down. If the economy continues in turmoil, multiples may also be affected.
To Sell or To Wait
You may be wondering whether to sell now or wait until things settle down. This begs the question, wait until when, and for what?
While the selling price may go up a bit in a year or two if you wait, be sure you have the stamina to keep Revenue and Earnings flat or increasing during that time. If you are tired and your results start to turn down; it’s kryptonite to your selling price. What you will get for a business showing a downturn can be much less than if it were showing flat or increasing results.
To discuss your plans, reach out to the trusted team at Stacey International LLC. We are a credentialed and experienced team of financial professionals who specialize in mergers and acquisitions who help our clients get the most out from their exit. Give us a call today to schedule your free consultation.