Inside Automotive with Jim Fitzpatrick, powered by CBT News

Todd Berko Breaks Down Smarter Valuation Strategies for Dealers

• Jim Fitzpatrick • Season 1 • Episode 40

Share episode

Many dealers rely heavily on Blue Sky multiples when valuing their stores, but that narrow approach can overlook key operational and financial factors. On this episode of Inside Automotive, Todd Berko, co-managing partner at Bel Air Partners, explains why dealers should use a broader set of valuation methods—including ROIs, EBITDA multiples, and future growth assessments—to understand their true market value. He discusses how working capital needs, capital improvements, and asset turnover all influence what buyers are willing to pay, especially private equity firms that prioritize EBITDA performance.

Discussion highlights include:

  • Why Blue Sky alone can misrepresent a dealership’s real value
  • How ROIs, EBITDA multiples, and growth predictability strengthen valuation accuracy
  • Market trends keeping buy-sell activity healthy, including personal and family drivers
  • Ways dealers can increase value through documentation, add-backs, and operational improvements
  • Why some franchises facing challenges still offer strategic opportunities for new entrants

Inside Automotive with Jim Fitzpatrick is powered by CBT News, your go-to source for the latest news, trends, and insights in retail automotive. Subscribe for more interviews with top industry leaders, dealership innovators, and experts shaping the future of automotive.

For more content, visit CBTNews.com and follow us on your favorite podcast platform.

Jim Fitzpatrick:

Hey everyone, Jim Fitzpatrick. Thanks so much for joining me on another edition of Inside Automotive right here at cbtnews.com. A lot of dealers are still trying to make sense of what their stores are really worth, especially with everyone throwing around Blue Sky like it's the only way to value a dealership. Today we're breaking down the truth behind valuations and what you can actually do to maximize the value of your store. Joining us with what you need to know is co-managing partner of Bel Air Partners, Todd Berko. You've seen him here before on CBT News. Todd, thank you so much for joining us once again.

Todd Berko:

Oh, it's my pleasure. Thank you.

Jim Fitzpatrick:

Sure. So, as I said in the opening, you know, every it's it seems to be the end-all-be-all. What's the blue sky bringing on my Ford store or Toyota store or a Mitsu store or what have you? And and uh you guys feel a little bit different about that, right? Is is estimating blue sky, it's not the only way to value a dealership, right?

Todd Berko:

It's not the only way to value a dealership. Um, there's other methods, you know, there's return on investment, there's multiple of EBITDA, which all the private equity people use. Yeah. There's multiple of EBITDAR, which is how public companies are valued. All these things go into it. They all follow the same tenants, though, which is what do I earn now? What do I think I'm gonna earn in the future, how easy it is to get to my earnings growth, and how predictable my earnings growth is. But one thing uh that the uh return on investment and other methods do that Blue Sky, they take into account working capital requirements, and Blue Sky doesn't. So it's a good thing to actually do your initial negotiation in Blue Sky, but you should look at the other methods.

Jim Fitzpatrick:

So using different valuation methods obviously will yield different results, right?

Todd Berko:

Well, that's interesting. Uh we've actually done the high school algebra required, and you can actually get them to be almost identical. If you make certain assumptions about working capital requirements, capital improvements, asset turnover, and that's why I like to use multiple methods, because each method has its strength, strengths, excuse me, and weaknesses. So if you look at them all, plus you match it with what your buyers want to look at, that gets you the maximum price. Because sometimes your best buyer may be a private equity firm that wants to get into the businesses and willing to pay a premium, but they look at multiple of EBITDA. And so you have to focus on that for them.

Jim Fitzpatrick:

Sure, sure, sure. When discussing valuations for a particular franchise, obviously I've spoken to a lot of people in the industry, dealers and advisors and what have you. Many people do quote blue sky multiple, seems to be the go-to, as I mentioned. Um are you saying that that's just not accurate right now?

Todd Berko:

No, it is accurate. And I like what what I see in value- in negotiations are you'll do the letter of intent and you'll do it as a multiple of blue sky. And remember, multiple of blue sky captures the same thing that the other ones do. Like I said before, what it earns now, what it can earn, the growth, what the predictability of that growth is. It's all captured. You know, we use a shorthand in this industry: Mercedes, BMW, Chevy, Toyota. And really, when you do that, it's really what you're saying is what do these brands grow at? What is my potential? And that feeds it back. Um, so it's always good to do it. And you also have to remember these other things, working capital and other investments, they may be a part of the negotiation later on. So you're gonna drift to those valuation methods as the as the buyer figures out how much cash he really has to put in the deal. So you you have to actually look at all of them all at one time.

Jim Fitzpatrick:

Gotcha, gotcha. What speaking of which, what is the market like right now?

Todd Berko:

I think the market's strong, and I think it's strong for a couple of reasons. As you know, um I monitor what the blue sky multiple are the public companies. So I do believe in blue sky, obviously. Okay. And that has been trending upward uh since the pandemic. Uh obviously the earnings were high in the pandemic, which depressed blue sky multiples. But now, you know, they're pushing seven times, which given their port a lot of their portfolios, is a good, a strong valuation. Um and the other piece you have to remember is is that a lot of the buy-sell activity is non-economic. So if I'm a dealer, I'm getting older, my family situation changes, what I want to do with my life changes. So I may be wanting to sell. Now, when I sell, I want the maximum price. So there's always deal flow coming in. So I I think there's always it's a healthy market right now.

Jim Fitzpatrick:

Yeah, yeah. If I'm a seller right now, listening to you have this discussion, um, and and I'm thinking I want to either sell now or I in the near future, what should I be doing right now? What should I be focused on?

Todd Berko:

Well, I think one of the things that people don't focus on is documentation. And the reason why I stress that is you'll go into a dealer's office and he'll explain, well, you know, I made $2 million and I have another $500,000 of ad back. If you can document those adbacks, they're much more likely to be accepted by the buyer. Okay. So if, for example, somebody identifies something and then I can identify it in the accounting statements and I can point right to it, then the person's going to agree to it. But if I start saying, well, you have to look at it as an American Express bill or this or that, it gets it's too much brain damage. Yeah. Then he doesn't want to go through it.

Jim Fitzpatrick:

Right, right, right. And the ad backs, the ad backs for every dollar, you could be getting up to seven back. So I mean that's something that's should be focused on.

Todd Berko:

Well, actually, it depending upon the franchise, up to ten.

Jim Fitzpatrick:

Yeah, yeah. Yeah.

Todd Berko:

I mean, and it's, you know, it's it's not insignificant. And you also, when you do add backs, you want to make sure that you're realistic. You know, adding back um your wife's salary who doesn't work there, I mean, that's perfectly acceptable, or your boat or your plane. But you don't add back uh the Christmas party and say, well, I really don't have to throw it. You know, you can't, you can't, you you gotta be and also you really want to limit it. You know, once you get past a certain list, the guy just starts scratching his head and going, how much more do I have to go through? Again, simple is better.

Jim Fitzpatrick:

Would you would you add back in um payments on loans that that would be would be cleared up in the transaction? I mean, if I'm paying $30,000 a month on either interest or a loan payment, but that's going to be cleared up, that would be an ad back, right?

Todd Berko:

Non-floor plan interest is always an ad back. Because you have to remember the multiples that everybody focuses on assumes a dealership that's debt that has no non-floor plan debt.

Jim Fitzpatrick:

Right.

Todd Berko:

So therefore you add you add that back. You know another ad another clear ad back is um amortization if amortized good amortization of leasehold improvements if you own the real estate. Okay. So um non-cash charges in general, you can add back. One adback that people don't talk about a lot is taking your depreciation and moving it from tax-based to uh to um uh uh gap basis. So if you do straight line depreciation, your depreciation number may go down. Again, every dollar you save, maybe five to ten dollars in extra value.

Jim Fitzpatrick:

Yeah, yeah, that absolutely, no question. There's and obviously with some dealers out there, they get their store so tidy to sell, it's kind of like your home, they end up keeping the store. Does that ever happen?

Todd Berko:

Oh, unfortunately, unfortunately it does, because you know, all of a sudden you realize how great your store is and why do I want to get rid of it?

Jim Fitzpatrick:

I mean, right.

Todd Berko:

I mean, that that's a that's a big piece of it. Um, you know, sometimes we do our job too well.

Jim Fitzpatrick:

Yeah, yeah, exactly. I a friend of mine hired, he said, I want to sell this year, so I brought in a hired gun. I know I'm paying too much for the guy. He used to run the store. He came from my one of my competitors. He was knocking the cover off the ball there. I was able to get him. I hired him. We got the store fixed up, the place looks great, I'm ready to sell. And he and I said, Hey, I saw him eight months later, I said, Hey, did you just sell? And he goes, Sell? Are you kidding me? This guy's making more money than I've ever trapped up before.

Todd Berko:

Oh yeah. Oh, oh, oh, oh, yeah, oh yeah, that's definitely true. That's definitely true. You know, obviously, you know, the other part is that you get it going and the price you think it's worth all of a sudden goes up.

Jim Fitzpatrick:

Yeah.

Todd Berko:

And you say, you know, and or or my son, who wasn't interested in being in the business, now sees how much money he can make versus being an a an accountant or a lawyer or whatever, goes, I want to be in it now. Right. You know, it's all that.

Jim Fitzpatrick:

Changes everything, right?

Todd Berko:

Well, and you have to remember when you bring somebody else in, there's less of there's it's more likely to change more quickly because the existing dealer, there's been the guys who work in for 10, 15 years, he's been to their family's weddings, yeah, he's been part of their social fabric. And then to call them in and say, you know, after 20 years, you're not really doing it anymore. Yeah. I have to get rid of you, that's that's an emotional toll some people don't want to take. But a new guy comes in, he cleans it up, and all of a sudden it's running smoothly, is it easier to operate?

Jim Fitzpatrick:

Absolutely.

Todd Berko:

And the guy gets energized.

Jim Fitzpatrick:

Yeah, that's right. That's right. No question. Hey, let me ask you, with all of the headwinds that we see out there, I should I should say the uncertainty right now that's out there in the marketplace between tariffs and affordability out there that we hear so much about and some of the craziness that's coming out of, I'm gonna say, not the White House, but Washington, D.C. as a whole, uh, just came off of 40-some days of a government shutdown. Um, what kind of an impact does that kind of an environment have? Are dealers sitting on their hands right now going, I'm not gonna do anything, I'm not gonna buy, I'm not gonna sell, what or or or does it not?

Todd Berko:

No, the it does have an impact. They're becoming more cautious.

Jim Fitzpatrick:

Okay.

Todd Berko:

I would say that. They're becoming more cautious, but you've got to remember the difference between a dealer and an investor, let's say, in the stock market is these are long-term assets.

Jim Fitzpatrick:

Yeah.

Todd Berko:

You know, you can say we've been through ups and downs for the past 20 years, but if you owned a Mercedes dealership in Florida, you'd be a pretty happy guy living through the ups and downs. So these people have been battle-worn now. They're timing, they may, they may be a tougher negotiator, they may use it as an excuse. Um but you know, we'll work it out. Because think about it this way affordability is a problem, without a doubt.

Jim Fitzpatrick:

Yeah.

Todd Berko:

Well now used cars become more important. Service becomes more important. You know, to focus on these businesses just as new car, just as new car businesses was something that, you know, the public did 10 the public investors did 10, 15 years ago. But these are multifaceted businesses.

Jim Fitzpatrick:

They really are. Yeah, no question.

Todd Berko:

So there's that, it's just like, you know, I mean, five years ago you were interviewing people saying, well, sell your car dealership. People are gonna take they're gonna get their uh self-driving electric car, is gonna pick them up, take them to work, and then another electric car is gonna take their wife shopping, and we're not gonna need dealerships anymore. And what followed is ten years of tremendous profits.

Jim Fitzpatrick:

Right, right.

Todd Berko:

So You're right. You know, uh I'm not gonna I I'm not a suitseer, so yeah, I just thought this has been a good business, and people gotta get from one place to another.

Jim Fitzpatrick:

That's right. Let me ask you this before you leave, and I appreciate all the time you've given us here. Um let's talk about two franchises that in the last you know couple of years have been troubled, and that's the Stellantis group and also Nissan. What where where where are you on on those two items? I mean, if you get a uh are are they selling? Are they people buying them? Are they feeling good about Nissan? Are they not? What what what's the deal on those?

Todd Berko:

There's always opportunity. You know, um I've been valuing a lot of uh Stellantis dealerships recently.

Jim Fitzpatrick:

Yeah.

Todd Berko:

And yeah, they're having a tough time. On the other hand, if I'm a used car, if I'm in the used car business, I want a new car franchise because it gives me more credibility, it gives me access to the you know, to the productive. So all of a sudden now, maybe it's not another dealer, it's a um it's you know, it's a used car guy. Or now a GM can afford to buy it. You know, their prices have obviously sagged, yeah, but that doesn't mean there's no buyers for them. Um and then you have to remember the sellers go, well, you know, I just bought a Hyundai store and that's on the rise. I want to fund that. Maybe I'll sell my Nissan store. I had a good run with it.

Jim Fitzpatrick:

Yeah.

Todd Berko:

Maybe it's time to move on. Yeah. There's all this portfolio, portfolio movement going on. Yeah, so the you know, there's always a buyer. Um, I'll give you a perfect example. I mean, we've sold in the past 18 months three or four Mitsubishi dealers, you know, and at good multiples too, because there's people who want the who there are people who actually like the brand. Yeah. And there are and there are people who see it as a path towards greater things.

Jim Fitzpatrick:

Right, right. A friend of mine just acquired a Mitsu store, and um, he's doing great with it, and uh, he's focused very much on used cars. There's enough cars in service in his uh PMA that he's doing pretty decent with, and um and he's feeling very good about the future. Listen, it's not a Toyota store, as we know, Mitsu is is not a very high-volume store, but he's crushing in on used cars and and uh and he's feeling good about it. To your point, it's his first store, and that's probably a great place to start if you've got limited funds. And you know, once you get your foot in the door of being a new car franchise uh dealer, then who knows, you know, what what opens next, right?

Todd Berko:

Well, let me put it to you this way. I have an acquaintance or a friend in the car business. He started out as being a counterman in a Buick dealership 35 years ago. Now he's got every toy he wants, and he's doing rather well.

Jim Fitzpatrick:

Yeah.

Todd Berko:

So you you just you know, sometimes you just gotta get on the field.

Jim Fitzpatrick:

That's right. That's right. That's a good way to put it. Todd Berko, co-managing partner at Bel Air Partners. Thank you so much for joining me on the show once again. Very much appreciate it. I know our dealer community will get a lot out of your visit with us. So thanks so much.

Todd Berko:

Thank you very much. I really appreciate your time. Thanks.

Jim Fitzpatrick:

Thanks for watching Inside Automotive with Jim Fitzpatrick.