Merchant Banking

Principal Investing

Presidio offers principal investing capabilities of typically $5 million to $20 million of equity in auto dealerships. We believe that Presidio offers the most acceptable form of equity capital for dealerships because we:

  • Deploy large pools of capital
  • Offer a culturally-sensitive approach with dealers because our professionals are dealer operators and entrepreneurially-minded founders themselves
  • Identify and vet individual general partner investors for franchise approval standards
  • Invest for the long-term
  • Evaluate six components in evaluating our principal investments in an auto dealer: Brand, Market, People, Facilities, Presence, and Cost of Capital / Return on Invested Capital (ROIC)

presidios_process_for_valuing_dealerships

Brand

As professionals in the automotive sector, we have all witnessed the volatility of automotive brands over the years. In 1999, people thought Audi was dead and today it is one of the hottest franchises in the U.S. Similarly, in the late 1990’s, the value of a Ford franchise was roughly equal to that of Toyota and Honda. By the early 2000’s, however, its value had fallen precipitously, yet today a Ford franchise is worth at least double from its low.

Because a brand’s importance to valuation cannot be understated, there are a number of qualifying questions to consider, including, but not limited to: consumer desirability of the brand’s current and proposed products; the manufacturer’s relationship with and commitment to its dealer network as evidenced by advertising spend, sales incentives, warranty policies, product availability, and facility requirements; captive finance arm cooperation; among many others.

Market

The old adage “location, location, location” applies to the automotive retail sector just as much as it does for the real estate business. A comprehensive look at the density and growth rate of the population, traffic patterns, community adoption of specific brands in specific markets, as well as the demographics of a given community, are key factors in determining an ultimate valuation. One must also take into consideration the number of competitors in a given area, as well as the economic health of a particular market.

People

Like so many businesses, the success of a dealership is closely tied to the people who operate it. Investors want to know that either the leaders or employees who have built the business are likely to stay on board following a change of ownership or that investors are able to attract and retain new successful management.

Facility

A dealership’s facilities represent a major investment and ongoing expense for owners. A facility reflects a dealership’s brand and is critical in attracting and retaining customers. When evaluating the impact of the facility on a dealership’s value, we look at how the facility has been maintained, whether it meets the manufacturer’s image requirements, and whether the space is adequate to meet current demand and support future growth. It’s also important to identify any potential issues, such as environmental problems or deferred maintenance, that may need to be addressed.

Presence

Automotive dealerships occupy a unique place in the community in which they operate. Although this is an intangible, it holds tremendous value and needs to be analyzed. Factors that determine the value of this presence include a dealership’s traditional and digital marketing activities, the frequency of its advertising and, importantly, whether the community views the dealership as a good, contributing corporate citizen.

Performance / Return on Invested Capital (ROIC)

Now that we have discussed the more qualitative factors in assessing a dealership, it’s time to look at some numbers. When determining an ROIC, we have to develop pro forma projections and then calculate an ROIC sensitivity analysis. Finally, we benchmark that data against information from previously closed transactions.