WHY TAKING A LONG HARD LOOK AT THE SERVICE BUSINESS CAN NOT ONLY HELP BOOST PROFITS AND STABILIZE YOUR BUSINESS, BUT INCREASE THE VALUE OF THE DEALERSHIP AS A WHOLE
In recent months much has been said about the fixed operations opportunity for dealerships. Both white papers and editorial articles seem to have just noticed that new vehicle dealers do more than simply sell cars and trucks.
Words like annuity and phrases like five-year trailing revenue stream are being thrown around to describe the relationship between the new vehicle dealer and the potential revenues to be earned during the years that vehicles will remain on the road.
Dennis DesRosiers (of DesRosiers Automotive Consultants) recently observed that there will be a significant movement in the age of used vehicles on the road caused by the sales slides and subsequent gains of the past 5 to 7 years. This theory is supported by the increase in vehicle quality and thus longevity and consumer demand. He believes that dealers are poised for a strong period of fixed operations growth.
Jim Bell, regular Canadian auto dealer contributor, has been preaching fixed operations excellence for years. Yet still today, many dealers are not fully capitalizing on their local opportunity. So how do weak fixed operations impact your store?
MISSED OPPORTUNITY
The obvious answer is that you are missing a big profit opportunity. With service margins in the 70 per cent range industry wide and parts margins in the 35 per cent range, it doesn’t take long for the lost profit opportunity to add up. For example, if your brand has an average of $300 CP sales per repair order (RO), the service margin lost would amount to $210 per RO.
If you add a modest parts lost margin at $50 per service RO, for each customer not doing business at your store, there is a lost margin of about $260. For each 100 customers, that 26,000 and each 1,000 customers equates to $260,000!
Many dealers have underutilized capacity. Assuming a normal 10-hour day, a capacity utilization of between 70 and 80 per cent means that the physical plant you pay for as part of your overhead could produce 20 to 30 per cent more volume.
Using 1.5 hours per RO as a very conservative benchmark, most dealers could easily add one more RO to their daily routine. Just adding one more RO per day would add six more ROs per week. At a margin of about $260 per RO, that equates to $1,560 per week and $81,120 per year. Not too shabby and not too much of a stretch.
Wholesale parts is another area of underutilization. Wholesale parts provide additional gross margin to your store by selling to other dealers and aftermarket repair shops. They are going to buy the parts somewhere, so why not from you?
This is not for everyone, but in many cases, dealers will find that there is lost opportunity in their wholesale parts business. However, I believe this is a business of go big or go home. In some cases it might be more advantageous to team up with a number of dealers and you benefit by being able to purchase your parts at a better price. You are not really in the wholesale parts business but you are benefiting from prefered parts pricing that serves to increase the gross on all your parts activity.
For all of 2013, my articles only covered the very important and relevant topic of ownership and management succession issues.
Going hand in hand with this, however, is dealership valuation. How does fixed operations help with dealership valuation?
STABILITY
Fixed operations are the stable part of the business. New and used vehicle sales are the volatile part of the business. Valuation is an attempt to discount future business potential into today’s dollars, expressed in terms of what an informed buyer would pay for your dealership.
As we all know, the industry measures future profits by historical profit times a multiple. That multiple has many components to it. For the fixed operations component, the stronger the fixed business, the higher the multiple and conversely, the weaker the fixed business, the lower the multiple.
Let’s look at a couple of examples. ABC Co. and DEF Co. each make $500,000 net profit. In simplistic terms, ABC Co. earns 80 per cent of its total net profit from new and used vehicles and only 20 per cent from fixed operations. DEF Co. is the exact opposite, at 20 per cent from the retail side and 80 per cent from the fixed side. ABC runs at 60 per cent workshop efficiency and DEF at 85 per cent.
A buyer would pay more for DEF Co. than ABC Co. even though their net earnings are the same. Future earnings are much more predictable and as such a higher transaction price is justifiable. ABC Co. is subject to greater volatility and as a result, is seen as a riskier proposition, demanding a higher return on investment and thus a lower multiple. Not only does a strong fixed operation increase dealership profits, it also increases dealership value.
At this time of year, many dealers have just finished reporting their full 2013 financial results. This would be a good time to assess whether your dealership is maximizing its value.
If you are a standalone dealer and have been in business for a while, we know you are thinking about how you are going to exit the business. In all likelihood the majority will sell to a third party. At this point you are still in control and can have a significant influence of the ultimate selling price of your dealership. If you find yourself on the weaker end of fixed operations, do yourself a favour. Focus on increasing the activity and profits from fixed operations.
USE WHAT YOU HAVE
Measure your underutilized capacity, examine your workshop efficiency and keep track of your returning customer base to make sure it is increasing.
In all likelihood, many of you are also being pressured to renovate and buy into the current facility and image program for your brand. This would be a good time to assess your fixed operations capacity to ensure you are equipped to take advantage of the increase in fixed activity predicted by the pundits. The NADA/CADA Facilities Programs Project Report clearly indicates that increasing fixed operation capacity at the time of a facility upgrade provides you with a measurable return on investment.
As a dealership owner, you should be keeping a regular eye on your valuation. Your annual business plan should be to maximize your value by ensuring that you track the metrics. The fastest way to increase your value is to increase your fixed operations performance. Don’t wait until you decide to sell or even worse you are forced to sell for some unforeseen reason. Take control of your valuation now, not when it is too late to do anything about it.
