Chris Collins explains why chasing gross profit can tank a dealership's actual value. A $1M dealership earning at 8x multiple is worth $8M, but adding $1M in parts and service profit doubles the company value to $16M. High service-manager turnover happens when dealerships push gross profit over owner-focused profit.
We have a situation in our industry where most of the people running the businesses do not have a lot of experience with fixed ops. And so what they say is, get me gross profit. Get me gross profit. Right. But what they mean is, get me profit. But they're not the same. They're not the same thing. Agreed. And what happens to us, because we're a company designed to go in and focus on profit, a lot of times the accounting firms will recommend us to somebody, and what will happen is they say, hey, two years out, I want to sell my dealership. I need to make more profit. Or they will say, hey, you're leaving a lot of money on the table. You should look into these guys and they will make more profit. And then they'll realize the value of their asset is completely different than what they thought before. Right, exactly. And so if you are. And I want to explain this to service managers in the sense that I feel like they get blindsided. The reason why there's so much turnover at the service manager position, which in some manufacturers is close to 50%, some we've seen higher than 50%, but I would say the average is 50%. Why? Service managers, well intended, come in one day and they get fired. And they don't understand why. And it's a trick bag because they've been told, get more gross profit. Get more gross profit.
Which they do.
Which they do. But they do it at the expense of profit. Correct. And so the way that it works in business, and I think a lot of people don't understand this, is if you have a business that is making, let's say it's making a million dollars a year in profit. Right. That business falls into different categories. So if you have a pharmaceutical business, it might be worth 15 times earnings. If you have a Subway sandwich shop, that might be three times earnings. Right. Oftentimes the.
What do you call those, like rest homes for elderly care. Oh, yeah. Those will sell between three and five times earnings.
For a while now, the automotive industry, especially dealerships, truck or car, will sell somewhere between 5 and 10 times earnings, but it usually falls closer to 8 to 10 times earnings. Right. So what that means is it's the. It's earnings times a multiple in every industry has a different multiple. And then, you know, if a lithium autonation comes in, they're willing to pay more than maybe your dealer across town that wants to expand because it's public money and they're. They're more about market share than actually making money on the buy. They will overpay for the long term gain. Right.
Which eliminates our competition and makes it so they buy more stores.
So if you own a dealership and your dealership is making a million dollars a year and you could sell that for 8 times earnings, what is your dealership worth? 8 million 8 million plus assets. So if you own the land, the equipment, the inventory, parts inventory, that sort of stuff. But basically the, you would, you would contend that if you own the parts inventory, you had to put money out, so that's not a real plus plus. Fair enough. Because it's your, it's your liabilities versus your assets, Right. So you had to buy those parts. If you did it with credit, maybe, but most manufacturers don't allow you to buy the parts with credit. You have to have working capital. Right. So your, your business is worth hypothetically $8 million because it's eight times earnings. Okay. Correct. Got it. Now, if we come into a dealership and they're making a million dollars a year on the front end, but service.
Is making nothing or losing in some.
Cases, or losing in some cases, but let's just say they're breaking even for the sake of this math. So we come in and they start making.
We'Ll just say in a year's time, they make a million dollars in parts and service that they weren't making before. Now the, now the company is making $2 million a year. What is that worth?
16 million.
So when a service manager is focusing on gross profit, when it is calculated how much you pay for a dealership, does the, does gross profit ever come up in the conversation?
Never.
If a, if a dealer goes to borrow money to buy land, apartment buildings, or another dealership, does gross profit come into the equation ever? Never know what banks, what buyers. Everybody looks at investors. They look at, what is the cash to the bottom line? What is the profit? Basically the cash flow. What is this thing making in profit? So now for anybody out there who owns a business, if you go from your asset being worth 8 million to 16 million, that is a pretty substantial.
Increase in net worth, is it not?
It's a good day.
Thanks so much for watching this clip.
Of Service Driver Revolution.
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