#129 - What's The ROI Of Your Dealership?

You are listening to the Independent Dealer Podcast with hosts Luke Godwin and Jeff Watson. Thank you so much for tuning in. Let's do this.

Hey, everybody. Welcome to this episode of the Independent Dealer Podcast. Luke. Today I'd like to go through a little ROI exercise, a little return on investment exercise. We're going to do some numbers, try to keep it super simple for everybody. We've also got the YouTube channel that you guys can follow along. We'll have a little spreadsheet there where we can do some numbers as well.

You do spreadsheets, Jeff?

I'm an amateur compared to you.

Oh, I didn't know that. Hey, but hold on. Didn't we have a big change at NIADA last week?

I think there was some news what happened.

So, you know, hopefully everybody's members here, but Steve Jordan decided that he wanted to branch off into a different career path. And I think it was announced late last week. Is that right?

Yeah. So if you guys don't know, Steve Jordan, president of the national association CEO would be the CEO is the title. Okay, CEO. And he's been at it for six years or so.

Yeah, I think so. And before that he was I guess CEO in training or something to that effect for probably another two or three years. So he's. He's been with the association for, I would say 10 years. Before that he was with the Florida Association. But a lot of change since Steve got on board. And I think we'd be a little remiss to not mention it and to talk about, you know, some big purchases they made along the way. With him at the helm, one would be buying the 20 groups, which I think you and I are big proponents of.

Yeah, they bought out Ledham. Correct.

They bought out Ledham and with that came lead them had one of those conference. Now, I'm not sure how many people out there attended that conference, but they had one. And also the purchase of nabd.

Right.

I think that might be the bigger purchase. You know, people won't think about it a lot, but you know, there was two really big conferences competing against each other for dealers money, you know, in the spring and the summer during most years. And bringing that together really, I mean, honestly saved a lot of money for the dealer because, you know, there was a lot of people that went to both shows. And I really think it's been a good thing for the association, the things that Steve put in place.

Yeah, yeah. He's obviously a charismatic guy. And the association in general we love because of its support of the used car Dealers. Right. I mean, they are our voice in Washington nationally. And then of course, you guys need to be involved with your state associations, too. So he went to CAR Global.

CAR Global, which owns Trade Rev Adesa afc. And I talked to him yesterday, and I believe he's going to help, hopefully help with the development of the products they already have. It seems like CAR has been for a long time. Kind of they would buy things and maybe just kind of let them go and didn't understand really what the dealer needed. And I think Steve's going to. He's going to be a good liaison between CAR and the dealer because he's got so many contacts. So I think it'd be a good thing. But, you know, you mentioned something a second ago about how the association really helps with the governmental side. And what's great right now is that our friend, I mean, he's been on the show so many times. Sean Peterson is. He's running it right now. And hopefully Sean will be. Hopefully Sean will be the new guy. I don't know how that's going to play out, but Sean's loved by us, that's for sure. And Sean's done some really great things for the association, and I'd like to see him get an opportunity at it.

Yeah, the hunt's on for a new CEO. And Sean sounds like he's gonna throw his hat in the rings that were you saying?

He's putting his hat in the ring, I believe. But actually when they released it, they released Sean as being the interim. Interim CEO. So, you know, hopefully it's his job to lose a great guy. And I think he and Steve are two different people. But, you know, it's good to see Sean getting the opportunity to start with. I know he'll do some really good things.

So out of straight curiosity, is it the national board on that or who is it like a election process? They draw straws.

So I would assume the executive committee has got a committee going forward. Hopefully. That committee is very diverse. I'm not so sure that it is what I've heard so far, but I think that, you know, the executive committee is the one that would be doing the hiring is what I would assume. But hey, we're all. We're all board members. We're all members of the association. So if anybody has an opinion out there, you really should reach out to your. I guess the best way to reach out be to your state VP or your regional VP to really voice any concerns that you would have on who should be hired and how the association is being run.

Yeah. Yeah, that sounds like. Sounds like a good place to get involved, and we're excited for them. So good news. Good news on the horizon. Luke. What I wanted to cover this week, and I hope everyone can stick with us through this, I want to talk about ROI of your car, your car dealership's cash, right? I think so many times as dealers, we look at our investment in our dealership and we just kind of run along with it, right? We just kind of go. And every so often there might be a conversation about, like, well, you know, commercial real estate is good, and I would much rather be in that. Or, you know, how has the stock market done since March? You know, say you had cashed out of your dealership completely and bought in at the height of COVID What kind of a return would you have gotten compared to sticking it out with cars? And I feel like so many times we have so many metrics that we measure in the dealership, you know, cost of goods sold, gross profit, net operating overhead. We never really look at it like, what is your cash return on your dealership?

You know, what's funny is I think we get caught up in all those metrics, but those metrics done properly, should give you, I would think, in the high 20s to 30s on ROI. And I don't know, I think you've run some numbers here, Jeff, but I have love that.

Guess that's fun for me. What do you think your return on investment is at your dealership? And I want all the other dealers to think that, too. We know that you in the stock market, if you're getting around 10% year over year, that's a decent return. If you're in real estate, you want to be getting 10 or more on a commercial property or a triple net or something, right? So from your dealership, you got to think, well, man, I've got to be in the 20s to 30s, right?

You would think so because the risk is pretty high. So, you know, it's really higher than probably the stock market. The risk is. And it's probably. The risk is probably higher than real estate, I would think run properly, you should be high 20s, low 30s on ROI is what my thought process would be. Okay, so probably in the 40s.

Yeah. What I want to do is I'm going to super simplify it and I'm going to make a handful of assumptions, and there's probably. Well, I guarantee you there's some people out there smarter than me that will be able to find some issues here and help me Correct this. So we're definitely gonna have a follow up episode. But I've done some very simple math to help dealers kind of think this through at their own dealership. So definitely, if you see something we've done wrong or an assumption that I've made that's inaccurate, send us a message. You know, please let him email me. Yeah, yeah, definitely. Because I would argue that our ROI is much, much, much higher than that. And here's how we're gonna get there. So I'm gonna share this screen with everyone on YouTube and we're gonna walk through the math for everyone that's on the podcast. Right. So I want everyone to pretend you see my screen. Luke, it a little teeny.

I like a lot more colors in spreadsheets.

I know, man, I'm sorry. I'm gonna bring it down here so I can actually see it. Okay, there we go. So I did super simple. If you see my left hand column, we're gonna talk about your dealership. And you have one car.

You. Jeff. Jeff. I'm actually. I'm seeing it looking at your idms now. So you.

Oh, okay. I'm gonna go back screen. Well, you don't want to see that because there's nothing good there. A bunch of losses. Okay, well, now I lost it. Okay, so what I'm gonna do is show you guys that if you are a single car dealership, you're running just a single operation, right? You're only able to sell one car at a time. You've got $10,000, one car, $10,000. Right? You go buy that vehicle. It's frontline ready, it's 100% clean. You have it shipped to your lot, all in. You're into this thing, $10,000. Now you sell it. You have tax, title, license, registration, and for simplicity purposes, Luke, we're going to say that that is covered by your cash down. So I don't know what your tax, title, license, registration is. It doesn't matter. Your cash down is going to cover any additional cost. So now you are still into that car, $10,000 cost of goods. What would you say? I mean, gross profit on that thing? I think benchmark is about 30%, Luke.

Yeah, it's pretty close. And we're talking about. Are we talking about buy here pay your deal. Are we talking.

Not at all. We're not talking about here pay. I'm going to take buy here pay here completely out of this because I feel like that SC Skus, it's a unique model. Yeah, we're just gonna Talk about flipping a car over and over and over. You're gonna have about a 30% gross profit. That's the benchmark. Yeah, completely. You sold that car for $13,000 front and back, your $10,000 car investment. Now, obviously, you're gonna have some fixed and variable costs. That's, you know, keeping your lights on, your insurance, your overhead, any, you know, that person you had out there spinning the sign, which I think the benchmark for that is around $1,200 a car. Luke, that might be a little low, I think, for some of us, I think. So we're right around $1,200 a car. So we're gonna say our net profit is about $1,800.

Okay.

Which is about where benchmark is 18%, right?

Yeah.

That's about the net profit per car sold. Now, here's the kicker. That's one flip, right? I had the $10,000. I flipped it once. I had an 18% return on my money. Now I'm gonna do that multiple times in a year.

Well, you hope you are.

My inventory turn benchmark is about 5.9, so about six turns a year, which is what, every two months? Yep. So if I flip that $10,000 every two months at an 18% return, that means I'm going to have my 18% flipped six times. And if I'm doing my math right, that is 108% return annually.

That sounds like. That sounds pretty good.

So super simple math. Go ahead, Luke.

What you're not accounting for is the ones you lose on, because you're not gonna. You're not gonna replicate that every time.

Exactly. So let's. I mean, take that even slimmer. Say, hey, man, after I, you know, my average flip, I'm not getting an 18% net profit each time. I'm really only getting a 10% net profit each time, but I'm still flipping that six times. That's still a 60% return annually on that $10,000 that you're flipping. Flipping, flipping. Right.

Yeah.

Not to mention now we've reinvested our initial capital, and now we're doing that with two cars every six months, you know, every two months.

But every time you do that, your. Your. Your probably overhead goes up a bit.

Yeah, yeah. And all those variable expenses kind of change and obviously volume. And now you've added a third salesman, and blah, blah, blah, blah, blah, so. But what I wanted to illustrate for dealers is, obviously, we've got the downside where we've got the headache. We've got income tax that we're going to have to pay on that, as opposed to on my right hand column, I have just a basic rental house. So say you put your, you know, you went out and bought a rental home. Really, after all said and done, I won't walk through these steps with a modest cash flow. Your cash in deal, your inventory turn, you know, your amount of rent you make each month, you're about 12%, which is really, for any of my real estate. That's about what I expect to see is a 12% return. Now, that doesn't account for the fact that I've got depreciation, I've got appreciation, so I've got some serious tax savings that's going to help me out on the real estate side that you don't really get on the car side. But when you're Talking about a 12% return in a rental home or a commercial property compared to a 60% or 100% return annually selling cars, I mean, Jeff, we're in a pretty darn good business, Luke.

I agree. And is there a difference, you know, and this may be going off on a, on a different tangent, but do you see a difference in. And it being commercial property versus residential when it comes to. Because I'm just, I know that we're not taught, we're not, we're not here to talk about the rental property business, but is there a big difference in the rate of return there?

Yeah, from my standpoint, and definitely with my properties. And it's all, it's so much of it is different based on region. You know, there's a lot of places where, you know, you're gonna pick up a home and you're looking at the 2% rule, which is if I buy a $200,000 home, I need to get 2% for my rent. Right. Which in my area is absolutely unheard of. If I bought a $200,000 home, I'm barely. I mean, I'd be lucky to get a 1% rent. But when you scale up into multifamily, then obviously you've got the economies of scale that start to duplicate. You know, you're not. You might only make two or three hundred dollars per door, but you've got 50 doors on your commercial property. Okay, so that's going to help. The other thing that's going to hurt you on your ROI is, you know, from a commercial standpoint, your interest rates going to be higher, your, your amortization is going to be a little bit shorter, 20 to 25 years. So really, at the End of the day, what you're looking at is cash flow. What is my take home cash flow? Just like we do with our. Or we could do with our car lot. Right. If we had a very simple model. If you're not throwing in flooring lines, and if you're not throwing in buy here, pay here situation, you could look at it a very simple, I had one car, I flipped it in two months. I took home $1,800 cash flow from doing that.

You know what's funny is I think that's how people get sucked into the car business. You know, it's a hobby to them. And on the side, they may be buying five or six cars a year and curb stowing them or flipping them. You know, they. Next thing you know, they took that $3,000, they first invested it, and then they have $20,000 and then they decide to get in the car business and it all goes downhill from there, right?

Yep. Yeah. Isn't that so funny? I think, I do think that a lot of us turn hobbies into headaches, you know, and you come into this because you enjoy cars or you enjoy people, and then you wake up one day and you realize you've got this big old mess on your hands because maybe you're not an operator, maybe you're not a business owner, maybe you never intended to get 30 or 50 cars a month. And we know a lot of really great successful dealers that they operate as a single person, you know?

Yeah. I mean, there's something to be said about those people. It's easy, it's simple. Now, you know what happens a lot of times is you start there and you want to grow and you get bigger and then you end up not making as much money. Right. You made more money as one person. So that return is interesting. That ROI is interesting. I'd be willing to bet you the more times you do that it looks like you would have a bigger number. But I'd be willing to bet you it shrinks as you grow. The ROI does.

Yeah. It'd be really interesting to see where that economy of scale is if you ran this out on a long term model. And I think we know that it's very easy for us to do. And I think I even plugged mine in for a minute, kind of looked at those based on my year to date. And yeah, I was not anywhere near 100. And I think I was more in the 60 to 70% ROI when I took my 12 months of gross income, net income, operating overhead, and then compared that to My cost of goods, which now it's completely separate. When you throw in something like a flooring line, because you're not actually looking at a cash on cash return. Not a lot of dealers actually put cash into their flooring line. They're leveraging their flooring lines to make money, and they're just paying that as an expense, you know, and that's.

Yeah, that's interesting because you didn't, at that point, you didn't leverage your cash. And I wonder how do you wonder how you figure an ROI on that if you don't. If you're actually not putting in the cash?

Yeah. Well, you would look at it, I would think, just the exact same as a real estate deal. I can put in $50,000 and buy a $200,000 property. Right. I'm not putting up $200,000 to buy that property, but I get all the benefit and I just pay my banker a little percentage, you know, a 5 or 6% interest rate on that 200,000 that I borrowed from him by only putting up 50 grand. And I've never used a flooring line, so I don't know. But I think that's a similar situation with flooring line. Right. You're basically using the bank to leverage your inventory to make money. Now, if you're talking about your cash on cash return, you're much, much higher.

Right.

You know, flooring lines get a lot of bad rap, though.

They do. I mean, they're expensive. I mean, it's, you know what happens. And we won't go really off topic, but we will, just for a second. But what happens is, you see. Oh, well, it's. They're charging me 7% or 8% or whatever it is. Well, the next thing you don't. You don't put in all the other little fees. You know, every time you purchase a car, it's $75.

You.

Every time they send you a title, it's. It's $25. Every time they have to come and do an audit at your lot or you have to send in audit payments, it's $95. Then you didn't sell that car, so then you got to redo it. And you know. Yeah, all these little fees, you just get feed to death. And it goes from being 7 or 8% to being 12 and 15%. And that's where people get in trouble. And it's.

And it's a cash flow, right? What happens when they hit you with curtailments and now all of a sudden it's a cash Flow hurt, you know, because you've got to pay those things down out of your cash on hand.

Yeah. You know, I. I never had a floor plan. And then several years ago, we were sitting at a 20 groove meeting and everybody in there had a. Had a floor plan. I said, well, we're trying to retail some more cars out. I'll try it out. I got one. I got one from an afc and we used it for about, I guess about two or three years. And I would run it up at the end of the year because I was buying cars for taxis, and that's really the only time I used it. And I look back at how much it was costing me, and it blew my mind. I mean, just I looked at how much better or worse we were doing because of it. It didn't affect our business one bit. And so I didn't. I cut it off. I said, you know, this time last year or actually a year and a half ago, I just said, I'm done. And it saved me a lot of money. So, you know, people need to take all those things into account because I'm not saying. I'm not saying you don't need a floor company because there's a good use for them, but make sure you look at all the fees when you're. When you're in it.

Yeah. And to that point, Luke, there's been so much talk, I think, about dealers looking to take on debt to grow. Obviously, there's strategic, you know, plans for that. But I think with this exercise, it shows the car business is good, slow growth is okay, you know, slow and steady. There's no reason to get crazy and burden yourself with flooring lines and lines of credit and, you know, things like that. When. If you just stay the course, making 60 to 100% ROI each year, it's not going to take you long to where you've got your whole flooring line. You know, all your inventory is paid for with cash. You're able to double down, reinvest that into your buy or pay here portfolio, if that's what you're doing. You know, things like that. So that's what I love about this exercise. And it really helps me just to come back home and say, hey, man, yeah, I could suck some cash out of the dealership to go chase that rental property or that commercial investment. But that really the best use of my cash right now, where I'm young, I'm energetic, I'm not looking to set sail anytime soon, man. Keep it in the dealership, you know, take A little bit less on your, on your salary. That's another huge argument, man. If I paid myself a little bit less each month and I was able to reinvest that in the dealership and inventory and not have that flooring line, and I flipped that every two months, yeah. I'm going to be able to pay myself double at the end of the year or at the end of 10 years. Yep.

And that's. If we really want to talk about something that has good roi, let's talk about our friends at Dealer Re, Jeff, because they. Yeah, reinsurance is really good roi, man.

Well, what's the beauty of that? And if people don't know, of course Dealer re sponsors us. Go back to episode 19. Listen to Tim. It's a great product. But the beauty of that is we've got 100% ROI in this business. Guess what, though, you. You're in a 30% fricking tax bracket, man. That sucks. So you may have made really great money, and we're showing that you've got a $10,000 gross profit at the end or net profit at the end of the year on your $10,000 investment. But when you got to pay 30 grand of that to taxes, that hurts. So when you've got a reinsurance company, you're able to legally take a line item expense for your warranty products, right, Luke? Your service contracts, your gap, your other cpi, if you're selling it, those types of products are line item expenses. They come out of your right pocket, they go into your left pocket, tax deferred.

And you know, the other thing there is, if you're selling service contracts and things like that and you're letting another company make that money, this is a way for you to make that money. And that's, you know, again, when you can keep the money to yourself, there's just a lot, there's a lot of more money to be made. Just that ROI that we were just talking about, it goes up dramatically. So I think this is, this is just a way for you to bring so many things into your dealership that will create wealth. It creates a tax haven, and it also creates a way to treat your customers like you want to be treated. Because when you sell a third party warranty, guess what? Yeah, they, they deny these things all the time. I've got a service department and we won't even deal with third party warranty. Those are so bad.

They're in the business to make money. They're. They're in the business to make money. So why not make it your money, that's. That just. It absolutely blows my mind that I spent. I mean, I Never really sold third party warranty companies, but a few for the last 15 years. But when I see dealers that are like, who's the best warranty company? Blah, blah, blah, I'm like, are you crazy?

They're all horrible.

They're all horrible. Now if you're just reserving on your own for a warranty or a guarantee, make it legal, take the deduction, you know, call the guys at dealer re. But Luke, what I want to drive at the point we want to drive home with this episode is guys, the car business is great. You know, the car business is booming. We've got some headaches, right? I mean, it's not all fricking cherries. Luke's. What are you, like 25? And you look 45? I had so much hair when I started this.

He had a full head of hair. It was like down to his shoulders.

We've got some headaches, but we got to stay on the positive side and look at that return, look at that long term growth. And to the point, don't run yourself ragged. And that would be my call to action or my warning for some of the single owner, you know, one or two employee type operators, you know, look for those opportunities to live your life, you know, have that lifestyle a little bit that, not that you've got to go be crazy, but take a Saturday off, you know, what's it going to cost you to have a part time salesman come in and fill your space or to hire a salesman so that you can free yourself up to focus on some higher level stuff or take the week off with the kids, it's gonna cost you very little. And if you're the bottleneck in your dealership because of those reasons, because you don't want to be there on a Friday afternoon or the doors aren't open on a Saturday, you know, look at those opportunities because when done right, you're making good money.

Hey, Jeff, where does buying your own property fit into this ROI and in charging your company rent?

Yeah, I think from that point, you know, you definitely want to own your own property. It's just like the McDonald's, right? They talk about McDonald's. It's not always about the hamburger. It's about controlling real estate. They control some of the best real estate and I think they're one of the largest real estate holders in the whole world.

Chick Fil A. Yeah, yeah, yeah.

Chick Fil a owns it. I'm not sure if the franchisees of McDonald's own their real estate. Or if McDonald's does, but I think the franchisee does. I know with Chick Fil A, the franchisee does not own the real estate. Owns it. But anyways, yeah, if you're paying rent, you're throwing that money away. That sucks. This is a great opportunity to get in. Now what you're going to do is you're just going to. And again, I'm not a tax accountant, but you're taking money out of your right pocket. You're putting it in your left pocket. Right, Luke? So when you. Your dealership pays you, Luke, the landlord, you're basically deducting it on your dealership side as rent, but you're having to report it as income on your property side, which is okay because you're able to take the depreciation of that property against that income. You know what I'm saying? It's gonna help transfer that overall reduce your tax burden. But then, of course, hopefully you're building equity in a piece of land that you own yourself.

Yeah, I think, I hear so many people talk about renting certain places, and I really think one of the. One of the great things of having a dealership is being able to charge yourself rent in and develop wealth through property as well.

Yeah. And I think we talked about that too in one of those episodes where they say, why would you open a second location? You know, one of the factors in opening a second location, and I had to ask myself this a couple months ago when I wanted to expand to a second location, was, can I buy it? Is there a real estate play in this to say, hey, this is a good location and we're going to make some money there, but we're also going to own the land underneath it that in 20 years is going to be worth 20 times more and be an asset for us long term.

So, you know, with that being said, is there when you're buying. When you're buying real estate or looking to open up another location, do you automatically go to where other car dealers are or do you look for a real estate play? That's. Maybe you're thinking long term. You know, do the. I really think this part of town is going to develop. Maybe I should be there before everybody else, you know, because today you really don't have to have all that drive by traffic like we had to have years ago.

We talked about that. Right. I mean, it's not. It's not. I mean, I looked at my sales from last month and the amount of Walk on, drive by people I had has steadily decreased, I would say. Yeah, like I don't know if all dealers could feel that way but it's much, much more repeat referral, Internet based decisions. So yeah, you might not need to pay the premium to be on car row. You might be able to go to some undeveloped areas. And the beauty about a car lot is you're not building a large infrastructure. You know, you need a thousand square foot, 1500 square foot, 3000 square foot.

Building.

That if you bought raw land and built, it's not a crazy investment up front.

No, as long as you don't have a bunch of crazy city ordinances that make you put in Taj Mahals and a bunch of landscaping and all that type stuff.

Yeah, yeah. Which is the beauty to buying in those outskirts. Right. Maybe you're a little bit out of town where the land's a little cheaper, the restrictions are a little less and then you control a piece of property. And I've said it before, I mean, I don't know if this is going to be a dealership in 20 years where I'm at. Shoot, it might be a frickin Tesla charging station, might be a, I don't know man, just a waypoint for autonomous cars to stop in and get cleaned out. You know, who knows what your dealership will be in 30 years from now. But you own the land underneath it. That's what's important.

Yeah, I think we've given the dealers a lot to think about today and you know, it's really about building wealth and doing what's right for your family. And I think a lot of things we've talked about are some things that people should really, should really write down and set goals for, you know, for the end of the year and the next part of next year to really think about how to, how to do that.

Yeah, yep, do it. Sit down, run your numbers, figure out your roi. I mean what a great way to do that. Say hey, I'm making X amount. This is gonna get me somewhere.

You really have to dig into your numbers too and exactly. We preach the dealers that they need to dig into their numbers and know your numbers and this is a good way to do it. Good exercise.

Alright Luke, have fun down at the beach. I'll let you go. You gonna go get some tan or what?

I'm gonna go get a little darker.

Yep. Nice, nice. Alright, see you guys next week.

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