ROI Guides Also Questioned
BLOOMINGTON, IL A rethinking of the “BlueSky” formula, used by automakers to judge performance of their dealers, has been urged by a veteran dealership CPA, Carl Woodward.
Based in mid-Illinois, Woodward in a year-end report calls on dealers and automakers to reexamine the timeworn methods of assessing the “BlueSky goodwill” factor in scoring dealers’ performances.
The ROI factor, of course, is widely if not totally applied to decide dealer performances in selling stores or determining vehicle allotments.
Pulling no punches, Woodward raises these issues for dealers to contemplate:
- Multiples of earnings can be simplistic and inaccurate unless other factors are considered in the “BlueSky goodwill” analysis.
- For example, BlueSky calculated at eight times earnings results in a 12.5 percent pretax return on investment (ROI) based on the BlueSky amount alone. Woodward spices his findings on the ROI/BlueSky factor with the following examples:
- Reasonable dealer/general manager compensation should be paid to determine if a fair value is being paid for the facilities being used.
- Despite income…depreciation and amortization expense…excess compensation to relatives or other employees of the dealership (should be reviewed)
- Woodward closes his broadside with a stunner: Take a BMW and Ford dealership of the same size and in the same town with reported profits of $2 million and “assume a multiple of eight for BMW and four for Ford. Why would someone pay $16 million BlueSky for BMW and only $8 million for Ford?” “The pretax ROI is quite different. While some brands do carry a premium, paying twice as much for one dealership over another where expected operational profits are the same is a large risk.”
Urging dealers to normalize ROI numbers, Woodward concludes his eye-opener. “But is Ford that less a value than BMW?”