Welcome, everyone. This is Rex Collins. I'm with HBK's Dealership Industry Group, and today's session is The Art of the Deal, Buying, Selling, and Valuing Equipment Dealerships Today. The slide that you see in front of you right now is my very brief bio. I work with dealers. That's all I work with. That's all I've worked with since 1987, and just a little bit about today's session. Today's session is not going to be a math problem. We're not going to be going through a formula for determining value of an equipment dealership. Each dealership is different, and you must know and understand that these differences, some of which are financial, many of which are non-financial, in order to determine the true value of an equipment dealership today. In essence, we have to get into the minds of the buyers and the sellers because ultimately that's what a business valuation is supposed to do anyway. There is something as a dealer that you can count on. You're not going to own your dealership forever. Your business is going to be sold or transferred in whole or in part voluntarily or involuntarily at some point, if for no other reason than upon your death. But whatever the reason is, most often the transaction involving the sale is going to be among the biggest and most important transactions of your business and your personal life. Key to planning your future is doing whatever you can on an ongoing basis to ensure you maximize your business's value, what it's worth to someone else. Another way to think about this is we're going to work with you today on the fact that getting the right value means getting the value right. So we're going to talk about some of the things that impact value in a buyer or seller's mind. Maximizing the value of your dealership starts with knowing what contributes to and what detracts from its value, to understand how valuation works and the circumstances or factors that impact that value. The first thing I'll mention is the economy. Regardless of what you're selling, what lines of equipment you're selling or where you're selling it, the overall economy will always have an impact on what you can get for your dealership. Today, about 70% of our nation's economy is considered strong. Unfortunately, business equipment spending falls squarely in the other 30%, the weaker part of the current US economy. Now, there's been discussion about a Trump bump, and we believe it's real, and your business can be dramatically impacted by this so-called Trump bump, especially if the planned spending on infrastructure gets passed and gets approved and gets implemented. At that point, there's going to be a tremendous impact on the purchase of equipment to accomplish those jobs. So that's a positive impact. So the economy can have a negative impact or a positive impact. A few items of interest also to consider. Right now, companies are not spending on equipment because there's a call in general for these companies to start returning profits to shareholders. There's demands for increased utilization and productivity out of existing equipment, and technological advances have combined to really curb equipment purchases. Economists expected oil and gas industry spending to decline for at least the next 18 months. However, this seems to no longer be true. I'm working with an equipment dealer client in West Texas. As a matter of fact, I'll be going there week after next, and things are booming right now. So the economists didn't quite get that right. Another point to consider is that lower commodity prices are driving down prices for agricultural equipment in the US and worldwide. So if you're in that space, to expand upon that, it's been a very wet spring in many areas, and that's made corn planting difficult, if not impossible, and then flooding has occurred in previously planted areas. But the corn market hasn't really rallied and reacted to this reality. There's going to be adverse effects from this, this wet planting season, if you will, that can only be covered up by near perfect weather going forward, but the markets haven't drawn that in yet, considered it. There are some concepts related to value that I want to discuss. Circumstances play an important role in determining value. For example, some shares of ownership are more valuable than others. That is, minority share of the business will be of less value on a per share basis than the shares that give the buyer a majority interest. Control demands a premium over just getting into the game. As mentioned, the economic environment plays an important role. To a great extent, what a business is worth depends on the economic climate, sorry, local climate, not just the national climate. But values are also subject to the business's marketability, which is impacted by such things as location and competition, and the ability for the buyer to win approval from the manufacturer. And this requires the buyer, among other things, to invest substantial capital, as well as have a good, clean record, a good reputation, and other items. There are a lot of determining factors that impact value, and one of those is comparison to your peers, or to the peer group in the industry. What I've got up here, 13 and 14 benchmarks, these are very high level for, this happens to be for an OPE dealer, each industry has its own benchmarks, and we use that when we're dealing with our dealer clients. But the point I want to make here is, you need to be comparable, you need to exceed your peer group, if at all possible, within tolerable limits. Gross profit per employee, I typically talk about this, and that's just one of the many, many metrics that I use, but the gross profit per employee per month, that's critical. That's probably the first metric in any dealership valuation, or any consulting engagement that I have for opportunities, profitability opportunities, or any consulting engagements that I have relative to the sale of a dealership, is I do that computation, and I want to see where that leads me. The solution may have many results, or many factors that impact correcting a situation, but that's my starting point, and there are many other items that we look at. Some other determining factors that drive the value of an equipment dealership include inventory. Inventory levels are driving dealership prices in certain industries more today than they have for several decades. In particular, used equipment on the ground in the ag equipment business is impacting value substantially in a negative way, less so in the construction or heavy equipment industry, but when we start looking at inventory, bifurcate that down into the rental fleet. In the rental fleet, the utilization and the mix of the rental fleet can have a tremendous impact on value as well. Another item that's impacting value is the revenue sources. A dealership that has several sources of revenue is of greater value than one that's dependent on the rise and fall of one particular industry, so if you just provide equipment to the oil and gas sector, you're going to ride that up, and you're going to ride it back down. You're tied to that, so too is the dealer generating profit from repairs and parts and selling finance, insurance, and other products. The broader our income base, the better off we are, so that's where we consider that, and then brand. What's the sign? What's the flag that you have out front? The rights to sell a market-leading product or products enhances the value of your store substantially. Taking it away from this industry, motorcycle dealerships. There's a tremendous value difference in motorcycle dealerships. If you've got a Harley dealership, that's the flag everybody wants. The value is tremendously high. If you've got the metric, the Asians, much lower value for those. You can look in your own industry. Am I a John Deere dealer? Am I a Case dealer? Am I a New Holland dealer? You guys know what that means there. Same cat, whatever your flags are, so that can impact value. Real estate can impact value as well. The dealership must be in the right location and occupy adequate facilities from which to operate. On the other hand, certain factors will drive dealership values lower. A small customer base is one of those. A concentration of business with one or a few customers exposes the dealership to a greater risk, quite similar to being very dependent on only one industry. Is the business owner dominated? That's a negative impact on the business. The value of a dealership heavily dependent on the owner for customer relationships and management is going to be discounted. Most of the time, the selling dealer is exiting the business, if not immediately, very soon. If I'm buying a business that can't operate profitably without him, I'm going to pay less for it as a buyer. Poor financial performance. I'm finally talking about financial performance here. Poor performance, comparing unfavorably, again, to your best-in-class dealers, as the benchmarking indicates, reduces value. And then a poor outlook. Where the immediate future of the industry or industries the business serves or the outlook for the economy is poor, sales prices are going to be lower. Because it's more than likely that someday you're going to sell or transfer your business, it's critical to address these factors, the ones you can proactively address, to ensure that they add to rather than detract from your dealership value. I want to talk about some stories as we're talking here as well that seems to bring it a little more home, some true life, what's really going on. There has been a flurry of transactions and mergers among equipment dealerships recently. In a fairly recent six-week period this past winter, we concluded six dealership transactions. With banks lending again and offering favorable terms, buyers are plentiful, and we believe dealerships are going to continue to exchange hands in bigger numbers than usual, at least for the next four or five years. While the time appears right, as a buyer or a seller, you need to know what the value is in today's market and how to avoid some common pitfalls when valuing the dealership. In virtually every dealership buy-sell transaction, both the buyer and the seller will require the support of consultants who are experienced and expert in the dealership industry to avoid problems. Still, it is important for owners and prospective owners to understand the key issues and hurdles to address in route to determining the right price. Talking a little bit about these six transactions that we closed, and it happened to be in a six-week period, although we did two in one week and we had one week off. One of those was a stock deal, and five were asset deals. If we would have gone back 10 or 15 years ago, I would have told you all six were going to be asset deals. We're now seeing a lot more interest in stock deals. We're going to talk about another transaction that closed the end of April that was a stock deal as well. We're seeing more and more stock deals. Of those six transactions also, four of those transactions rented the real estate and two purchased the real estate. Quite honestly, that was unheard of 10 to 15 years ago. The dealer always sold the real estate. Now what we're seeing is that the buyers are looking at the real estate and they're saying, I've got to put 20% down to buy the real estate, 20%, 25%, depending on their bank. I'd rather keep my money and buy another dealership with that rather than put it into real estate because my return on investment is going to be that much higher. Let's talk about another transaction that we did and the value of this and how important it is to get that right value. As I said, this is a recent transaction and we got called and the dealer was considering an ESOP. We're not going to talk about ESOPs too much today because it's not strictly on point. That may be a topic for a later time. We were completing the valuation of the dealership and we got done. We provided our valuation to the dealer. As it turns out, the dealer was then contacted by a broker. The broker offered their own valuation, nothing wrong with that, nothing wrong with getting a second opinion. Just make sure that the broker understands your business and isn't looking to make a quick buck if you're the seller. The broker did its study, submitted its valuation and its summary, but instead of confirming our value, the broker's study came in at $22 million less than ours. Obviously, this was a large, large deal. First thing I think is, oh my heavens, what did I do? I've missed something. I took another look at our valuation and our numbers and I said, you know what? I think my number's right. I told the dealer this and the dealer looked at me and said, okay, then find me a buyer. We did. We found two buyers, as a matter of fact. We took the lesser of the two offers financially. We can talk about why at a different time. The deal closed after a couple of months, a few months, and the deal closed actually for a price that was greater than, slightly, than our valuation. What we were able to negotiate was a price that ended up being $23 to $24 million higher than what the broker's asking price was. The question comes up as to, well, why were the two valuations so different and what kind of conclusion on this webinar can we draw from that? Well, first is that dealerships are complex businesses with a wide range of factors that influence overall value. Getting the value right requires a complete analysis of all the dealerships' assets and income sources, as well as consideration of a variety of internal and external economic factors. That is, an accurate valuation requires an intimate understanding of today's dealership business, both financial and non-financial. Some of the things to consider, again, are that inventory issue that could weaken values or strengthen values if you've managed it right. Corporate relationships are important. Sales effectiveness is vital. Customer satisfaction index scoring, how happy your customers, what your repeat customers are, are very, very important as well. Moving forward, buyers and sellers both need to be aware of how transactions are being framed in today's market, so we're going to talk about some of those, the language we actually put into a letter of intent and so forth as we move forward. What kind of due diligence needs to be done and how to avoid some common pitfalls. Even a small mistake could cost big, big dollars if we do this wrong. There are many, well, let's talk about some of the bullet points that are on here, okay? Comparisons to other dealers. We talked about that when I talked about the benchmarking, so we're going to do that. The market area, do you have the right product to match the demands in your market area? What may be a highly valued market on the East Coast, in the West, may be of no value. What's the difference in the equipment that's being represented and sold? Your market area, does it match the next point, which is the manufacturers that you represent? Then involvement of key management. Will there be success if you're not there? If it's all about you, again, the customer relationships are too closely tied to the owner or upper management. Those customers are at risk, which reduces the dealership's value. We know also that the manufacturers are pressuring dealers to get bigger, and that's a factor to consider, whether gifting or transferring, buying or selling, only a comprehensive valuation that considers the economy, the market, and the complex network of issues and activities that drive dealerships will ensure a transaction that is fair or a valuation that is fair and in the interest of everyone. Stock versus asset deal. We talked just a few minutes ago about the impact of that there are more stock deals now being even considered than in the past, but still, by and large, the transactions are asset deals. The value of the business may be the same ultimately under a stock versus an asset deal. The value of what the dealer gets to retain ends up with is in his pocket, if you will, but here's the difference. The structure, and because of that structure, the net proceeds can be quite different, and we need to plan around these items, and as the dealer once said, it's not about what you make. It's about what you keep that counts. Buy-ins and buy-outs. We're seeing a lot more buy-ins, whether it's a structured merger. We did a deal not long ago that the buyer and seller, it was intended to be a buyout, a complete sale, an asset deal. Buyer and seller couldn't reach terms that were acceptable to everyone, and so what we ended up doing was moving that to a merger transaction with a structured buyout over time, and that's gone extremely well. We're a year and a half, not quite, into it, and it's gone extremely well. Obviously, the proof's in the pudding, and when we get the entire thing bought out, we'll absolutely know. The other thing that I want to mention is, if you were talking about structuring a deal that works, we've got a client that I worked with, and this is a very short story, but I think it's impactful. I've got a client, they are actually working with another client that's in a very, very similar situation, that's two brothers in the one story, but in the story that I want to focus on, it's a single owner, owns a dealership, owns the real estate, in a dying community, not a real strong market. He's got a job, not a business, if you really think about it, and there's very little market cachet, very little demand for this business, the dealership that he's wanting to, going to have to get out of, at some point. A few years ago, we met with him, and when we met, talked pretty bluntly, which you'll find that we do, and said, look, you don't have a successor, if you're going to retire in 10 years, you're going to end up stuck with this thing, and if you can't find a buyer for the business, you're not going to find a buyer for the real estate. Your entire wealth, basically, is tied up in this business, and you have no way to end the game on it. The dealer actually initiated the call to us, so this wasn't something we brought up out of the blue. What we did for this dealer was, I looked at him and said, look, we've got to find you a successor. What we did was, we went out, and we actually found Scott. I knew Scott, and I brought Scott, introduced Scott to the exiting dealer, and Scott came to work, all with the intention that Scott will ultimately be the dealer. We started dating. Scott went to work for the dealer, making sure they could get along. Then we got engaged. We talked about the structure. We put more framework around what we were talking about, as far as the buy-in. Now, Scott doesn't have a lot of money. In the dealer's eyes, Scott doesn't have much money at all, but for him, he's putting all his cards on the table. He's pushing all his chips into the ante, if you will, and showing a significant investment for him in the business. Scott has become a minority owner now, so they've gotten married, if you will, and we've got a structured buyout. What this has done for the dealer is, the dealer has guaranteed 10 years, assuming the business is around, 10 years of rent, with a guarantee, not an option to purchase, but an obligation for Scott to purchase the real estate at the end, so that my dealer client isn't going to be stuck with a single-purpose facility with nothing in it. We also have structured the buy-in, where Scott is getting a benefit as well. The dealer's getting a benefit because he's getting bought out, he's getting paid for his business, and paid for his real estate. Scott's getting a benefit because Scott is getting some sweat equity. He's getting, call it a discount, whatever, but Scott is getting the ability to buy a dealership that he would never have before, and he's getting it priced at a favorable position for him, so that he can become the dealer. At the conclusion, my exiting dealer will never be less than a 51% owner. When it gets to that point, Scott will go to the bank, borrow the rest of the money, and take my guy out. Some other things to consider that have an impact on what you keep versus what just you make is that taxes can have a dramatic impact as well on the net proceeds to the seller and future cash flows of the buyer. We are often, well, not often, we are making all the decisions, helping make the structuring decisions in the most tax-advantageous way possible. One last item, a comment regarding stock deals versus asset deals. In mergers or stock deals, where the buyer is purchasing the stock as opposed to buying the assets, the due diligence and the seller's reps and warranties are going to be much greater than the much more typical asset deal. The third bullet on the slide that you see is a letter of intent. Should it be binding or non-binding? We typically will have the letter of intent as a non-binding document. The only binding element is highlighted in red that you see there, and it's a no-shop provision. Basically, hey, I'm the buyer, and oftentimes it's in exchange for a deposit, but I want you to take it off the market because I'm now going to start paying some professionals, accountants, me, the deal consultants, me as your accountant, or the attorney to start drafting documents. It's important that if you're a buyer, that you take that ability to shop out of the equation. Let's talk about a couple of other items, fixed assets. While it's not uncommon to employ an appraisal firm to assess the value of shop equipment and other fixed assets in other businesses, and they're out there and they exist, what we've found is that I've used them twice, and we've hired them twice, and neither time have we actually used their results. I quite honestly don't know how they can do what they do because today they're valuing the equipment in your dealership, tomorrow they're at the beer distributorship, the next day they're at the restaurant, and the day after that they're at the HVAC contractor. I have no idea how they can have the expertise to know what the value of all that equipment is. They're in a tough position. We typically will advise our clients to not even go through that unnecessary expense to come up with a VAD result. the approach that we typically take, and this is born out of all of the transactions that we've actually closed over the last two plus, almost three decades, actually three decades. I've been doing transactions for 30 years, yeah. So what we did was we took all those transactions, or a good portion of those transactions, we laid them down, and what it amounted to was the fixed assets were coming in at somewhere pretty close to 50% of the original cost, not net book value, not the depreciated value, but the net, or the original cost of the equipment. Now we've done transactions where we've used other agreed-upon valuation methods. We recently did a deal where all assets that were acquired in the last two years were 90%, three to four years old were 80%, five years ago was 60%, six years ago was 40%. Going all the way down to anything over 13 years old was at 10%. So there are different ways to get there, but as an aside, when we got all done with that, that happened to be the merger that we did, and we looked at both the buyer and the seller, the larger and the smaller of the two. The transaction ended up at about pretty close to 50%, even though we used that graduated scale. Rental equipment, I'm gonna talk about rental equipment a couple of times, but I wanna bring it up here because a lot of dealers or their accounts classify those as fixed assets. Rentals for our purpose, for this, are treated like used equipment, more like used equipment than fixed assets. And we'll talk about that again a little bit later. Parts, what we typically see are parts are transferred as kind of determined on this slide, but what we're doing is we're just buying all new parts that are returnable, not obsolete, and we're gonna take an inventory. As an aside, dealers have less than a one in 10 chance, so less than a 10% chance of selling a part that has had no sales activity in the last 12 months. So a part you have on your shelf that you haven't sold one of those parts is not gonna have a good chance of selling in the future. So if it's not returnable to the manufacturer as a buyer, I want a discount on that, if that makes sense. So I'm gonna take a discount on those parts. Moving forward to used whole goods. I've mentioned it, for ag equipment dealers, again, specifically ag equipment, for those of you that are listening, that has been the single biggest factor in ag equipment deals either coming together or not coming together right now. And it's still a big factor on any dealerships, folks. There's quite an investment there most frequently, and we've gotta get the number right. So we've gotta adjust this to the fair market value and use Iron Guides, Equipment Watch, use the guides that are out there, look at Ritchey Brothers, what's been running, and we've gotta value this stuff. For the ag equipment side, as I say, I don't wanna be chicken little, the sky is falling, but those of you that are in that industry know that it's fallen and it hasn't been able to get up yet, to paraphrase the old commercial. There's a three-year supply right now of used equipment on the ground that's large ag equipment, small ag equipment, not so much of a problem. But compounding that is there's a capacity two and a half times the demand on an annual basis to build new large ag equipment. And Deere, Case, New Holland, so forth, are not going to willingly give up market share. As I say, deals are not happening oftentimes because of this used situation. I don't wanna focus on ag equipment, but it is such a dramatic impact in that segment that I do feel like I need to mention it. The same process goes for your used whole goods if you're not in the ag equipment business. We've got to get the right value. In a transaction, what we often are doing is basically the buyer and seller are gonna walk the lot, as is, I've got language from an LOI here, but basically what this says is we're gonna walk the lot and we're gonna agree or disagree on pricing. And if we disagree, then I'll take them to the auction, I'll get rid of them, I'll do whatever. Most frequently, even though that's what it says, we end up getting 85, 90% of the used inventory everybody agrees on. We've got this five to 15% that there's some problems with. And what we often do is we lump those together, we negotiate a price and frequently, that's most frequently how the transaction occurs so that the selling dealer doesn't end up with any inventory. We've done some other things. We've also pegged a date and this will happen when we've got the seller and buyer are working together on operations, typically after they've reached an agreement. So what this says is basically, hey, for any units that are fresh, we're gonna buy them at whatever you've got them in inventory for, but we're gonna call the inventory with you, okay? That's the aside that you need to know about there. But anything that's older than that, we're not gonna buy in essence. So it causes everyone to try to pay attention and keep everything fresh. New whole goods. Our new inventory, basically, it's gonna be at net net cost. Now to include your setup charges and those types of things, but it needs to be adjusted for any accessories that have been taken off. You've done whatever you've done to it, either to add accessories to or delete them or remove them from that. So we've gotta adjust for that. Rental equipment. Going back to the rental equipment, rent to rent items should be treated as used whole goods and rent to sell items are treated more like new whole goods except there's a discount, negotiated discount based upon hours of use and utilization. Again, we're getting down to what's the fair market value of that equipment. Rolling stock. The rolling stock will typically refer to Blackhook or wholesale value for the base unit. Let's say we're running F350s, whatever. So we'll get the mileage, so forth. Added to that are going to be the equipment on the back of those service trucks, an air compressor, whatever you have. So those will be valued like we valued the fixed assets as we talked about in a previous slide. Other assets that we need to consider. We need to consider all the other assets. There are finance reserves and oftentimes those are transferred at some sort of a discount. Pool funds. Those can be transferred and therefore there is value there and we can get into what that value ought to be but don't forget those things. Sometimes we're seeing those not on the books and so if you're selling and we can monetize that, let's do it. Some of the manufacturers will do some advertising and promotional funds and so don't forget those if we've got co-op funds that we can use. I'll buy them if they can be transferred. So we've got to work with the manufacturer on those types of things. Customer lists, the language in here is pretty clear. We're going to get all the customer lists as the buyer. No additional charge for those but there's value in those customer lists and customer files. And the seller needs to assign us telephone numbers, websites, those types of things. As you'll see on the next slide, in red, I want all these lists in a downloadable format. If I'm not on the same DMS, I want to be able to put this or CRM system even, I want to be able to drop it into my system if that makes sense to everyone. And so I'll pay for that as the buyer. Okay, it doesn't really have to do with the valuation but it does have to do with the first two items, buying and selling the dealership, first two items on our title for today. Liabilities assumed. Basically, we're not going to, as a buyer, I don't want to assume any liabilities and we kind of start there that on an asset deal, purchasers not assuming any of the liabilities. What you will see though is frequently we will talk specifically about any product sales, whether that's extended service contracts, maintenance contracts, whatever. The reason I will frequently put this in there is because it has led to confusion and dealers think they're out and then they're going to continue to get chargebacks for these product cancellations if they come up. If it is a stock transaction or a merger, you're going to have to look at your reserve or you're going to have to accrue for some future chargebacks and that's going to affect the value. I'm going to skip ahead to a topic that's later in the slides, but I'm going to talk about it right now and then I may reemphasize it later. We're talking about F&I products, the products, the service contracts, maintenance contracts, whatever. One of the items that we see that is missed frequently, very, very frequently are the profits that are generated by those dealers that have set up their own reinsurance programs for or are handling these products. There's underwriting profits, there's investment profits and there's oftentimes over-remit programs and those items can amount to millions of dollars in value to your store. So don't overlook that. That is, and you'll see it in the slide later, that is the single biggest thing that I see overlooked by those not familiar with the business. Okay, moving on back to the topics and why a lot of you are online here is the big question mark, blue sky. How do we value blue sky? What's that going to be? The goodwill, intangible value, blue sky. I didn't mention this earlier, so I'm gonna mention it now. If you were to, one of the important things about making sure that your financial records are clean, that you can provide all the information is to clean up your own house. If you've got toys, boats, RVs, whatever on the books and you're running a bunch of expenses through the dealership that need to be added back, I get it, I understand it. We always have that back. You've got a place in Florida or in Montana or whatever and you're running all your travel expenses to get there and back and you're running all the upkeep and the condo association fees and you're doing all that through the business. The buyer isn't gonna care about those. Yes, we can do it through add-backs. The problem is the add-backs get stuck The problem is the add-backs get scrutinized heavily. If you are serious about selling your business, clean up your house, you're not going to show somebody your personal residence if you're looking to move and have dirty dishes in the sink and it's not gonna look, stand tall. The same thing goes for if your business isn't standing tall with financially, it's not meeting the metrics. We need to improve that. I'm working with a dealer right now. We met with him, he wants to sell and he doesn't have to sell right now. We have agreed that we're gonna work. He's agreed he's gonna stay around for five years. I don't believe we need five years but five years is great. We're going to increase, we're gonna strengthen the balance sheet and we're gonna increase the profitability so that and we're gonna clean the clean house if you will, not from an employment perspective. We're just gonna make our house look pretty for any buyers and that's going to, everything we do to increase profitability, it's a multiple of that that comes back to my owners when they sell. So, at any rate, moving on to talk about how do we get there. Goodwill, this blue sky figure, is an economically justified value beyond the value of the business tangible assets. That's just what it is, okay? This value is, as I've already stated, probably the reason you're all on here and it's the most difficult value to negotiate and to come up with. Part of the problem often is being the unwillingness of the seller to allow the buyer or me as the buyer's advisor to conduct the property diligence in advance of an agreement being reached. I've got on here, we had that happen one time and what we did there was we negotiated a five-year period. We said, hey, normalized earnings, we're gonna talk about what normalized earnings mean here in a minute, and we negotiated a multiple of some multiple x times sellers, normalized earnings, before deductions for owner salary, but we put a cap on it. But in no case are we gonna pay more than x million for the deal. So, that is one way we handled that when we couldn't do the due diligence that we wanted. Now, I talk about normalizing entries. There are a number of normalizing entries. This is simply a very, very, very small, that was three very's by the way, very small sample of those. And what we're doing is we're saying, okay, owner's compensation, we're paying the owner. I'm doing a deal right now. The owner isn't there. The owner's son is there, but we're still paying the owner. He's got it literally as place in Florida, actually it's not in Florida. He's got a place in Michigan, and he's got a place in Montana. And this dealer is not at the dealership, but we're paying him. Well, a buyer coming in isn't gonna continue to pay the dealer's salary. He's gonna pay the necessary salaries to operate the thing. So, we look at that. We look at extra family members on the payroll, family members being paid too much, too little, rent, is it too high or too low? All the benefits, are we country club dues, PACs that we're just creating a slush fund for ourselves, those types of things. The reinsurance company is big. Sales commissions from the manufacturers, is that going through the store, is it going straight into the dealer's pocket, or is it going to the sales people? And we've seen all of it. So, those are the types of things that we're looking at, normalizing. So, we come down to a true income that a buyer is going to expect, and that's the basis for determining our blue sky. Now, we will build a cap rate to apply to that normalized income stream. And people talk about multiples, and it varies from industry to industry. A very, very low multiple on OPE dealers, for example. A higher multiple on construction equipment dealers. A low multiple today on ag equipment dealers. But it also depends on those other non-financial numbers, factors, to help us come up with this cap rate or blue sky. And what ultimately happens is this blue sky figure, so we take the normalized income, we apply a multiple to it, or a cap rate. A cap rate of 33% is a multiple of three. Cap rate of 25% is a multiple of four, if you will. And we apply that multiple, or the cap rate, to the earnings, we add the result of that to the asset value that we've talked about earlier. What's the value of the inventory, the fixed assets, and so forth. And that's the transaction price for, in total. The reason we use this methodology is because that's how deals are actually bought and sold in the industry. So that's what makes the most sense. I'm not gonna spend, in the interest of time, I'm not gonna spend a lot of time on real estate issues other than what I mentioned earlier, is that the real estate oftentimes is being rented and you may have facility demands from a manufacturer. And so that's often, if you've got an adequate facility, both in image and facility space capability, then you'll get more value for your business itself if the underlying real estate's taken care of properly. And then other items in the letter of intent, just expect a covenant not to compete in there. What we did on one transaction was we negotiated our deal. Then we put, not a covenant not to compete, we put an employment agreement in place. But this employment agreement had very, very low performance triggers and it even paid the spouse if the dealer died. So it was actually additional payment to the dealer and it was really just additional goodwill. But we were able to create a workable deal where it wasn't workable for the buyer if they would have had to pay that all up front, but it was workable if we were able to do this as an employment contract. It got into a lot of complexities which I don't have the time to go through today, but my point with this is make sure that we put our thinking cap on. And we do, I'm anticipating doing 20 to 24 transactions in this calendar year. We're doing transactions all the time and there's more than one way to skin a cat, so just know that. Some other items that have to be considered is closing and manufacturer approvals. Closing doesn't happen without manufacturer approvals, so that is one of the contingencies that we will have. In addition to manufacturer approval, which what we do is we start the application process immediately even though we may not have told the manufacturer yet because we're still negotiating, maybe getting down to the executable documents or whatever. The other items that are contingencies are adequate financing and conclusion of due diligence. If you're a buyer, absolutely demand that you use somebody with industry experience to do this. You've got to know where the bodies are buried and you'll end up potentially making a bad deal if you're not careful. The other items on that slide are really pretty small items. You know, do you want a company car after you sell and those types of things. Factory approval, I've already mentioned it, but we do get some assistance from some of the manufacturers. Many of you are shaking your head no right now. I've been in those rooms with the dealers saying, the manufacturer never assists in this, okay? I got news for you. We did valuation work for a PE group that bought an equipment deal, construction equipment, and they got, through assistance and through marketing assistance, they got the full value of the Blue Sky for the stores. Did a deal in the Midwest where we didn't get the full value, but we got value. And basically what it was, was the seller and buyer couldn't come to terms, couldn't bridge the gap. And we went to the manufacturer and said, hey, you want this deal to happen, right? Yeah, we do. Said, we need some love. Met with a dealer from the South. The first deal that I talked about was East. The second one was Midwest-ish. Yeah, Midwest, West, Midwest. And then the third one I'm talking about is in the South. And we just met with the manufacturer and they gave us everything we asked for. Again, 100% of the Blue Sky figure is being supported by the manufacturer. Now we have to sign an agreement back with them, but we're getting money. So don't forget that that's an opportunity to find some financing for yourselves. The next slide is the slide that I was talking about with regards to the producer-owned reinsurance companies, over remits and retros. These all relate. And if you do not have, if you are a substantial dealer and you do not have a producer-owned reinsurance company set up already and aren't taking advantage of this, you need to give me a call or send me an email. And we can talk about that. It's not a topic to talk about on today's webinar. But this will mean, even if you're not talking about selling, this will mean millions of dollars to you in your pocket, in your family's pocket. But anyway, this is the item that can impact, that gets overlooked, but can impact the transaction price or the value of your store by millions and millions of dollars. The last slide really deals with negotiations and successful buy-sell negotiations. And the first thing that I advise dealers is to determine what you want, what's important to you. I talked with a dealer from out West last week, and he point blank said, look, I've got enough money, I'm fine. But I want this business. He's in a town that's got low opportunities and he's about the only business in town. He said, look, I don't want this town to die. So I need to find a buyer that's gonna keep the business located here. And I want my people to have a job. He said, I really don't need the money. And I just need them to be tied to this community. So determine what you want. Most of the time it does come down to finances because you've got to take care of yourself, your spouse, and your family. Determine what you want from a legacy perspective. Basically, we're talking about succession planning at this point. Know what you want. And succession planning is not estate planning. Estate planning is a part, a very small part of succession planning. But that again is another webinar for another day. Know what information, if you're the buyer, that you need initially. If you're the seller, make sure that you know what the seller's going to need. We typically will put what we call a book together. And it's got everything for a buyer to look at. We'll put what I call a one pager. It's a summary. Basically, we talk to any potential buyer first, feel out whether they've got any interest before we start sharing any info. Then we'll do a one pager, make sure that we take their temperature. And then finally, we're moving forward with things, with divulging complete information. The third item is never try to negotiate this for yourself. You've been trained over your career to sell the equipment, sell it today. If I don't get it sold today, they're going to go to somebody else and buy their equipment. Deals take longer. There are a lot of nuances. There are a lot of complexities. You're not equipped. You're great at selling equipment, servicing equipment. You're great at running your business. You're not the right guy to do this. It also creates a buffer. We can be the bad guy, and you can be the shining knight riding in on the white steed who saves the day and so forth. As we're trying to negotiate on your behalf the best deal possible, you can reign things in. And it's working together. It's still your deal. You get to call all the shots. Dig deeper. Make sure that this is exactly what you want. Make sure that you've communicated with the family. And if you're selling, if you're buying, dig deeper. Make sure that you know what this thing's worth, which is the next bullet point, and line up your financing. And make sure that you've got the management structure in place, which is part of the dig deeper as well. Moving on, don't get in a hurry. Don't rush things. And absolutely keep it quiet. It is to your best interest to keep this quiet. As a seller, your employees are afraid of the unknown, and we've seen it. Even though they have not lost their job, are not going to lose their job, because the buyer needs an in-place workforce, they will start abandoning ship because, oh, I don't want to work for somebody else. I'll go find my own job on my own terms. And so keep it quiet from that perspective from a seller. From a buyer, you absolutely want to keep it quiet, because you don't want any other potential buyers knocking on the door. That is exactly 60 minutes. And you've got my contact info here. If there are any questions, comments, or concerns, my email address, contact me anytime. My cell phone, pretty much 24-7. I head up, again, our dealership industry group. We've got about 41, we have 41 people in the dealership industry group. We've got 20 offices located all over, so we can get to you very, very quickly and easily. Or about 20, I think it's 19 offices. But anyway, and we focus, me and my team, we focus completely on dealerships. And it won't be our first rodeo. If you have questions about this or anything else, please give us a call. Thank you.

equipment dealerships

true value

buying

selling

financial aspects

non-financial aspects

maximizing value

marketability

manufacturer approval

valuation issues