The dealership business is coming off some of its best years ever, and the combination of low unemployment and pent-up demand for vehicles will provide momentum for dealers going into 2023. Yet rising interest rates and a volatile economy could serve as a check on the appetite for vehicles while the pace of manufacturers’ production ramp up remains a wild card that dealers need to watch closely. At some point, industry conditions and financial returns are likely to return to historical norms, a downshift from the operating conditions of the past few years.
Not only will dealers need to prepare for short-term market changes, but a leader also must consider longer-term moves to secure the business for future generations and maximize its enterprise value. Whether you have aggressive growth plans or want to maintain the status quo, you’re the one responsible for ensuring the value of the enterprise and protecting the livelihoods of all those who depend on the business.
A changing economy raises the bar on the level of modeling needed to develop informed cost of capital assumptions and model downside scenarios. Truist Dealer Services can help by providing the technical planning skills to model scenarios that will prepare your business for the future while keeping your management team focused on running your dealership’s operations.
Go to the drawing board to start planning.
Planning starts with your strategic vision for the business—even the most sophisticated models are grounded in a succinct and straightforward statement of where you want your business to go and what you’ll need over the coming years:
- What are your goals and objectives over the next 5-10 years?
- What is the plan beyond that intermediate 5–10-year horizon?
- Do you have the financial and intellectual capital (people and talent) to achieve those objectives?
- Are future generations prepared for their roles in the business? If not, what happens?
The answers to these questions come easily to some, but a strategic advisor like Truist can often help you frame your picture of the future.
Digging deeper, you’ll want to take time to discuss and document key business elements. Some elements will apply to your business more than others, but a complete plan should consider the following:
- Competitive strategy – Are you in the right markets with the right brand mix?
- Growth and acquisition strategy – How do you assess new markets and how far can you extend your geographic reach? Are add points an option and are you cultivating your manufacturer relationships to position for those? How do you interact with potential sellers and position your dealership as a buyer of choice?
- Potential divestitures – How do you assess underperforming stores? Are you appropriately pruning your portfolio when necessary?
- Capital strategy – Do you have an efficient capital strategy that is easily (and quickly) scalable and can withstand an unexpected economic shock?
- Talent strategy – Do you have enough bench strength to manage the complexities of an acquisition and additions of new stores and/or brands?
- Ownership, succession, and exit plans – Do you have clear plans for transition? How prepared is your next generation for whatever role they’ll have in the business going forward? Should you be considering an exit at some point in the future? If so, what type of planning are you doing now to prepare for that exit?
Part of effective planning includes gathering outside perspectives on the overall economy, the auto retailing industry, what other dealerships are doing, and the issues that are most pressing for your business. Here’s another area where Truist can help—we’ll share our views on what’s most relevant for your business and outline the implications for your planning. That includes looking at consumer trends, economic forecasts, M&A opportunities, observed dealer best practices, geopolitical issues—helping you anticipate what comes next.
Using financial models to bridge to your long-term vision
Dealership financial managers and CFOs often have their hands full with day-to-day operating pressures and that can mean detailed financial modeling and scenario planning gets less attention than it should. It’s not an easy task to assemble the tools and skills and carve out the time to build detailed models incorporating factors like cost of capital, economic volatility, and pressures on the auto retail businesses, while adjusting for business risk.
Detailed modeling matters—it’s the key to preparing your business to handle whatever comes next and giving you a roadmap to critically assess the impact of future decisions. The scenario planning you do now, including modeling and stress-testing possible outcomes, puts you in a better position to act quickly later when acquisition or transition opportunities surface.
As you build scenarios, what should you be modeling? Below are essential factors to consider:
Your current capital structure and its implications. Take a step back for a better perspective on your dealership’s capital structure—are there ways you can strengthen your capital base, improve your access to capital, or reduce your cost of capital? Do you have loans spread across different lenders, making it harder to consolidate equity and create strategic leverage? Have you considered a loan syndication that would give you ready access to committed capital to fund growth projects quickly and efficiently?
Future capital requirements. Do you have the necessary capital to facilitate planned organic growth such as real estate projects, facility upgrades, relocations, and add points? Do you have ready access to capital to support a growth-through-acquisition strategy?
Other needs within or outside of the dealership. Assess tax issues, estate planning, outside interests, and philanthropy plans. Do you want to diversify your family wealth and potentially consider a dividend recapitalization to “take some chips off the table”?
Once you have a sense of these factors, a detailed financial model enables you to see the immediate impact of various scenarios on both your balance sheet strength and future cash flows. You can stress test your initial assumptions for a wide variety of potential challenges like the potential for recession, increased interest rates, or manufacturer challenges. A well-thought-out model is an invaluable tool in the decision-making process.
What to expect from Truist scenario modeling
When it comes to supporting your dealership’s plans, the Truist Dealer Services team offers you deep industry knowledge that ranges from corporate finance to M&A and from wealth management to treasury services. Our collaborative approach involves working with your leadership team to build out the models and tools you’ll need to make informed, long-term decisions that minimize risk and grow enterprise value.
Here’s how it works. We start with a joint working session to understand your vision for your business and then talk through what’s happening with your employees, your leadership team, and your customers—all the key players. We’ll share what we’re seeing and what we’re expecting moving forward.
We’ll also discuss your family and workplace dynamics, as well as any succession plans you may have or want to develop.
From there, we’ll gather vital statistics about your dealership. We’ll model various scenarios using the levers available to you so you can see the impact of potential financing sources across time and how they might affect your business.
Building a workable roadmap
With your goals in mind, we’ll create a comprehensive qualitative and quantitative analysis that looks out over the coming years. Then we’ll come back to the table and talk through taking advantage of opportunities, looking out for hidden risks, and determining how you might be able to improve cash flow or rethink your capital mix. Most importantly, we’ll help you get ready to act on the opportunities when they arrive.
Find the peace of mind that comes from being prepared for what comes next.
Let Truist put our expertise to work and help you get prepared for the future. Talk to your Truist Dealer Services relationship manager to see how we can help you be ready to turn possibilities into realities.