What is My Dealership Really Worth in This Market?
By Tim Dankoff
Auto Dealer Alert, 2006 Volume 7
This can be a very complicated question. A lot of factors are involved in answering this question—such as, what size of ownership interest are you talking about and why do you need a value? Dealerships typically have different values for different purposes.
This article addresses partial, or minority, ownership interests—interests that you may want to gift to your children. Controlling interests (that is, more than 50 percent ownership interests) will be addressed in a future article.
The fair market value (FMV) of a partial interest in an automobile dealership is critical if gifts of stock interests are being made, or your estate holds a partial interest in a dealership at the time of your death. The determined value will dictate how much gift or estate taxes will be paid and can influence the decisions you make today.
It is well accepted that a partial interest in a company is worth less per share than a 100 percent stock interest. What is not so well accepted is how much less and how to compute it. Note that this very important question is generally dealt with in the context of gift and estate taxes—so whatever position is taken will be reviewed by the Internal Revenue Service (IRS).
There are two general schools of thought concerning how the FMV of a partial interest in a dealership should be determined.
- Option 1 - Determine the value of the entire dealership and then apply discounts
- Option 2 - Determine the value from the viewpoint of a partial owner
It has been our experience that Option 2 usually produces a more understandable and defendable result. An exception would be in those circumstances where the owner has an expectation of selling the dealership in the foreseeable future (in which case a partial owner would likely share pro rata in the sale proceeds). Also note that Option 2 generally results in a lower FMV. In theory, Options 1 and 2 should result in the same value. However, many times large discounts need to be applied when using Option 1, and taxpayers and appraisers alike are often wary of applying such large discounts knowing that the IRS will likely challenge them. Therefore, those using Option 1 often end up paying more gift and estate tax than they really should.
When using Option 2, the focus of the analysis is generally on expected annual profits or cash flows from the perspective of a minority owner. As would be expected, this analysis results in higher values for more profitable dealerships and lower values for those that are less profitable. The ultimate per share value conclusion, from the perspective of a minority shareholder, may be more or less than book value per share. The fact that a minority owner places little, if any, weight to book value makes sense given the minority owner’s inability to access it. (A minority owner generally cannot influence the distribution of assets or otherwise access the assets.)
This is important because, right or wrong, the IRS may take the position that the value per share for a minority interest cannot be less than book value per share. One particular case (Rothgery) may be cited by the IRS.
Estate of Bernard Rothgery v. Commissioner1 (“Rothgery”)
- This case dealt with the value of a 50 percent ownership interest in a dealership
- The court concluded that the value for estate tax purposes was book value per share
- The court also concluded that a valuation of an interest in a dealership should be performed using the asset approach as opposed to the income (earnings or cash flow) approach
- The court concluded that it was not appropriate to adjust the value for a lack of marketability
The Rothgery decision was made within the context of a narrow, specific set of facts. One of the more important differences between Rothgery and the valuation of a typical minority interest is the size of the interest. Most gifts, and some estates, involve less than 50 percent interests, and the rights and abilities of a 50 percent owner are significantly different than those associated with the ownership of a minority interest.
Therefore, we believe the decision reached in Rothgery is generally not applicable to a valuation of a minority ownership interest.
Conclusion
In many situations, determining the fair market value of a partial interest can be more complicated than determining the value of the whole company. The FMV of a partial interest in a dealership can be more or less than book value per share. Though the IRS may take a close look at appraisals that value partial interests in automobile dealerships at less than reported book value, the facts of the situation may suggest that this is the most reasonable result.
It is important to seek advice from an experienced, qualified business appraiser who is familiar with the issues involved in minority valuations and knows the appropriate ways to address the issues to your benefit. To not seek professional advice may result in the payment of unnecessary gift or estate taxes—and no one wants to pay more taxes than warranted in a particular circumstance!
1Rothgery v. United States, 201 Ct. Cl. 183, 475 F. 2d 501, 594 (1973).
About the Author: Tim Dankoff is a Litigation, Valuation, & Investigative Services partner at Plante & Moran. He has valued hundreds of businesses and business interests for a variety of purposes, including shareholder and partner disputes, divorce, employee stock ownership plans, gift and estate taxes, purchase price allocations and goodwill accounting, corporate restructurings, sales, and acquisitions. He also has significant experience addressing damages and misappropriation of funds. For assistance, or to answer any questions you may have, feel free to contact Tim at 248.223.3502 or tim.dankoff@plantemoran.com.
