Digital Dealer - September 2017 - 44

FINANCE & INSURANCE

Continued from pg. 42

starts to produce meaningful cash
flow.
Finally, this treatment of
reinsurance cash flows may have
reflected the historic market power
of buyers versus sellers. Sellers of
individual stores represented one
of many stores available to strategic
buyers, and buyers could choose
to pursue the deals that were
perceived to be the most attractive.
WHOLE NEW WORLD

These dynamics, however, are
changing. And, today, this industry
convention is being reevaluated.
Buyers and sellers alike recognize
the value of these ancillary cash
flow streams, providing yet another
way to diversify the auto retail
profit model and take advantage
of additional revenue in a world of
increasingly transparent pricing of
new and used cars.
HOW DOES REINSURANCE

...OFTEN SIGNIFICANT REVENUE AND GROSS
PROFIT TIED TO F&I DOES NOT RUN THROUGH THE
DEALER STATEMENT. AND, THAT IS WHERE THERE IS
AN OPPORTUNITY...
the fierce world of new car pricing,
this represents a very attractive
alternative source of gross margin.
To this point, the six publicly
traded retailers, for example, have
all commented in recent quarters
on the importance of F&I to their
enterprises' profitability. And,
each of them have emphasized in
past earnings calls their efforts to
improve F&I gross profit per unit as
a way to offset the margin pressure
in the new car department. (See
chart 1)
PUBLIC'S GROSS PROFIT PER
NEW VEHICLE

CHART 1

Public's Gross Profit Per New Vehicle
F&I GPVR
Public Auto Retailer

2014

AutoNation
Sonic Automotive
Asbury Auto Group
Lithia Motors
Group 1
Penske

$1,409
$1,220
$1,349
$1,170
$1,324
$1,093

AFFECT TRANSACTION
VALUATIONS?

Much of F&I gross profit flows
directly through the dealership
statement, and is very clearly
a component of dealership
profitability. F&I is clearly an
important leg of the stool in
evaluating dealership profitability.
In advising our sell-side clients,
we find that buyers are very keen
to assess F&I gross profit per unit,
looking for potentially easy ways to
increase dealership performance
if they find deficiencies there. In

44

SEPTEMBER 2017

2015
$1,534
$1,279
$1,408
$1,196
$1,368
$1,107

2016
$1,588
$1,354
$1,446
$1,276
$1,397
$1,082

Q1 2017
$1,625
$1,379
$1,514
$1,307
$1,386
$1,104

However, often significant
revenue and gross profit tied to F&I
does not run through the dealer
statement. And, that is where there
is an opportunity for sellers to
more clearly delineate the profit
potential associated with their
programs.
The easiest component of any
off-statement income to monetize
in a buy/sell transaction is any
type of pack or over-remit that
is flowing to dealers outside of
the dealership financials. This
represents real-time gross margin

D I G I TA L D E A L E R . C O M

to the dealership, but simply does
not appear on the P&L.
Some dealers use these packs to
maintain margin in their vehicle
service contracts, while others do
so to manage sales compensation
expense. Regardless of the reason,
we often see these funds flowing
to management companies, other
dealer-owned entities, and at times
even directly to dealers' home
mailbox. In these cases, we add
these funds back to dealership
profitability, specifically to F&I
gross margin.
The more complex questions
around valuation occur in the
event of dealer-owned reinsurance
entities, which provide a
combination of deferred income
and investment income.
In this case, there is more
uncertainty around timing and
cash flows. Funds are set aside
for future claims, invested, and
claims are paid out as they are
incurred. After seeding a successful
reinsurance program over multiple
years, we often see dealership
groups generating very consistent,
and sometimes large, annualized
cash flows stemming from the
combination of reinsurance profits
and investment income. We have
seen cash flows from this kind of
arrangement as high as $2 to $3
million per year.
In a traditional buy/sell, the
seller retains the reinsurance
program and receives multiple
years of cash flow as the program
runs out. After the closing, buyers
can put in place the same program
and anticipate the same cash
flows from their newly established
reinsurance program; however,
Continued on pg. 46
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