Finance a car garage or dealership
The automobile trade is in serious trouble. Sales are down sharply with sales of 112.179 billion in 2009. For the sale of new vehicles, government measures such as the eco bonus manage to support mainly small models. These are also promotional offers such as the recovery of old vehicles that maintain the activity. But these processes reduce the margins practiced. As for the used car segment, it is declining due to the appearance of new vehicles that are more and more economical. Added to this is the competition from other sales channels. Manufacturers offer their models directly to companies for their professional fleet. Used vehicles are sold directly between individuals. Finally, a dealer can now represent several brands. The new vehicle segment is particularly cyclical. To avoid difficulties, professionals must have related activities that escape these variations. Professionals are therefore forced to diversify. They offer in addition to the sale of vehicles, maintenance and repairs, as well as the sale of accessories. Many people offer the sale of fuel. After-sales service can also make a difference.
The decomposition of the automobile sales market in France
In an increasingly difficult environment marked by the sharp drop in sales, the concentration will certainly accelerate. The sector is organized into 6 sub-sectors:
- Dealers are bound to a builder by a contract. They take over the marketing of the brand’s vehicles. They also take care of after-sales.
- Brand agents work under contract with a dealer. They receive a commission for each sale made.
- The self-employed market mainly only used vehicles. They may have another mechanic activity, or selling fuel.
- Agents often operate internationally. They acquire vehicles on behalf of another person.
- Supermarkets can sell new vehicles since October 1, 2003.
- Internet has appeared in the sector and is increasingly used by individuals.
The constraints of a car trade
Many texts govern the marketing of vehicles. Relations between manufacturers and distributors are regulated in particular by a European directive of July 31, 2002. This text allows in particular under certain conditions the representation of several brands by a dealer. The latter can obtain the spare parts without going through the manufacturer and subcontract to another operator the after-sales service. Finally, dealers can settle in any member country of the European community.
Two types of contract govern the relationship between manufacturers and dealers:
- exclusive distribution agreements that grant them an exclusive geographical area
- selective distribution contracts that require them to meet certain standards.
The status of a car trade
There is no requirement of any qualification to practice in the sector. As with most activities, it will be possible to practice as an individual entrepreneur or by creating a corporation. Taxation follows the regime of industrial and commercial profits. The professional is therefore subject to corporate income tax if he has created a company, or includes the income from his business in his income tax return if he has opted for the business. The concessions take for the most part the legal form of public limited companies. In general, brand agents operate their business in the form of an LLC.
The standard VAT rate of 19.6% is the only one applied in the sector.
The characteristics of the profession
Recovery is the most common installation mode. The investments needed to start up are very heavy. A large exhibition area is required and safety and insurance costs must be provided. A computer system is essential to manage inventory. The parts are indeed very numerous and it is imperative to be able to access the computerized systems of the manufacturers. Inventory required for start-up is very expensive, but for dealers, they are financed by the manufacturer by setting up a credit to the seller.
Managing a car dealership
In such a difficult context, the dealer will have to be an excellent manager. He will analyze his turnover by following the evolution of the sales, but also their distribution between nine and occasion. He also follows the sale of spare parts and related services. He surrounds himself with qualified personnel and organizes their rise in competence. The quality of the personnel responsible for repairs is a crucial constraint.
For brand agents, their vigilance is limited to the breakdown of turnover between sales and services.
For dealers, most of their revenue comes from vehicle sales. For the sales agents, it is the spare parts as well as the activity of the repair workshop which contribute essentially to the turnover. The context requires excellent expense control. It will be possible to optimize stocks to avoid the costs incurred by over-storage. However, in this sector, large stocks are essential. Given the weight of inventories, the induced financing costs are very important.
To achieve further cost savings, the marketing channel needs to be streamlined. For satisfactory results, it is necessary to achieve a gross margin that ensures the profitability of both segments: sale of new vehicles, resumption of opportunities. For brand agents, the competition from automakers and auto repair franchises makes it necessary to remain profitable in its repair business. In any case for all professionals a perfect inventory management is unavoidable.
The management ratios of a car trade
The valuation of a car business
The professionals of the business transaction apply to the annual turnover a% in order to establish a valuation range. The valuations are different according to the activities:
- A trade in automotive equipment can be evaluated between 20 and 40% of annual turnover
- a car repair garage will be valued between 30 and 50% of annual turnover (75% for high returns)
- a service station between 15 and 50% of annual turnover
- a garage selling new vehicles between 10 and 35%
- a garage selling used vehicles between 5 and 30%
Financing an automobile trade
In such a difficult and increasingly competitive environment, financial strength is essential. To be successful, professionals with sufficient equity must have a strategy of diversification and maintain a perfect quality throughout the range of their services.
To limit debt, equity should represent more than 40% of stable resources. For dealers the supplier credit is decisive, but the need for working capital is equivalent to about 1 or 1.5 months of turnover.
As for any business, banks are not able to finance the stock, which will have to be financed by the personal contribution of the partners.