Whether you are evaluating a dealership available for sale or one already in your portfolio, you may be wondering whether net income, earnings before interest, taxes, depreciation, and amortization (EBITDA), or another metric is the most appropriate measure of dealership performance. In this article, we break down the metrics and their appropriateness for automotive dealerships.

Net Income

Net income represents a dealership’s total profit after all expenses, taxes, and deductions have been subtracted from revenue, including non-cash expenses such as depreciation and amortization.

Why would this metric be used? A dealer principal or potential buyer may value a dealership using this method because of the capital-intensive nature of the business. Whether evaluating service lifts, oil pans, or small tools, dealership operations are demanding on fixed assets. Depreciation may serve as a helpful proxy for annual capital expenditures.

However, net income may not be ideal when valuing a dealership because of the non-cash expenditure of non-floorplan interest expense that would not be realized or transferred over with a transaction (on a cash-free, debt-free basis, that is). It may also include non-operating interest income or expenses that should neither benefit nor burden the valuation. For these reasons, while net income can be used as a valuation base, we would recommend the use of an alternative metric.

EBITDA

EBITDA is a commonly used valuation metric across many industries. EBITDA is a metric that can measure operational financial health from day-to-day operations. While this metric may be useful for other industries, in the context of dealership valuation, we believe that this metric improperly excludes non-cash expenses and operating interest expense, such as floorplan interest expense, that would occur in a typical dealership’s operations.

As such, we believe an alternative metric could be used for dealership valuations.

EBIT

We believe that the most appropriate measure for valuing a dealership is an adjusted earnings before non-floorplan interest and taxes (EBIT), as it comprehensively captures the expenses a dealership typically incurs in operations while excluding the income and expenses that are outside normal operations.

Floor plan interest expense is a consistent and forecastable operating cost, and depreciation serves as a proxy for capital expenditures that are realized on the balance sheet but not reflected in the income statement. As with most valuations, the calculation of value will need to consider adjustments to EBIT that are unique to each entity and dealership. Such as gain/loss on sale of assets, investment income, interest income, and other interest expenses.

The Bottom Line

In summary, while net income improperly includes expenses and income that should not benefit or burden the dealership, EBITDA excludes non-operational expenses that should be included, like depreciation. Using adjusted EBIT reflects normal operational expenses while excluding non-operational expenses and income, providing a clearer view of a dealership’s financial performance.

Why Blue & Co. Can Help You Value Your Dealership

Blue & Co. brings deep expertise in dealership operations, market trends, and financial performance. Our team combines industry-specific knowledge with proven valuation methodologies to deliver an accurate, defensible assessment of your dealership’s worth. Whether you’re planning a sale, succession, or strategic growth, Blue & Co. provides the insight you need to make confident decisions and maximize value. Contact us today!