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there are certain costs of doing business, you got to have an inventory to sell to the consumer.... and I would believe the manufacturer wants the inventory on the lots for the dealer to sell.
At the end of this post, you'll see all I need to derive return-on-equity is what I can buy this Honda store for, lock-stock-and-barrel.
First, what are sales? From your posts...
"Profit centers are:
Parts
Service
New sales
Used sales
Finance"
Now your comments for this Honda store...
"say a Honda store has an average selling price of $23K a copy, x 200 units new..$4,600,000
Say you do 80 used at $12K a copy..$960,000
Say service sells $250,000... parts does $175,000... etc."
This gives a monthly gross sales figure of $5.985 Mil... without F&I. I'm gonna guess F&I gross sales at $550,000 (1% of new+used gross???). So to make round numbers, I'm gonna say this store has monthly gross sales of $6.5 Mil. Now make that $78 Mil annual gross sales. (Please correct me if my F&I guess is way off).
Then we derive annual post-tax store-profit.
"Overall, a well-run mainstream store should have a 2-3% NET post-tax return."
I take this to be return-on-sales, so this store has annual profit (using 2.5% of sales) of $1.95 Mil... let's call it $2 Mil.
So now I wanna know how much it would cost me to buy this average Honda store (and whether my F&I sales figure was off).
I want to see how this investment, with its $2M annual "dividend" compares with me taking the same money and just putting it into the stock market, where long-term, I could expect a fairly safe 10% compounded annual return.
Oh boy.
Where is it? And not just regionally.. what market? How is CSI? Allocation? Shop equipment? What does the showroom look like?
Does it include the land? Has Wayne Huizenga been running amok buying Honda stores nearby thereby driving prices up?
Who cares what the store is worth ... I want to know where I can get a "fairly safe" 10% return in the stock market!
Since I'm from New Hampshire, let's say suburbs 20 miles west out of Philadelphia, Valley Forge / King of Prussia area. High-average incomes... country-ish suburbia at its finest. Store has 20-year track record of averageness. They own their 25-year-old store (expanded and remodeled 5 years ago) on 6 acres with 600 feet frontage on a well-travelled route... typical suburban retail-row, auto-row location. Facility-size adequate for current volume with ability to grow another 30% before any new building needed.
If you have any more qualifying questions, just assume my answer is "average" (cuz I won't know what the questions really mean). CSI-- customer satisfaction??
Dunno, Probably about 25,000,000
But on the upside, if I operate the business well, to above-average returns, and my manufacturer doesn't stumble, that 8% yield could become 12%.
Or I can put that $25 Mil into a broad-based index fund, looking for the market's traditional long-term compounded returns of 10%. Not assured, but with a 20-year investment horizon, fairly likely I'd be close to that.
Wayne WhateverZinga has nothing to fear from me.
Of course, if it is my 2.5 Million and the bank's 22.5 million.... Hmmmm...
Many Thanks Bill, an interesting exercise.
Hankr
Corporate welfare may have not been the best term. Ford is free to do what it wants to with its money. I hate to sound the part of the bleeding heart liberal here, but it irks me that businesses can get away with so many things that regular individuals can't because they have lobbied and had laws passed to favor them. Being compensated by some back end money for higher than normal interest rates is just one of them. Another is bankruptcy. if an individual files bankruptcy they cannot just go out change their name and start over again, but businesses do this everyday and it is legal. Worldcomm/mci lied about their books, why is this company even still around? They should be shut down and all of the principles put in jail.
It is my understanding that the Ford dealer is a totally seperate company from Ford the carmaker. They should have to stand on their own feet, just like us individuals do when times get tough.
Some thoughts for your stock market comparison.
1) Try to get a bank to lend you anywhere near 80 percent of your stock market portfolio.
2) Does your stock market portfolio allow you to drive all the new hot cars for a few months and then sell them for just about what you paid for them ?
3) If you are comparing stocks to car dealers, just compare the stable old-line stocks (some people call these value-stocks). For example General Motors has a price-to-earning of about 6.76 right now. Or another way to look at it they earn a NET dividend (retained and paid out) of 14.8 percent. The reason that General Motors stock is not higher is that people (the market) assumes that General Motors will not be able to sustain their profits long term.
4) It isn't really fair to compare hot growth stocks with a car dealership. A car dealership is a (relatively) stable business. Their growth (and downside risk) will never compare to that of some of the hot growth companies.
5) For your broad based stock fund, I'll use the S&P 500 as a baseline. The S&P500 has a price to earnings ratio (trailing earnings) of about 30 ( or NET yield of about 3.3 percent). If you look at predicted earnings for the next year some people predict the price to earnings at about 19 ( or a NET yield of about 5.2 percent).
Clearly the dealership in your example beats the pants off your stock fund example.
Ford's effort got a fair amount of press, and (understandably) stiff resistance from the dealer community. I think Ford failed and moved the stores back into private ownership. Why did their effort fail?
What are the terms of most auto-manufacturer-retailer franchise agreements? Are they on annual, or 5-year, or 10-year renewable terms? What sort of events would permit either party to terminate the agreement? Does it happen often (excluding outright business failures)? Are stores territorially-protected (can't assign another franchise within x miles)?
Even from the viewpoint of a "bleeding heart liberal" what could possibly be the benefit of forcing a business into a situation where it would go out of business and drag down its product manufacturer with it?
Good luck,
Jack
2. My ficticious Honda store sells nothing I get excited about. It's just business.
3. My point was that I'd not overload in any one or few stocks... reducing potential gain, but spreading risk as well. Simply invest in a diversified fund that tracks the overall market.
4. I'm not talking about hot growth stocks returning 10%... those are historical averages for the market as-a-whole. If I were to invest in a high-growth technology fund, average long-term returns would probably be more like 12% but with wildly fluctuating yearly performance.
I see the stock market as less-risk, not more. Is a dealership "stable"... in a big picture, aggregate industry-sense you could say so. But throw all your eggs into any ONE dealership, with ONE manufacturer-partner, at ONE location and your risk increases greatly.
I wonder what the overall annual failure-rate for dealerships is? Bill??
-Jason
I believe that you are comparing stock market total returns (yield and growth) with the dealerships yield only.
Dealerships do fail, but I think that the failure rate is much less than expected because of the veting process that goes on.
I was not trying to say that the dealers should be run out of business. i was just trying to point up a fact where one business (manufacturer) came to the back door aid of another totally independent business(dealer). And where individuals were effected by the same problem (high interest rates) but there was no there to help these people out.
not sure where you are going with the individual thing...??? yes, interest rates were high at the time, people had to pay high rates to borrow money... so did everyone else, businesses or individuals.
Are you sure your point doesn't just boil down to "It's not fair that people or companies with more money than me can do things I can't do"?
Why did they fail?
I was, sort of. The 8% is return-on-capital from operations. I acknowledged that there was also a return-on-capital element of the entire business appreciating, but do not know what that might be.
If annual appreciation-returns were, say, 5%, then total returns of 13% from the dealership investment versus 10% from the stock market... in my view, more reward in exchange for more risk.
The entire discussion was to illustrate that dealerships, in spite of what many have suggested, do not exactly have a license to "print money". Their investors put big numbers at risk, and receive fair, but not outrageous returns. It is just another competitive business where the successful are rewarded.
I was just trying to illustrate that in the same fashion that I could leverage my 2.5M with a bank loan to buy that dealership, so too could I buy stocks on margin for leverage. The actual amounts were not germane to the point I tried to make.
-Jason
1) Return on Equity - By law you can only borrow up to 50 percent of a stock market margin account. This has been true since the margin fiasco's preceding The great depression.
2) Your equity in the dealership is probably only 20 percent or so. Therefore your return on equity is not 8 percent but 40 percent. The interest paid for the dealership is included in the overhead figure.
3) If the dealership value increases with inflation (say 3 percent), your equity increases by 15 percent due to the leverage of your investment.
4) Combining the return on equity of the ongoing operation with the return from the investment, I get a return of 55 (40 + 15) percent total return on equity.
5) This is a great return on your investment, but as you have pointed out there is quite a bit of risk.
6) Don't try this at home as your mileage may vary.
Which is (I suspect) why so many states have laws against factory-owned stores. They require independently-owned franchises.
Seems a little "Un-American" to me though. If a manufacturer wants to own all the stores and control pricing, let them. It's their product and their sales at risk.
It really doesn't stem free competition... IMO, government need not insure there is a competitive marketplace for Fords... only insure that there is a competitive marketplace for cars.
2. My basic presumption was that I bankrolled the entire enterprise... no debt. It was also my assumption that the operating returns did not include debt-service (though I was working with Bill's numbers and it wasn't clear).
3. same comment as 2.
4 & 5. This is the heart of the matter, and your scenario where debt is part of the picture is probably much more real-life. Bill's estimates of profit-margins relative to sales probably also included some debt-service within the cost-structure (as is more typical in a real-world dealership). So your return figures on MY risk-capital using the business to service debt probably are right.
Yes... a good, even great return, but still lots of risk.
Thanks for your insights.
Look at Rydell out here in Southern California
I do not begrudge anyone whith more money than I have being able to do more because they have the money to spend. What I am against is those same people doing so because of some "unfair" advantage that they have been able to get passed into law. I think we can all agree that someone stealing is wrong. To try to keep this on topic, to me it is just as wrong when people take advantage of the tax loophole to get the US govt to pay for their huge SUV's. That was not the intent of that law, but people with way more money than I have ( I could not go buy a $50,000 SUV) are able to get a luxury SUV for next to nothing. Am I making any sense? I do not begrudge the guy buying the SUV, more power to him, what is wrong is using the tax code for preferential treatment to get it at nearlty no cost. In this example it applies to people that make more money than me. I am just as much against people that make way less than me getting free handouts that do not really need them.
I know, life isn't fair. Then why do we teach our kids that it is? My parents did what I think is a pretty good job of trying to teach me about fairness and treating others equally. I think I am a better person because of it. But maybe I would have been better served by being taught from birth that it is a dog eat dog world and you better put everyone else down so you can be at the top.
1. I think this country has accepted the fact that tax law in many cases is used to drive behavior and spending to where the tax code writers and passers want. We may not all agree that this should be done, but it is.
2. The cost of an SUV that a business pays is the same as any consumer, so the economy is stimulated. You just don't get them for nothing.
3. The depreciation is not avoided, but accelerated. When the SUV is sold, the total depreciation and tax consequences will be the same except for the "cost of money".
4. All sales and usage taxes and fees are the same.
The net result of this unpopular law is that many SUVs are purchased that would not be otherwise.
Finally, this effect is similar to a mortgage deduction. I've heard dozens of cases where people "stretch" to buy and finance all they can because "Uncle Sam" help pay for it. Now, if we could simplify the tax code and eliminate all deductions, I'd be happy, but it's not going to happen.
Boom... (noise from big guy jumping off soap box)
Jack
jack..I agree with you about the simplified tax code. We should go to a national sales tax with no exemptions. Like you, I doubt it will ever happen.
Mark
I was responding to a masspector's post regarding SUVs and the tax code. The tone of his post was that the government bought or subsidized SUVs for the rich business owner. I was merely pointing out that the purchase transaction was the same as any other SUV including sales prices and the payment of sales taxes and fees. Also, it's seldom pointed out that the SUV tax law is not tax avoidance, but accelerated depreciation.
BTW, it's not a tax "loophole". Section 179 was clearly put in the tax code on purpose and is having the intended consequences.
Happy 13th to all,
Jack
If you lease or purchase a vehicle for your business and deduct the cost or depreciation on your taxes as a business expense, that's just the way it was all designed, as far as I can tell.
In a business transaction, it doesn't matter to the IRS whether you're deducting money on a truck or an air ratchet - it's all business expense.
If so, I was unaware.
As a small business owner, I can elect to buy what I want, but it must still be paid for. If I buy a $50k whatever, I'm denying myself the opportunity of spending that money on other items, including my salary.
Again, the US Congress has decided to put in this provision. They want people to invest in capital (including SUVs) and they attempt to increase the normal demand for capital spending by use of the tax code.
Cheers,
Jack
It used to be, many years ago, if memory serves right, that you went, picked out that nice shiny new car, paid and drove off (maybe the next day) with plates.
Now, with the advent of computers and the information age, you would think it would be much easier. Instead, a paper is affixed to the back window of the new car (or front if it is a jeep, with the attendant consequences for visibility) and then 5-10 days later, one has to return to the dealer to have plates put on.
Why can't it be simple?
- Lou
regards,
kyfdx
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Now we have the same STOOOPID paper "temp tags" on vehicles for MONTHS!
When I've bought vehicles from a private party and needed new plates I was in & out of the State office in under 30 minutes and they weren't even trying to move fast...