The Current Tariff Landscape for Dealerships
Tariffs—the topic seemingly on everyone’s mind. In this edition of Accelerate, we’ll share high-level considerations as your dealership navigates the tariff environment, and relay insights we’ve learned from our auto, commercial truck, and machinery and equipment clients across the country.
How We’re Seeing Dealerships Respond
The back and forth of tariff conversations and regulations has dealerships, original equipment manufacturers (OEMs), and customers in a continual loop of uncertainty. We are seeing and hearing that most dealerships plan to stay their current course as the future remains unclear. We saw customer demand surge in Q1 of this year as the consumer feared potential future price hikes—a few auto dealership clients have shared that Q1 of this year mirrored COVID-19 level sales numbers, which had previously been record numbers for their locations.
While sales may surge or plummet, dealers are generally holding fast and hesitant to make any drastic changes or investments until certain tariffs seem more concrete.
Some strategies our clients are considering are:
- Ordering specific parts at a 10 to 20% increase—these include parts that are normally used in high volume or are easily resalable.
- Holding onto used vehicles or equipment that would normally go to auction to provide more price variety should tariffs impact new cars in the future.
- Staying firm on pricing in case sales decline in future quarters from possible decreased demand due to the tariffs.
No matter the strategy your dealership may pursue, the greatest asset in the current landscape is information—staying informed on updates from Washington and understanding the impact tariffs could have on industries in the United States. Forvis Mazars has a dedicated tariff resource center to help you stay current on these matters.
Navigate Tariffs With Confidence
Tariffs can be complex, but staying informed doesn’t have to be. Our team provides tailored updates and actionable insights to help you prepare for what’s next.
Reinsurance Considerations
Some dealers—specifically in auto retail—may be considering other strategies to approach tariffs, namely, in their reinsurance entity.
One way to navigate the impact of tariffs on your reinsurance company profit is to consider updating the pricing and rate cards for vehicle service contracts and other service products offered to customers. While updates to the rate cards are forward looking for the life of the policy, and would not apply to products already sold, accounting for increasing costs now could materially impact the profitability of your reinsurance company given the expected higher claims expenses in the future.
Dealership Valuations – Tax Planning Opportunity During Market Uncertainty
A natural impact of tariffs is consumer uncertainty, given the constant updates from Washington and various OEM responses. Consumer uncertainty has contributed to market downturns in the past, and some dealers facing a potential estate tax liability may consider planning a dealership valuation to use a portion of their gift and estate tax exemption.
We saw after the 2008 recession—and particularly after the first quarter of 2020—that many dealerships bounced back valiantly. By focusing on strong operations across the diverse dealership business model, the average dealership was able to capitalize during the recovery and growth period that followed.
Based on our experience, it is generally the case that market multiples and the profitability of new-car dealerships are inversely related. For instance, if the pre-tax earnings margin of a particular dealership is 6% of sales while the average for a similar dealership is 3%, hypothetical buyers may worry about the ability to maintain such a level of profitability going forward—that increased risk is often reflected in a decreased market multiple. In the case of the 2008 recession and first quarter of 2020, we observed that the inverse relationship between profitability and market multiples is not always the case during market uncertainty. Based on the limited buy/sell activity that occurred and the pricing levels of the public dealership companies, we witnessed a decrease in both earnings and multiples. Looking back, this was a great time to be a buyer, but the extreme uncertainty at the time caused the implied valuations to temporarily decrease.
Since downturns typically result in decreased pricing and valuations, this may not be the best time to sell a dealership; however, for investors facing a potential estate tax liability, this can be an excellent opportunity to use a portion of your estate and gift tax exemption. As we observed in working with clients, it can be behaviorally difficult to make significant transfers during times of uncertainty; however, if you have a plan set in place for when these opportunities arise, it can be to your advantage.
Our Dealership valuations professionals can help you think through these questions and devise a valuation strategy during this time of uncertainty. If you’d like to learn more, connect with our valuations team.
Conclusion
The dealership industry is highly impacted either directly or indirectly by tariffs in certain regards. In a time of uncertainty, staying informed and connecting with your trusted advisors often is a necessity. Forvis Mazars will continue to share updates on tariff regulations and the impacts to dealers, and we encourage you to connect with one of our professionals as you have questions.