TO THE EDITOR:
Moshe Stopnitzky belittles the multiple of earnings (goodwill) approach as a “rule of thumb” that uses a wide range of supposed multiples and leaves unclear what definition of earnings should be used (“The myth behind ‘multiple of earnings,’?” Nov. 27).
I have been valuing dealerships for 30 years and co-authored the original NADA guide. The goodwill and return-on-investment approaches are two ways of getting to the same answer: How much additional value is there above the assets? The first looks at pretax income and an expected payback on the goodwill investment; the second looks at after-tax and a normal after-tax ROI.
Since most transactions are assets based, the intangible value is essential to know. But the ROI approach faces the same dilemmas as the goodwill — how much do we adjust rent, owner salary, perks, etc.? The ROI approach also starts with a range of returns; Stopnitzky argues buyers are seeking a 17.5 to 25 percent ROI for domestic brands. How is that any more helpful than 3 to 5 times earnings?
The correct approach is to weigh the factors that increase or decrease the investment risk, whether trying to determine a reasonable required ROI or a reasonable payback multiple.
MARK D. SCHMITZ, President, MDS Associates, La Quinta, Calif. The writer values dealerships for litigation, estate planning and corporate restructuring.