F&I firms, or Finance and Insurance firms, specialize in providing finance and insurance-related products, such as vehicle service contracts, to car dealerships. For many owners of F&I firms, the operational aspects of running their business and helping their client base maximize dealership profitability consume most of their time.Thinking about succession planning and value maximization of their own business isn’t always top of mind. But even if an owner has no plans to perpetuate their business anytime soon, it’s wise to have a sense for how external parties will view their company and understand what levers they can pull to increase value.
A buyer or investor will typically determine a firm’s value (and what they are willing to pay for it) by estimating its EBITDA (Earnings Before Interest Taxes Depreciation & Amortization) and applying a multiple. While the calculation is simple, arriving at the specific underlying valuation inputs can be complicated. Consistent cash flow is the primary driver of EBITDA and is an aspect where an owner has a significant amount of influence. The factors driving the EBITDA multiple, however, are less cut and dry.
Business owners often ask MarshBerry, “How can I enhance valuation?” Here are six keys to increasing an F&I firm’s attractiveness and worth:
- Deliver superior financial results. F&I firms that exhibit strong and consistent revenue growth, profitability, and cash flow are more attractive. In addition, larger firms often command higher purchase price multiples.
- Develop a strong and diversified client base. F&I firms that nurture deep dealership relationships tend to have higher customer retention. Those with superior knowledge of F&I products and reinsurance differentiate themselves as trusted advisors. Providing robust training and responsive, ongoing support also creates customer stickiness. Equally critical is maintaining a diversified client base. Having too much of the business tied up with a single or few dealership group(s) makes a company particularly susceptible to revenue loss if that business evaporates, which is a risk with the rise in dealership consolidation.
- Build a positive industry reputation. Developing a strong reputation within the market brings credibility and trust and often leads to new customer relationships.
- Offer a broad and customized product portfolio. A comprehensive offering of innovative products and tailored solutions that cater to a wide range of dealership needs, including those of large dealership groups, can be a key differentiator in the market.
- Exhibit growth potential. Demonstrating a clear growth strategy, untapped avenues for future growth (such as product or geographic expansion), and a strong pipeline of new business opportunities increases a firm’s attractiveness.
- Build a scalable business. It’s prudent to build an F&I firm that can accommodate future growth. Having a firm be overly reliant on a single person, such as the owner, limits growth as one person can only handle so much. It also entails risk, as the business may struggle to function if that person is unavailable due to illness or other unforeseen circumstances. To mitigate these risks, owners of F&I firms should focus on assembling a strong and empowered team. Building a resilient enterprise versus a one-person shop is an important avenue to enhancing value. Finding ways to drive efficiency, such as streamlining operational processes and the smart use of technology also adds to an F&I firm’s scalability.
Keep in mind that valuation is part art and part science, and a firm’s perceived value can vary greatly from one buyer to the next. But whatever the scenario, start with the end in mind and focus on the factors that influence a firm’s attractiveness and value. Taking proactive steps to optimize business performance is a clear path to long-term value maximization.
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