Building Wealth Over Time: A Roadmap For Commercial Dealers

By Michael J. McGregorPublished On: October 23, 2023

In the commercial tire business, the quest for profitability can sometimes feel like a struggle. Commercial tire dealers tirelessly serve their demanding customers, often operating on challenging margins. If you find yourself in this position, there are some smart strategies that can help you build wealth over time. In this column, I’ll be exploring real estate ownership and retirement planning, followed by the benefits of investing in index funds.

One of the smartest financial decisions any tire dealer can make is to own the real estate on which your business operates. While your business may be your primary source of income, the property your dealership sits on will become a valuable asset in its own right. Consider this scenario: after years of hard work and dedication, your tire business has grown, but its profit margins remain in the 3% to 4% range. We know that the formula for valuing high cash-flowing businesses is a multiple applied to profitability, but with lower-margin businesses, it’s likely to be an asset-based valuation comprised of the A/R, inventory and equipment — hopefully with a bump for goodwill. In contrast, the property your dealership is housed on has likely steadily appreciated. When the time comes to sell your tire business and retire, often the real estate is worth more than the business itself.

Investing in real estate not only provides upside in value, but it also offers tax benefits, such as deductions for rent, insurance, upkeep and property taxes. Additionally, you generate personal income by leasing the property to the business. Make sure that you are charging yourself fair market rent and raise the rent as needed to keep it at market rates. If you operate in a location that you don’t own, I’d recommend either trying to buy it or moving nearby to an equally good location that you can own. While running your business may be your current focus, securing your financial future is equally as important. Building wealth over time starts with smart, tax-efficient retirement planning. If your business is structured to allow it, set up a 401(k) plan for yourself and your employees.

Contributions to a 401(k) are made with pre-tax dollars, reducing your taxable income in the present while building a nest egg for the future. To maximize the benefits of a 401(k), contribute the maximum allowable amount each year. The limits can change, so stay updated with the current contribution limits set by the IRS. By consistently funding your 401(k), you’ll harness the power of compounding tax-free, allowing your investments to grow substantially over time. In addition to a 401(k), open an Individual Retirement Account (IRA), which offers tax advantages similar to a 401(k), with the added benefit of flexibility. You can choose between a Traditional IRA, which provides immediate tax benefits, or a Roth IRA, where withdrawals in retirement are tax-free. By contributing the maximum allowable amount to both your 401(k) and IRA, you’re creating a strong foundation for your financial future. The earlier you start saving for retirement, the more time your investments have time to grow.

Now that you’ve laid the groundwork through real estate ownership and retirement planning, it’s time to make your money work for you. One of the most prudent investment strategies for long-term wealth building is to invest in index funds, specifically those tracking broad market benchmarks, like the Vanguard, Schwab or Fidelity S&P 500 index fund. Index funds are the only type of investment outside of Berkshire Hathaway stock that has the seal of approval of Warren Buffet. Index funds offer a passive investment approach that has consistently outperformed active stock picking over the long term. Rather than trying to beat the market by selecting individual stocks, index funds replicate the performance of a market index, like the S&P 500.

This approach has several advantages:

Diversification. Index funds provide exposure to a broad range of stocks, spreading risk across the entire market.
Lower costs. Index funds generally have much lower fees and expenses compared to actively managed funds, which can eat into your returns.
Consistency. Over time, index funds tend to deliver consistent, market-matching returns, making them a reliable choice for building wealth steadily.
Minimal effort. With index funds, you don’t need to constantly monitor and adjust your portfolio. They require minimal management, allowing you to focus on other aspects of your life and business.

Investing in index funds is a long-term, low cost “buy-and-hold” strategy. While the stock market can experience fluctuations in the short term, history has shown that it tends to trend upward over extended periods. Stay committed to your long-term investment plan and resist the urge to make impulsive decisions based on short-term market volatility.

Michael McGregor is a Managing Director at FOCUS Investment Banking (focusbankers.com/tire-and-service) and advises and assists multi-location tire dealers on mergers and acquisitions in the automotive aftermarket. For more information, contact him at [email protected].

This article was previously published on Modern Tire Dealer.

Michael McGregor, a FOCUS Managing Director, has over 15 years of experience advising on business transfers, capital raises, and management buyouts for middle market businesses. Prior to Joining FOCUS, Mr. McGregor was a Managing Director at Robertson & Foley, a regional Investment Bank based in Charlotte, NC. He led the firm’s entry into human services – a category that comprises Medicaid-reliant services such as foster care, mental health and MR/DD services for society’s most vulnerable populations. At Robertson & Foley, he successfully led recapitalizations of family-owned businesses to private equity ownership; steered several cycle-sensitive businesses through the 363 bankruptcy process; executed multiple buy side acquisition search engagements; and assisted a diverse number of sellers of privately held businesses. Mr. McGregor started his career in finance as a registered representative at Paine, Webber Jackson & Curtis and then took a 20-year detour into the automotive aftermarket. He joined the Firestone Tire & Rubber Company (later acquired by Bridgestone Tire) where he worked in a variety of positions including financial analysis, automotive product marketing, retail store management, regional marketing management for 350 western region stores, market research, database marketing management and strategic project management. Mr. McGregor ran tire store groups in Los Angeles and in Northern California for Bridgestone. Both were turnaround situations and Mr. McGregor broke them even within short order. He specialized in finding ways to improve gross profit margins while growing car count, unit sales and service sales. Mr. McGregor has been a founder or co-founder of 3 automotive-related businesses: a direct advertising & marketing firm in Northern California that specializes in promoting auto service; a retail chain of automotive accessories in Southern California and an innovative auto service start-up. As the self-billed “father of managed car care” he founded and launched AutoPact Car Service, the nation’s first “HMO for Car Care”. He sold the operations to AAA Carolinas in 2001. Mr. McGregor earned his Bachelor of Science degree in Business Administration /Finance from California State University at Long Beach. He received his M.B.A. from The University of Pennsylvania’s Wharton School of Business.