2018 will be fifth consecutive year of over 200 buy/sells; strong economy fuels robust market - sellers motivated by high valuations that may not last; increased consolidation, generational transfers and growing pool of investors also heat up market; concerns remain about tariffs’ impact on valuations
Automotive retail buy/sell transactions increased 20% year over year in the third quarter meaning that 2018 will be the fifth consecutive year of over 200 buy/sells – and among the most, if not the most, active years for buy/sells on record - according to the just released The Blue Sky Report’s® Third Quarter Report by Kerrigan Advisors.
Underlying the robust buy/sell market, says the report, is the growing US economy: the average dealership has achieved record sales over the last twelve months. But, potential future challenges to the economy and auto retail are also impacting the market, driving sellers who are concerned that today’s high valuations may not last into the next year. These factors, combined with increasing consolidation that promises stiffer competition for smaller players, an increase in generational transfers, and a growing pool of investors, has set the stage for today’s robust buy/sell market.
“With rising interest rates and the changes coming to auto retail, we find sellers more motivated today, concerned that current valuations may not replicate in the future,” said Erin Kerrigan, managing director of Kerrigan Advisors. “And many of these sellers are willing to accept creative transaction structures as part of their exit in order to achieve their valuation goals, a new industry trend and one we expect to continue into 2019.”
“Capital markets are attracted to the sustainability and resilience of the dealership business model, even in the face of a more volatile stock market,” added Ryan Kerrigan, managing director of Kerrigan Advisors. “These investors believe in the business case for consolidation, particularly as technology becomes an increasingly critical part of retailing and scale improves profitability.”
Another force contributing to an active buy/sell market is the generational shift occurring within the dealer body. Much of auto retail is family-owned with most dealers being second generation or greater. The report notes that an estimated 50% of dealers are currently in the process of transitioning generations – something many will find challenging, particularly since the odds are stacked against them (only 12% of family businesses make it to the third generation and only 3% to the fourth).
The report also notes that the domestics’ share of the buy/sell market increased in Q3 and will dominate 2019’s buy/sell market due to their low blue sky multiples. In addition, high real estate values are, and will continue to be, a value driver of most buy/sell transactions. Millennials also have a key role to play in future valuations: according to the report, franchises with meaningful millennial market share are well positioned for future higher valuations. The report’s bullish view of the market, however, is tempered by some concerns over the potential impact of higher interest rates and proposed tariffs.
“High import tariffs should be of great concern to auto dealers as they will have a negative impact on auto sales and franchise values,” continued Erin Kerrigan. “Buyers will be unwilling to pay current blue sky multiples as earnings growth prospects turn negative. We can see no positive outcome from auto tariffs and encourage all industry participants to employ their political capital to ensure these tariffs are not implemented.”
The Blue Sky Report, published by Kerrigan Advisors, is the auto industry's most comprehensive and authoritative quarterly report on dealership M&A activity, as well as franchise values. It includes analysis of all transaction activity for the quarter, and lays out the high, average and low blue sky multiples for each franchise in luxury and non-luxury segments.
Key Highlights from the Blue Sky Report Q3 2018 Report include:
The report also identifies three trends which are expected to affect the industry for the remainder of the year and into the new year:
For more details and to preview report, click here.
Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report® which includes Kerrigan Advisors’ signature blue sky charts, multiples, and analysis for each franchise in the luxury and non-luxury segments. The company also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail. To access The Kerrigan Index™, click here.
Erin Kerrigan is Founder and Managing Director of Kerrigan Advisors, and is a recognized industry expert on dealership valuation, real estate and buy/sells. A sought-after commentator on automotive retailing topics ranging from consumer auto buying trends to auto retail consolidation to private equity in auto retail, she has keynoted numerous automotive conferences and her analysis has appeared in publications such as Automotive News, CNBC.com, The Economist and the Wall Street Journal. For a recent video of Erin’s commentary on the market, click here.
Ryan Kerrigan is Managing Director of Kerrigan Advisors and an expert on US auto retail buy-sell and capital-raising transaction work. Prior, Ryan served as Managing Director at Serent Capital, a $250mm private equity fund investing in middle market companies and served as General Manager of the family’s auto dealership. Mr. Kerrigan began his career as a management consultant at McKinsey & Company, where he advised Fortune 500 companies on growth strategies, organizational issues, pricing and business valuation.
About Kerrigan Advisors
Kerrigan Advisors is the leading dealership buy/sell advisory firm focused on providing a high level of client service for dealership sellers nationwide. Led by a team of veteran advisors, Kerrigan Advisors customizes each sale process to maximize the seller’s transaction proceeds. The firm has sold 76 dealerships in the last four years, including five of the Top 100 Dealership Groups in the U.S. With the most comprehensive buyer database in the industry, Kerrigan Advisors has the industry context and expertise to match every seller with the right buyer. In addition to Kerrigan Advisors’ buy/sell and capital-raising transaction work, the firm also provides a suite of consulting services including accounting preparation for sale, litigation support, open point applications and transactional due diligence.
In addition to the monthly Kerrigan Auto Retail Index, each quarter, Kerrigan Advisors publishes The Blue Sky Report®, a Kerrigan Quarterly, which is the auto industry's most comprehensive and authoritative quarterly report and analysis of dealership buy/sell activity and franchise values. Kerrigan Advisors’ Managing Director, Erin Kerrigan, is a recognized industry expert on dealership valuation, real estate, and buy/sells, and is a frequent speaker at leading auto retail events and conferences, including NADA, JD Power Automotive Roundtable, AICPA, NADC, and Driving Sales’ President’s Club. She has also been a keynote speaker for events hosted by American Honda Motor Company, Audi of America, US Trust, Ohio Automobile Dealer Association, and SunTrust Bank and has led webinars for NADA and Automotive News. Kerrigan Advisors’ Managing Director Ryan Kerrigan is also a sought-after industry expert. He is featured in a monthly column for Dealer Magazine and has written Op-Eds for Automotive News, among other outlets.