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Blue sky values up, but buy/sell activity likely to slow as industry growth does, panel argues

SAN FRANCISCO -- Slowing vehicle sales growth rates across the industry are also likely to slow dealership buy/sell activity just as blue sky values peak, just not yet, argues a panel of experts on dealership transactions at the 2015 J.D. Power Automotive Summit.

While new-vehicle sales growth slows, lenders are increasingly willing to fund acquisitions in an industry with higher returns on investment than are available almost anywhere else.

“Dealers have gone from being the pariahs to the darlings of the financial community,” says Erin Kerrigan, managing director of Kerrigan Advisors, which helps dealers navigate buy/sell transactions. Kerrigan predicts buy/sell activity will soon begin to get weighed down by a variety of factors that include slowing new-vehicle sales growth. “2015 might not be the peak year, but it’s certainly going to be a good one.”

Kerrigan said that dealership profits and revenues are at record levels, motivating some potential sellers who feel their dealerships have never been healthier -- or more valuable. But while potential buyers are benefiting from cheap capital, they may be reluctant to come in when sales growth might not be sustainable.

Kerrigan, who spoke before a panel discussion on buy/sell activity, said dealership blue sky multiples can range from 3.1 to 9.3, depending on the potential buyer in a transaction. Blue sky is the intangible value of a dealership expressed as a multiple of adjusted pretax income.

Private purchasers were generally willing to pay lower blue sky multiples, while publicly held buyers were generally willing to pay higher blue sky multiples, depending on the transaction.

Kerrigan said buyers have shown a greater willingness to pay higher blue sky multiples for dealerships that are underperforming in their markets, and lower multiples for those that are overperforming their traditional returns.

Buyer demands for a franchise and its real estate costs also factor into agreeing to multiples, as does whether a franchise matches the demands in its local market, she said.

During panel questions, panelists said that automotive retail is becoming a very attractive investment for outside investors, mentioning the Warren Buffett-Van Tuyl deal as an example. However, manufacturer approvals remain a key hurdle.

“I think there’s a lot of outside money coming our way, and I think the manufacturers need to get ready for it,” said Ed Napleton, president of the Napleton Dealership Group, of Westmont, Ill.

Mark Iuppenlatz, vice president of corporate development for Group 1 Automotive, said he sees an “increase in the number of people putting their toe in the water, testing the market” to sell their dealerships. But, he said. “a lot of the people that are unmotivated sellers have unrealistic expectations, while people who are motivated sellers have realistic expectations” about the market value of their businesses.

For all potential buy/sell transactions, real estate values continue to weigh heavily on whether deals get done, panelists said. Dealerships with attractive real estate costs are far more likely to sell than are dealerships with high rents or big facility improvement needs.

“Real estate is the single biggest factor for deals that we haven’t done,” said Franklin McLarty, CEO of RML Automotive.

Napleton agreed: “You can get rid of your wife, but you can’t get rid of bad real estate. It stays with you forever.”

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