19700 Fairchild Road Suite 150, Irvine, CA 92612

|

Email us

|

(949) 202-2200

Buy-sells drop off, but outlook is positive

The coronavirus pandemic halted most dealership acquisition deals in late March as it became the biggest shock to the buy-sell market since the Great Recession, experts say.

But unlike the Great Recession, which chilled nearly all buying and selling of dealerships in 2008 and 2009 as financial markets dried up and lenders limited borrowing, this disruption is likely to be short-lived, said Alan Haig, president of Haig Partners, a dealership advisory firm in Fort Lauderdale, Fla. 

The number of dealerships changing hands fell in the first quarter and is predicted to be down significantly in the second quarter, but some buy-sell advisers told Automotive News they see a rebound in deal-making and transaction closings in the second half of the year. Haig, for instance, said he has clients working to close deals involving more than 25 dealerships by the end of September. 

"There's enough confidence with buyers and lenders, and values haven't really fallen that much since pre-COVID times," said Haig, whose firm had nearly no buy-sell activity from the end of March to early June. "So the sellers thought they were getting a fair value for businesses. So all parties decided to move ahead."

Erin Kerrigan, managing director of Kerrigan Advisors, a sell-side firm in Irvine, Calif., noted that deals just getting started now will still take several months to close.

"You might not see a pickup in closings until the first quarter of 2021, but we believe deal activity will be back at pre-COVID levels by the end of 2020," Kerrigan said.

All transactions that Kerrigan Advisors was handling when the crisis hit in March were postponed, and talks are resuming, she said. Buyers want to see that the stores are returning to pre-virus levels of sales and service.

"And to the degree that they are, then we're not seeing any discussion really of change in pricing," Kerrigan said." 

Haig said his firm's likely closings include a mix of multistore groups and individual dealerships across the country. 

Kerrigan Advisors' Blue Sky Report this month showed that in the first quarter, completed buy-sell transactions — both single-store and multiple-store deals — slid 9.3 percent to 49. The first-quarter Haig Report, released last week, said the number of individual dealerships bought and sold plummeted 34 percent to 68.

Even bigger declines are expected for April, May and June.

Haig predicted the deal tally could fall off 70 percent or more in the second quarter before rebounding for the rest of 2020.

Performance Brokerage Services Inc., a buy-sell firm in Irvine, Calif., closed on 13 transactions in the first quarter. In the second quarter, the firm has closed just three deals.

"March was just a black hole," said Jason Stopnitzky, co-founder of Performance Brokerage. "Everything got delayed and extended, and we lost two deals." 

Stopnitzky said his phone didn't ring with prospects for 45 days.

But the calls started again in May, said Jesse Stopnitzky, a partner in the firm and Jason Stopnitzky's brother. Performance Brokerage now has 10 deals expected to close by Aug. 1. Those mostly involve larger groups as the buyers."

Jason Stopnitzky said he's finding deal-making more challenging today than during the Great Recession. His firm handled 28 transactions in 2008 and more than 30 in 2009, he said."You might not see a pickup in closings until the first quarter of 2021, but we believe deal activity will be back at pre-COVID levels by the end of 2020," Kerrigan said.

"I feel like I'm working harder to get deals done now than ever before," he said.

Pricing, pressure to sell
Haig said the crisis has hurt dealership valuations to a degree. Some of his firm's deals have been repriced, and some sellers are opting to wait to see whether pricing rebounds. He had one deal collapse because the buyer wanted a discount and the seller wanted to wait for better pricing.

Haig estimates the average blue-sky value for a dealership is down 10 percent from the end of 2019 to $6.1 million.

For some dealers, the pandemic may trigger a decision to sell. Kerrigan said she expects more single-point dealership owners will decide now is the time to sell vs. re-engineer their business to be competitive online.

And there are dealers ready to jump on those stores, such as Matt Bowers, who bought a Chrysler-Dodge-Jeep-Ram dealership in Baton Rouge, La., this month, bringing the store count at his Southern United Auto Group, of New Orleans, to six. Bowers, the group's president, has a deal in the works to buy another store in the Southeast in 30 days.

"In the financial crisis, I saw opportunities come up in respect to leverage and performance," Bowers said. "Now people realize that the business is going to fundamentally change again."

Public retailer activity
Among the public retailers, only Lithia Motors Inc. and Asbury Automotive Group Inc. bought stores in the first quarter. Lithia purchased two California Lexus dealerships, while Asbury bought a Chrysler-Jeep-Dodge-Ram store in Colorado.

Asbury, the nation's seventh-largest new-vehicle retailer, in March canceled its planned $1 billion acquisition of 10 Park Place Dealerships stores in Texas. It also sold five stores in Mississippi and one in Atlanta during the first quarter. Asbury CEO David Hult said in April that Asbury was looking at deals again but would approach them slowly and thoughtfully.

Lithia, the third-largest new-vehicle retailer in the U.S., said it has delayed pending acquisitions until the second half of 2020. During Lithia's first-quarter earnings call in April, executives said the company had 14 deals under contract, had worked to renegotiate real estate terms and was waiting on earnings quality verifications. CEO Bryan DeBoer said Lithia's top priority "for allocating capital will continue to be expanding our network by acquiring strong new locations."

Kerrigan said the interest level for some buyers has accelerated because of the crisis. Her firm has been contacted by numerous dealership groups seeking opportunities, as well as newcomers who see it as a great time to buy.

"Now that we've had a pandemic-induced quick recession, if you will, now that we've had a dramatic correction in sales, the investors are very excited about investing knowing that the industry will likely face years of growth and years of improvement in earnings due to some of the efficiencies that have been picked up as a result of the coronavirus shutdown," Kerrigan said.

Share this article on: