Date published: May 1, 2015
The pace of transactional activity in the retail automotive world is strong and does not appear to be weakening any time soon. Attractive financing options, record profits, and big investment interest have all led to increased buy/sell chatter among automotive industry players. Blue sky generalizations, the “Warren Buffett” mystique, and the presence of private equity seem to cloud the realities of these deals.
Erin Kerrigan of Kerrigan Advisors spoke recently about Warren Buffett and others’ investment prowess, “These new investors are driven by returns, not ego.” Warren Buffett did not ascend to his lofty perch by making poor investment decisions.
Basic understanding of 1) buyer due diligence and 2) key factors to real estate and blue sky valuation will help when considering dealership value and in preparation for the detailed (and sometimes lengthy) process of sale.
Blue sky is a function of what two companies agree upon as the intangible value of a dealership. Dealers contemplating a sale should be cautioned to take a thorough look at their dealership’s image requirements, operations, and geography, as well as their goals upon liquidity.
Jeff Roberts, an attorney specializing in automotive dealerships, addressed dealers attending DrivingSales Presidents Club in April. He said whether buying or selling, consulting transactional, tax, and estate advisors before marketing for sale or structuring acquisitions will provide a realistic approach to determining next steps.
Image Requirements – How desirable is the real estate?
Valuation of real estate should begin with a trusted third party appraisal that is accepted by all levels of purchasers. In the buyer due diligence process, the appraisal will move to the income statement in the form of a rent factor, which in turn influences blue sky when analyzed as a multiple of earnings.
Manufacturer approval is a major component of any sale. Even if a dealer is currently image compliant, the manufacturer has the power (and is not afraid to use it) to mandate improvements from the new owner.
Erin Kerrigan advised, “Most buyers are not looking for a real estate project and many are fearful of the high fixed costs associated with expensive properties.”
Operation – Look at the income statement like a potential buyer.
The steps that lead to sale will require a normalization of earnings, i.e.; accounting for expenses (or profits) a buyer would not forecast and conversely any income that is not properly allocated. Do not underestimate buyer due diligence.
Location – How desirable is the market?
Most public and group acquisitions tend to be dealerships that service large markets with top performing franchises and/or dealerships of acceptable performance based on other factors set forth by the group’s business model. For example, a group may “tuck-in” an additional franchise in a market where it currently has a presence if it is accretive. Seasonality and low population growth have a negative effect on blue sky values.
On March 9, Fort Worth’s Star Telegram reported Berkshire Hathaway Automotive’s first acquisition since its establishment last year. Frank Kent Honda was owned by one of the state’s oldest family-owned groups and operated by fourth-generation siblings Will Churchill and Corrie Watson. Churchill shared that the sale was unexpected and difficult, but appropriate due to an unexpected loss within the family. Berkshire Hathaway Automotive is headquartered in Dallas and represents a variety of brands in the Fort Worth area.
Future – What is the goal upon liquidity?
Dealers are entrepreneurs by nature. A low-yield investment market has attracted new investors because historically, dealerships have generous returns. Upon sale, many dealers will have the choice to passively invest for low ROI or take on riskier investing; neither lending itself to the expertise developed while in the business.
Erin Kerrigan put it frankly, “Over performers are often better off keeping their dealerships and enjoying their cash flow.”
Dealers with intentions of staying in the business have expressed excitement about Warren Buffett’s endorsement of automotive retail. The positive publicity may be just what the industry needs to attract new talent.