DETROIT – A pandemic-induced dealership business model that forces dealers to make do with lean vehicle inventories, more digital interaction with consumers and engage in other cost containing measures, is yielding fatter dealership profits.
In turn, those profits are stoking a red-hot dealership buy-sell market.
So say dealership buy-sell advisors who handle those transactions for dealership groups that want to get bigger and dealers eager to cash out of their businesses.
“There’s no question that the buy-sell market in auto retail is probably as hot as it’s ever been,” said Erin Kerrigan, managing director of Kerrigan Advisors, a dealership consultancy in Irvine, Calif., that specializes on the sell-side of dealership transactions.
Cash flow from operations of dealer groups’ existing businesses coupled with inexpensive acquisition financing and debt financing has generated a “tremendous amount of capital” for groups looking to grow their businesses, Kerrigan said.
In 2021, publicly-held dealership groups acquired 250 plus franchises which were expected to add more than $20 billion in annualized revenue, according to Kerrigan’s year-end Kerrigan Index that came out in mid-January.
The groups also deployed an estimated $7 billion plus to dealership acquisitions, out-spending any prior year by more than $4.5 billion, the report said.
Kerrigan expects the momentum to continue into 2022.
More blue sky
Alan Haig, president of Haig Partners, a buy-sell advisory in Fort Lauderdale, Fla., does too. Haig said his calculations show that dealership “blue sky” or their intangible values, in late January was more than 60% higher than it was prior to the pandemic and per-dealership profits more than doubled from $1.4 million to $3.5 million.
On top of those profits, many dealers got cash infusions in the form of federal Paycheck Protection Program loans.
Those loans do not have to be paid back if the businesses that receive them meet certain guidelines pertaining to employees and payrolls.
“For a lot of dealers, they’re looking at their bank statements and they’ve never had so much capital,” Haig said. “For the buyers who are successful and want to grow — they’re putting that capital back into buying stores. For those dealers who aren’t sure about the future, maybe they want to take today as the time to exit, when prices are really high.”
The Dave Cantin Group, a New York City merger and acquisition firm, closed more than $1 billion in total automotive dealership acquisitions and completed approximately 40 total transactions in 2021, the company said n a Feb. 8, 2022 press release.
“We’re excited to carry this momentum into 2022 and create more value for our clients,” said CEO Dave Cantin, said in the release. “With competitive opportunities and approachable valuations, we’re confident that DCG will complete around 50 M&A transactions this year.”
Less inventory, more profits
Sweetening the dealership profitability pot in 2021 was slashing of new-vehicle production caused by a world-wide shortage of semi-conductor chips.
That vehicle shortage enabled dealers to hold transaction prices at or above manufacturers’ suggested retail prices, generating healthy profits from virtually every new vehicle they sold.
The inventory shortage is still an industry problem in early 2022 and vehicle prices are still high.
According to Kelley Blue Book, a Cox Automotive unit, the average new-vehicle price in January 2022 fell 1.8% or $839 to $46,404, compared to December 2021 but up 12.5% or $5,155 from average prices in January 2021.
Prices and profits of used vehicles, especially later model ones, also rose in 2021 when dealers and consumers turned to those vehicles as new-car replacements.
Technology drives consolidation
Technology is also helping drive dealership consolidation, too, the advisors said. Out of necessity, dealers escalated or honed their eff orts to provide consumers with an omni-channel experience of doing business online, on the phone, in person, or a combination of those methods.
Digital retailing tools have become more sophisticated and many dealers have found they can sell a lot of vehicles with little to no direct contact with the consumer, Haig said.
And consumers showed dealers they are willing to do a lot of car-buying leg-work without setting foot in a dealership, he added.
“There are enough online tools to figure out what we want to buy, figure out where that car is located and we can determine the condition of that vehicle,” Haig said.
“We can determine if it’s a fair price, we can get trade-in value online. We don’t really need to go to the dealership and sit for hours and hours.”
Public groups are main buyers
Publicly-held dealership group continue to lead the consolidation charge.
Lithia Motors of Medford, Ore., and Asbury Automotive Group, of Duluth, Ga., are among the most active buyers of dealerships, said George Karolis, president of The Presidio Group based in Denver and Atlanta.
He said large groups being acquired by even larger groups is not uncommon because every ownership group is “at a different stage and has a different mindset.”
“Some have succession plans, some don’t; some are retiring, so they decide to sell purely for financial reasons or they have facility issues that they don’t feel like investing in,” said Karolis, whose group was financial advisor to Park Place Dealerships in the Dallas-Fort Worth area to Asbury in August 2020.
The purchase price was $685 million for goodwill and approximately $50 million for parts, fixed assets and leaseholds excluding vehicle inventory, according to a press release, announcing the transaction.
But don’t count out the privately-held groups.
They too, are buying other dealerships to achieve economies of scale and more efficiencies so they can have a broader customer base, Karolis said. “There are hundreds of private buyers that want to grow,” he added.
Kerrigan Advisors is honored to work with auto retailers throughout the US to enhance the value of their enterprise. Learn more about our services below:
Customized and confidential sell-side services for higher value dealerships and dealership groups nationwide, with a proven record of achieving the highest sale price per transaction of any firm in the industry.
Capital raising and partnership structuring for growing dealership groups, supported by the largest investor database in the industry.
If you are a buyer in today’s market, Kerrigan Advisors welcomes the opportunity to learn about your acquisition criteria and include you in Kerrigan Advisors’ proprietary Buyer Database.
We welcome the chance to learn more about your acquisition criteria so that we can contact you in the event a client matches your investment profile.
Contact us to learn more about Kerrigan Advisors’ client services, or to have a conversation about the buy/sell market. All of our conversations are 100% confidential.