According to The Blue Sky Report® by Kerrigan Advisors, the pandemic’s impact on the first and second quarter will not result in dramatic changes to blue sky values, with a buy/sell rebound projected in the second half
IRVINE, Calif.–(BUSINESS WIRE)–The 2020 auto dealership buy/sell market declined in the first quarter, falling 9.3% off 2019’s transactions pace as the COVID-19 pandemic took its toll on auto retail, according to the just-released First Quarter 2020 Blue Sky Report® by Kerrigan Advisors. Transactions slated to close at the end of the quarter were postponed, renegotiated or, in the worst case, terminated. However, the report indicates that blue sky values are not dramatically impacted and, with auto sales due for an uptick, a buy/sell rebound in the second half of 2020 is anticipated.
A bright start to the year was not enough to avoid severe financial whiplash as US dealerships shuttered in mid-March and consumers were told to stay home. As a result, auto sales plummeted in March and April, resulting in one of the sharpest declines in dealership earnings on record, and the buy/sell market followed suit: Kerrigan Advisors expects the second quarter of 2020 to be the slowest buy/sell market in recent history.
“As a result of the coronavirus, auto dealers had to refocus their energy on internal operations and cash preservation in March and April,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “And while, at present, the industry is still managing through the economic effects of the health crisis, we see better days ahead thanks to the resilience of the dealer model that’s likely to thrive as dealerships reopen. In fact, with industry cost cuts and improved efficiencies, we expect auto retail will see significant improvements in profitability, making more money on less revenue, in the second half of 2020.”
Given strong buyer demand and today’s low cost of capital, The Blue Sky Report® by Kerrigan Advisors does not forecast dramatic changes in blue sky values in the foreseeable future, despite the economic impact of COVID-19 in the first and second quarter. Once again, says the report, many dealers have shown the ability to maintain profits, even during the worst of times (in the depths of the Great Recession, auto retailers remained profitable); and sellers choose to patiently wait for a buyer to reach their valuation expectations, rather than sell at a discounted valuation. This means that the most likely impact of COVID-19 will be a slower buy/sell market in the second quarter of 2020, rather than a decline in dealership valuations.
As auto sales rise, and buyers seek to put a substantial amount of capital to work, the report sees potential for a rebound in buy/sell activity in the second half of the year, and notes that the capital markets are experiencing a surge in auto retail valuations. Since bottoming on March 18th, The Kerrigan Index™ has risen 81.2% through the end of May. Also, the industry is seeing improved profits from an increased utilization of technology to cut costs as digital retailing becomes the order of the day.
“While the coronavirus will undoubtedly force some distressed dealership sales, those one-off valuations are not a reflection of the overall market,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “In fact, while this global health crisis is impacting auto retail in many different ways, industry partners, vendors, lenders and OEMS have provided dealers with tremendous financial and administrative support to ensure they weather the financial impact of lost sales and avoid closure. And, auto retailers have the most flexible cost structures within the supply chain, so they are best able to adjust to unforeseen events. Given that, the health crisis has caused few distressed transactions.”
Kerrigan Advisors made one valuation upgrade in the First Quarter 2020 Blue Sky Report, increasing Toyota’s low-end multiple from 5.25 to 5.5. This increase reflects rising buyer demand for one of the highest quality franchises in the market and a belief that Toyota is best prepared amongst all OEMs to weather the economic impact of COVID-19. “Toyota had one of the lowest sales declines in the first quarter of any franchise and maintains the highest credit rating of the OEMs,” said Erin Kerrigan. “With a flight to quality assets, Toyota franchises are expected to command even higher multiples as buyers seek safe investments during the pandemic.”
Kerrigan Advisors has identified the following three trends, which are expected to meaningfully impact the buy/sell market for the remainder of 2020.
Highlights from the First Quarter 2020 Blue Sky Report® by Kerrigan Advisors include:
The Blue Sky Report®, published by Kerrigan Advisors, is the auto retail industry’s most comprehensive and authoritative quarterly report on dealership M&A activity, as well as franchise values. The quarterly report, received by over 9,000 industry recipients in 35 countries, includes analysis of all dealership transaction activity for the year, and lays out the high, average and low blue sky multiples for each franchise in the luxury and non-luxury segments. For more details and to preview the report, click here. To sign up to receive the quarterly report, click here.
Kerrigan Advisors 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.
1 Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Kerrigan Advisors is the premier sell-side advisor and thought partner to auto dealers nationwide. The firm advises the industry's leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Kerrigan Advisors has represented some of auto retail's largest transactions and advised more of the largest dealership groups in the US than any other buy/sell firm in the industry. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, the firm does not take listings, rather they develop a customized approach for each client to achieve their personal and financial goals. In addition to Kerrigan Advisors' sell-side advisory and capital raising services, the firm also provides a suite of consulting services including growth strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.
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.—To download a preview of the report, click here.—The firm 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.—To read the—2023 Kerrigan OEM Survey, click here.—Kerrigan Advisors also is the co-author of NADA's Guide to Buying and Selling a Dealership.
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