Auto Dealership Buy/Sell Market Picks Up Steam: 2018 on Track for 5th Year of 200+ Acquisitions, According to The Blue Sky Report® Released by Kerrigan Advisors

New tax law and economies of scale help publics and consolidators buck trends to grow earnings and fuel Q2 Buy/Sell market to 92% growth over Q1; one-eighth of all auto dealerships have changed hands since 2014 as industry consolidation continues

The new tax law and improved economies of scale and scope are among the trends driving a robust Buy/Sell market in Q2, after a slow start to the year, according to The Blue Sky Report’s® Second Quarter Report released by Kerrigan Advisors.

Seventy-five transactions were completed in Q2, a 92% increase over Q1. With consolidators and publicly traded auto retailers seeing increased earnings as a result of these factors, profitability at dealerships holding steady, and dealerships embracing innovative, profit-driving business models, Kerrigan Advisors predicts that 2018 will mark the fifth consecutive year to see over 200 transactions.

“We estimate one in eight dealerships have changed hands since 2014 and we believe increasing consolidation means this number will only increase,” said Erin Kerrigan, managing director of Kerrigan Advisors. “Consolidators are leveraging significant opportunities to increase earnings with accretive acquisitions by achieving economies of scale and scope post-transaction.”

“Consolidators are finding new ways to grow earnings by employing technology and streamlining their business models, changing their selling systems, and introducing new products across their platforms, while the ‘to-be-consolidated’ are squeezing more profit out of their existing business models. And both are being positively impacted by reduced taxes as a result of tax reform,” added Ryan Kerrigan, managing director of Kerrigan Advisors.

The Kerrigans, however, did note that while blue sky values remained high in Q2, they were below 2017 levels, partly as a result of rising interest rates and floor plan cost increases. But, despite a plateauing SAAR, The Kerrigan Index™, which tracks publicly traded auto retail companies, continues to rise – indicating that Wall Street believes that scale matters and that anticipated disruptions to auto retail will disproportionately benefit the largest dealership groups. “There is little doubt that size will be a key driver for future success in auto retail,” added Ryan Kerrigan.

The Blue Sky Report, published by Kerrigan Advisors, is the auto industry’s most comprehensive and authoritative quarterly report on dealership M&A activity, as well as franchise values. It includes analysis of all transaction activity for the quarter, and lays out the high, average and low blue sky multiples for each franchise in luxury and non-luxury segments.

Key Highlights from the Blue Sky Report Q2 Report include:

• 114 dealership buy/sell transactions were completed in the first half of 2018, compares to 101 transactions in the first half of 2017.
• The number of franchises sold rose 22% over the first half of 2017.
• The number of multi-dealership transactions increased to 33 during the first half of 2018, versus 23 in the first half of 2017.
• Domestics maintained their leading position, followed by import non-luxury franchises and import luxury franchises.
• The publics are tracking towards nearly $1 billion of U.S. acquisition spending in 2018, a level that would surpass all prior years, except 2014 when Lithia Motors acquired DCH Auto Group.
• Private dealership groups continue to represent the largest share of dealership acquirers. Only 22 of the estimated 192 franchises that changed hands in the first half of the year were acquired by public companies.
• Dealership rents rose as compared to 2017, creating concern: the average dealer now has a rent to gross profit of 11.2%, a 3.7% rise over the 2017 ratio.

The Q2 Report outlines three key trends that Kerrigan Advisors anticipates will have a significant impact on the buy/sell market for the remainder of 2018 and into 2019:

• Consolidators focus on geographic concentration
• Successful business models command higher blue sky values
• Expense reduction becomes a major consolidation driver

In addition to expense reduction and a focus on geographic concentration, the report emphasizes the importance of successful and innovative business models to increased valuations, citing the recent sale of Wilsonville Toyota and Wilsonville Subaru, both of which effectively utilized a no-negotiation sales model, resulting in profitability far higher than industry standards.

“Buyers of dealerships today are students of auto retail. Most spend their days and nights thinking of ways to enhance their business’ profitability and strategically drive earnings growth,” said Erin Kerrigan. “Acquisition opportunities that provide an expanding group with new strategies to grow earnings will command a premium in today’s buy/sell market.”

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