Auto Dealership Buy/Sell Transactions Increase 20% YOY: 2018 Trending to be Most Active Buy/Sell Market on Record, According to The Blue Sky Report® Released by Kerrigan Advisors

Written by:
Melanie Webber
mWEBB Communications
December 21, 2018

2018 will be fifth consecutive year of over 200 buy/sells; strong economy fuels robust market – sellers motivated by high valuations that may not last; increased consolidation, generational transfers and growing pool of investors also heat up market; concerns remain about tariffs’ impact on valuations

Automotive retail buy/sell transactions increased 20% year over year in the third quarter meaning that 2018 will be the fifth consecutive year of over 200 buy/sells – and among the most, if not the most, active years for buy/sells on record – according to the just released The Blue Sky Report’s® Third Quarter Report by Kerrigan Advisors.

Underlying the robust buy/sell market, says the report, is the growing US economy: the average dealership has achieved record sales over the last twelve months. But, potential future challenges to the economy and auto retail are also impacting the market, driving sellers who are concerned that today’s high valuations may not last into the next year. These factors, combined with increasing consolidation that promises stiffer competition for smaller players, an increase in generational transfers, and a growing pool of investors, has set the stage for today’s robust buy/sell market.

“With rising interest rates and the changes coming to auto retail, we find sellers more motivated today, concerned that current valuations may not replicate in the future,” said Erin Kerrigan, managing director of Kerrigan Advisors. “And many of these sellers are willing to accept creative transaction structures as part of their exit in order to achieve their valuation goals, a new industry trend and one we expect to continue into 2019.”

Capital markets are attracted to the sustainability and resilience of the dealership business model, even in the face of a more volatile stock market,” added Ryan Kerrigan, managing director of Kerrigan Advisors. “These investors believe in the business case for consolidation, particularly as technology becomes an increasingly critical part of retailing and scale improves profitability.”

Another force contributing to an active buy/sell market is the generational shift occurring within the dealer body. Much of auto retail is family-owned with most dealers being second generation or greater. The report notes that an estimated 50% of dealers are currently in the process of transitioning generations – something many will find challenging, particularly since the odds are stacked against them (only 12% of family businesses make it to the third generation and only 3% to the fourth).

The report also notes that the domestics’ share of the buy/sell market increased in Q3 and will dominate 2019’s buy/sell market due to their low blue sky multiples. In addition, high real estate values are, and will continue to be, a value driver of most buy/sell transactions. Millennials also have a key role to play in future valuations: according to the report, franchises with meaningful millennial market share are well positioned for future higher valuations. The report’s bullish view of the market, however, is tempered by some concerns over the potential impact of higher interest rates and proposed tariffs.

“High import tariffs should be of great concern to auto dealers as they will have a negative impact on auto sales and franchise values,” continued Erin Kerrigan. “Buyers will be unwilling to pay current blue sky multiples as earnings growth prospects turn negative. We can see no positive outcome from auto tariffs and encourage all industry participants to employ their political capital to ensure these tariffs are not implemented.”

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 Q3 2018 Report include:

  • 179 dealership buy/sell transactions were completed in the first nine months of 2018, according to Kerrigan Advisors’ research and The Banks Report. This compares to 149 transactions in the first nine months of 2017.
  • Year to date, domestics’ share of the buy/sell market increased to 52%, up 68% from 2015.
  • The publics acquisition spending, year-to-date, declined 24% compared to 2017, although they are on track to spend $802 million on US dealership acquisitions, which would be the third highest year since the recession.
  • While the number of smaller dealership groups shrinks, the number of larger dealership groups (greater than nine dealerships) has grown 50% since 2012.
  • Private dealership groups continue to represent the largest share of dealership acquirers and are expected to do so for the foreseeable future. Of the estimated 296 franchises which changed hands in the first nine months of the year, 271 were acquired by existing private dealers and new private capital entrants to the market.
  • Non-luxury and luxury import franchises saw their market share decline.
  • Transaction pricing when including real estate remained at record levels through the third quarter of 2018, though average blue sky is down an estimated 10.3% from its 2015 peak. This decline in blue sky value is offset by the increase in real estate value.

The report also identifies three trends which are expected to affect the industry for the remainder of the year and into the new year:

  • Generational transfers increase the number of sellers coming to market
  • A growing pool of financial investors support consolidation and innovation
  • To achieve pricing goals, sellers increasingly accept structured transactions

For more details and to preview report, click here.

About Kerrigan Advisors

Kerrigan Advisors is the leading sell-side advisor and thought partner to auto dealers nationwide. Since its founding in 2014, the firm has led the industry with the sale of over 275 dealerships representing $9 billion in client proceeds, including the third largest transaction in auto retail history – the sale of Jim Koons Automotive Companies to Asbury Automotive Group. 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. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, Kerrigan Advisors does not take listings, rather they develop a customized sales approach for each client to achieve their personal and financial goals. In addition to the firm’s sell-side advisory services, Kerrigan Advisors also provides a suite of consulting and investor 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 Dealer Survey, click here. To read the 2024 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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