Buy-Sell Dealership Activity Expected to Grow

Written by:
Jim Henry
June 6, 2023

Buy-sell broker firms say auto dealers should expect an elevated rate of dealership acquisitions to resume again this year. They predict the number will be below the record and near-record volumes experienced in 2021 and 2022, but above the pre-pandemic levels in 2019 and earlier. They predict it will also be above the slow 2023 start.

And of highest priority to all dealerships, whether or not they’re for sale: dealership profits are also expected to remain at a high level, much higher than before the pandemic, even if profit per vehicle is down somewhat this year, because new-vehicle inventory is up.

“A little less than a lot is still a lot,” when it comes to dealer profits and dealership values, says the recent Haig Report for the first quarter of 2023 from buy-sell advisors Haig Partners, Fort Lauderdale, FL.

Adds Erin Kerrigan, founder and managing director of rival Kerrigan Advisors, Irvine, CA., “In 2023, there are many reasons to be optimistic about profit potential.”

For example, dealership Fixed Ops profits are up as customers drive more and service and repair older cars and trucks, she says during a webinar sponsored by the American International Automobile Dealers Assn., Alexandria, VA.

Analysts say average dealership retail gross profits probably peaked in the first half of 2022, driven by high consumer demand, coupled with the acute shortage of new vehicles, caused first by the COVID-19 pandemic and then by a shortage of computer chips.

Since then, new-vehicle inventory has gradually improved and average retail gross profits per vehicle are down from record highs. Meanwhile, as new-vehicle inventory increases, so do interest rates. Higher volume and higher interest rates have boosted the cost of dealers’ floorplans (revolving credit, usually from the manufacturer, to finance new car inventory and other major purchases).

Taken together, those factors mean average retail gross profits for publicly traded dealership groups are down 22% in the first quarter of 2023 vs. a year ago, the Haig Report says.

The report also says the average “blue sky” value for publicly owned dealerships is about $24.2 million in the first quarter of 2023, down only about 3% vs. the end of 2022. With that decline, the report says the average is still 2½-times higher than year-end 2019.

“Blue sky” estimates how much a dealership is worth, over and above the value of its physical assets. Put another way, it’s a measure of expected future profitability.

Despite the recent changes, “We are still seeing a lot of M&A activity,” says Alan Haig, president of Haig Partners. “I believe this year will pick up a bit from what we see in Q1” of 2023, he tells Wards..

Publicly traded dealership groups drove record-high dealership buy-sell volume in 2021. In 2022, the public groups pulled back, but privately held groups stepped up acquisitions, so total buy-sells didn’t decline much.

According to Haig Partners, U.S. dealership buy-sells hit a record 707 in 2021, including 215 stores purchased by publicly traded groups. In 2022, the total declined to 607, including just 40 stores for public groups. In the years just before the pandemic, the annual average total volume was about 330 stores, Haig Partners says.

In the first quarter of 2023, buy-sell volume fell to just 82 stores, including only two for the public groups, down from 118 in the year-ago quarter, the Haig Report says.

Alan Haig says the drop in first-quarter 2023 buy-sells is probably a delayed reaction to concerns about the banking industry due to several high-profile bank failures last year. Those concerns have largely died down, he says.

So, from a slow start, Haig expects buy-sells to pick up the pace later in 2023, especially as publicly traded groups get back in the market.

“You have to remember, there’s a long timeline between when a transaction starts and closing,” he says. “From start to finish, it could easily take six months.”

About Kerrigan Advisors

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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