Buying U.S. dealerships can be profitable

Written by:
Lawrence Papoff
Canadian AutoWorld
July 1, 2022

You would think the Steele Group would be content with its profitable Canadian dealerships – 49 dealerships representing 28 brands in Atlantic Canada plus eight collision centres and a finance centre. That the Steele Group would be the last to expand into the U.S. market. Well, you’d be wrong.

In 2020, Steele added Luling Chevrolet Buick GMC deep in the heart of Texas. Since that time, Steele has added four more dealerships. All are in Texas. They are CJDR (Chrysler, Jeep, Dodge Ram) Gonzales, Steele CJDR Lockhart, Hyundai New Braunfels, and Hyundai Kyle.

Luling is 76 km south of Austin and 227 km east of Houston. Steele Group president/COO, Kim Day said buying south of the border makes good sense. “The U.S., and in particular the state of Texas, is growing at a rapid pace both economically and population wise which provides a stable economy going forward. It further diversifies us as well.”

As for the looney’s low value as opposed to the greenback – in early May, one looney was worth 78 cents American – that isn’t the road- block it appears to be at first glance. Day called the weak looney a small trade-off, given the lower cost of doing business south of the border.

The remote management challenge
As with any acquisition, the Steele Group did its homework, examining all potential acquisitions carefully to minimize the possibility of any unpleasant surprises. They found Luling Chevrolet dealership staff to be “exceptionally talented” and proceeded to acquire others. Staff may be talented. But that doesn’t mean that the stores they acquired are left to carry on by themselves. They were now members of the Steele Group after all.

“We have spent time in the operations, with key support staff, helping to onboard the new stores. Charlie Raymond, VP operations, has spent time there working with the teams on the ground as well, which has helped transition these new operations,” Day said.

But the Steele Group ruled out micromanaging. Local management was left to carry on.

“We have built a culture of trust and respect throughout the Group that extends south of the border,” she added. Still, there is regular communication, so that Group = management is aware of challenges and opportunities. In short, it’s a matter of balance as is the case with the management of the other Group dealerships.

Day said that approach didn’t change during the pandemic, when regular contacts were done virtually like most dealerships.

Evaluating candidates
She added management should assess the geographic location of the dealership, the population growth, the size of the business and the dealership’s historical profitability. They should keep an eye on where improvements can be made and brand diversification. And of course, staff ability.

Day continued that based on Steele Group’s Texas experience in the U.S., there can be some minor process differences compared to the Canadian operations but overall, the business is the same.

“But at the end of the day, if you treat your people and your customers right, you will be successful.” She added that Steele Group values can be exported. “I believe that we have built values in our organization that foster a culture of inclusion, trust, respect, and integrity, and those are commonplace in every one of our businesses, no matter where we are located.”

The view from south of the border
Sell-side advisor Erin Kerrigan, founder/managing director of Kerrigan Advisors, has represented numerous U.S. dealers who have sold to Canadian buyers since she founded Kerrigan Advisors in 2014.

Kerrigan finds Canadian dealers bullish about buying south of the border.

One of the reasons is the state franchise laws that regulate the contractual obligations between dealers and their OEMs. “They regulate what the OEM can and can’t do. For example, they prevent the OEM from selling new vehicles and related services to the public,” Kerrigan pointed out.

She agreed with Day that when it comes to buying an American dealership, the weak looney is not a “dramatic factor.” The attractions, she added, outweigh the looney.

“We are a car culture. Dealerships have remained profitable through thick and thin,” Kerrigan insisted.

She said the pandemic is as an example. “Our industry became stronger because it became more efficient. We learned we didn’t have to sell all these cars at a discount.”

Now the industry is poised to be as profitable as it has ever been, Kerrigan predicted.

She pointed out weaker brands have more volatile earnings than blue-ribbon brands such as Honda, Subaru and Toyota. But she is quick to point out that “this is not to say you can’t succeed with the others. But you need strong management, a strong used car department and a solid fixed ops
plan. That’s key.”

Working with the financial advisor
Kerrigan pointed out that buyers should make their acquisition criteria clear – what market they are interested in, what brand, what dealership size and how much they are looking to spend. So, when an opportunity comes up, the financial advisor can move quickly.

Kerrigan predicted that more Canadian dealers are going to be looking south. “You are going to see a lot more Canadians coming to the U.S. as OEMs in Canada change the business model by dealing directly with customers, paying dealers a flat fee for selling cars. That takes away the negotiating and the pricing power dealers currently have. And the profitability of their dealerships.”

When asked if the American dealerships the Steele Group acquired are profitable, Day answers emphatically “Yes!” We are quite happy with the results so far.”

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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