Dealers Are Optimistic for Future Franchise Values and Buy/Sell Activity

Written by:
Ryan Kerrigan
Kerrigan Advisors
February 1, 2021

Kerrigan Dealer Survey shows that 33% expect an increase in their dealership valuation; 47% anticipate an increase in buy/sell activity; Subaru and Toyota top valuation expectations.

Auto dealers were more optimistic about the valuation of their dealerships in 2020 than in 2019 as reported in Kerrigan Advisors’ 2020 Dealer Survey released in the fourth quarter.  For all of the disruption and novelty of 2020, this age old business model and mature industry continues to find ways to perform well, further reinforcing the belief that the auto retail business model remains flexible, adaptable, and a very consistent source of cash flow. These beliefs got tested once again in early 2020, and auto retail came out with flying colors.

The 2020 survey queried 680 dealers and found that 33% expect an increase in the value of their dealership over the next year – a 27% boost compared to 2019’s findings, when only 26% of dealers expected their dealership value to go up (see Chart I). All told, more than 85% of dealers expect the valuation of their dealership to remain the same or increase and just 14% expect a decrease in valuation over the next 12 months.  This is very solid sentiment given a strong decade of dealership profitability.  

Chart I – 2020 Kerrigan Dealer Survey Results

These bullish dealer valuation expectations are being driven by an incredible combination of fortuitous developments that no one predicted coming into 2020.  After the pandemic-induced closures, there was a quick and robust rebound in auto sales, record industry earnings, and high expectations for sales and profit growth into 2021 and beyond.  The abrupt migration away from certain major metros, massive restrictions in public transit, reduced usage of shared vehicles, and the general preference for personal transportation, coupled with low interest rates, all coalesced to reset the trajectory for auto sales forecasts.  These are all major drivers squarely supporting growth in auto retail for the foreseeable future.

The survey also provided a glimpse into dealer attitudes about how COVID-19 is impacting their acquisition plans: 64%, a clear majority, do not anticipate adjusting their acquisition plans, while 17% expect to be more acquisitive and only 19% plan to be less acquisitive (see Chart II). Interestingly, close to a majority (47%) of dealers surveyed also expect to see buy/sell activity increase as a result of the pandemic (see Chart III).  We attribute these contrasting responses – more expect the buy/sell market to increase than expect to be acquisitive – to a rise in dealers who are considering a sale.  This is consistent with our expectation that transactions will continue to be completed at a high pace into 2021.

2020 Dealer Survey Q5/Q6 Chart
Chart II & III – 2020 Kerrigan Dealer Survey Results

Franchise Valuation Expectations: Subaru and Toyota Highest, Jaguar Land Rover Comes Back
Dealers also shared their opinions about the direction of specific franchise values over the next 12 months, pointing out potential winners, franchises they felt would remain consistently valued, and those expected to decline in value.  For the second consecutive year, Subaru and Toyota enjoyed the highest percentage of dealers who anticipate the franchises to increase in value at 38% and 37%, respectively.

This underlines the enduring value of certain consistently profitable franchises, such as Toyota, through multiple economic cycles.  Year-over-year dealer expectations of Toyota’s improved value grew 7.4 percentage points, more than any other franchise, which stands out given that Toyota is the highest valued franchise in the non-luxury market.

Also posting valuation expectation gains were Porsche (28%), Honda (27%), Mercedes-Benz (26%) and Lexus (26%). Stability was also on the mind of dealers, with over 60% of dealers expecting values for BMW (63%), Audi (62%), Honda (61%), Jaguar Land Rover (60%), and Mercedes-Benz (60%) to remain the same over the next 12 months. A majority of dealers identified Nissan (69%) and Infiniti (65%) as franchises most likely to decline in value.

Another note of optimism was in the turnaround of 2019’s negative expectations of Jaguar Land Rover. The 2020 Kerrigan Dealer Survey found that 73% of dealers expect the franchise will either increase or remain the same in value, and only 27% expect values to decrease, significantly greater than the 40% who expected a decline in 2019.

The increased optimism for Jaguar Land Rover reflects the strength of the luxury SUV market in 2020, the launch of the new Defender model, and the benefit of low interest rates and low gas prices, which also benefitted other truck and SUV-heavy franchises including Buick GMC, Chevrolet, and Ford.

The top five franchises expected to increase/remain the same/decrease in value over the next 12 months are as follows:

2020 Dealer Survey Q3 Chart
Chart IV – 2020 Kerrigan Dealer Survey Results

2020’s Kerrigan Survey found an overall improvement in valuation and buy/sell activity expectations by surveyed dealers, which is consistent with Kerrigan Advisors’ market observations. We also saw a high correlation between the 2020 results and franchise demand in our proprietary Buyer Database. Franchises most expected to increase in value have the strongest buyer demand, while franchises most expected to decline in value have the lowest buyer demand.

As we close out the historic, volatile year of 2020, auto retail continues to come through strong, having once again persevered and thrived when faced with the most recent challenges.  As such, auto dealers remain optimistic about the future valuations of their businesses going into 2021.  Given their performance, they should be!

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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