2018 transactions increased 6.9% year over year, including record number of multi-dealership transactions; in spite of auto sales downturn, 2019 acquisition market will be robust, with real estate valuations high and private investors seeing key value in Fixed Ops profit centers and improved retail efficiencies, according to The Blue Sky Report® released by Kerrigan Advisors
The automobile dealership buy/sell market recorded another year of tremendous activity in 2018, representing a 6.9% growth over 2017, and the fifth consecutive year of over 200 buy/sells, according to the just-released The Blue Sky Report’s® “Year in Review” by Kerrigan Advisors. Two hundred sixteen transactions closed in 2018, including a record number of multi-dealership transactions. And, according to the report, this five-year streak shows no signs of abating: in spite of an anticipated slump in auto sales and rising interest rates, Kerrigan Advisors predicts that 2019 will be another robust year for buy/sells and valuations.
“The strength of the dealership buy/sell market over the last five years is a testament to the health of the US economy, the financial markets, and most importantly the auto retail industry. We believe the number of buyers, particularly those backed by professionally managed capital, will increase in 2019,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “Despite rising interest rates and a decline in new vehicle sales, the average auto dealership remains highly profitable and valuable, continuing to appeal to private dealers who comprised the majority of buyers in 2019.”
In addition to a strong economy and the ongoing consolidation and innovation opportunities in auto retail, among the key factors Kerrigan Advisors cites for a strong buy/sell market in 2019 are a rise in the number of private investors seeking to put capital into auto retail (year-to-date, the pace of new investors seeking investments in auto retail has risen 59% as compared to 2018); increased dealership gross profit driven by fixed operations (service & parts), as well as dealerships’ historically demonstrated ability to adjust their business model to create new profit opportunities and reduce variable expenses.
“Buyers are looking for higher quality franchises which are more competitive as new vehicle sales decline,” continued Kerrigan. “These franchises tend to have more fixed operations revenue, which commands a gross profit margin nearly ten times higher than new vehicles and are benefitting from the surge of vehicles entering the “sweet spot” of customer pay post-warranty, more than making up for margin losses from a contracting vehicle market.”
Kerrigan Advisors noted that while overall Blue Sky multiple averages are lower, due to a decline in lower demand franchises, valuations remain strong, although more stores are trading at average, rather than high, multiples. Additionally, valuations are being positively influenced by high real estate valuations which are at peak levels and represented the largest portion of a dealership’s value in 2018: Kerrigan Advisors estimates the average dealership’s real estate value at $11.3 million, up 4.9% from 2017. This shift in dealership transaction values from blue sky to real estate has reduced the equity requirements of the average transaction which, Kerrigan Advisors believes, is one of the reasons buy/sell activity remains so strong.
Domestics continued to show strength in the 2018 buy/sell market, according to the report, exceeding 50% for the first time in the last five years. On the other hand, import luxury franchises’ market share continued to decline, a trend the report says will continue in 2019 as their high multiples will be more difficult to achieve for some buyers. Also contributing is the sensitivity import luxury franchises have to rising interest rates because their high valuations typically require more leverage. But, although the larger import segment will also see a decline in 2019, Kerrigan Advisors expects the top import non-luxury franchises, namely Toyota, Honda and Subaru, to grow their buy/sell market share in 2019.
“A key trend for 2019 is that the business model of the franchise will determine buyer demand: as industry sales contract, buyers become more discerning, focusing on high-performing franchises that have attractive, long term investment characteristics and that tend to outperform the industry when sales decline,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “Meanwhile, weaker franchises with challenging dealer business models will see lower buyer demand because today’s buyers are not attracted to franchises with poor dealer relations, highly variable incentive programs, less supportive captive finance companies, low sales per dealership and weak fixed operations.”
The report also identified the following four market trends, which it predicts will meaningfully impact the buy/sell market in 2019 and beyond.
- Sellers avoid image upgrades to capitalize on record real estate values
- Rising interest rates impact blue sky values
- Franchise business models determine buyer demand
- Transaction activity increasingly varies by market
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 year, and lays out the high, average and low blue sky multiples for each franchise in luxury and non-luxury segments.
Key Highlights from the 2018 Full Year Blue Sky Report® include:
- 216 transactions closed, versus 202 in 2017, resulting in a 6.9% increase over 2017.
- Year to date, the pace of new investors seeking investments in auto retail has risen 59% as compared to 2018.
- The number of multi-dealership transactions reached a record 65 for the full year of 2018, a notable 27.5% increase over 2017’s level.
- Domestics’ share of the buy/sell market rose again in 2018, exceeding 50% for the first time in the last five years.
- Public retailers’ acquisition spending declined in 2018 by 6.6% as compared to 2017.
- Private buyers continue to lead industry consolidation, acquiring 93% of the franchises sold in 2018, about the same level as 2017.
- Dealership real estate represented the largest portion of a dealership’s value in 2018, exceeding blue sky value by 84.2%.
- Public companies are undervalued relative to private dealerships. Public blue sky multiples now average just 5.1x, only slightly above Kerrigan Advisors’ average blue sky multiples for private dealerships, despite the publics’ liquidity premium.
For more details and to preview the report, click here.