Kerrigan Blue Sky Report Details Record-Breaking 2023 Dealership Sales

Written by:
James Hickey
Digital Dealer
April 22, 2024

Kerrigan Advisors just released their 2023 Blue Sky Report that found dealership transactions were up 6% compared to the year before.

A total of 397 dealerships were completed and included the third largest transaction in auto retail history—the sale of Kerrigan client Jim Koons Automotive Companies, representing 20 dealerships, to Asbury Automotive Group.

Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors, told that auto retail outperformed the broader corporate M&A market in 2023— dealership buy/sell market rose to a new all time high, the corporate M&A market declined 30%.

Erin Kerrigan Comments

“Auto retail consolidation is accelerating for a number of reasons,” said Kerrigan. “First, dealers have a record amount of capital to invest after four years of historic earnings. Since 2020, dealers on average earned 2.5 times what they earned in the prior four years before the pandemic. Those dealers who plan to stay in the business for the long-term know that scale is critical to their future success.

For this reason, Kerrigan said nearly 50% of the more than 60+ dealers surveyed by Kerrigan Advisors plan to acquire dealerships in 2024.

“They are deploying their large cash reserves towards expansion and acquisitions because they know they need scale to succeed in the future and they are attracted to the high levels of returns they achieve in the industry – averaging 35% in 2023,” she said.

Reasons for Exit

The number of franchises sold rose to 680 in 2023, the second highest level on record. And the number of multi-dealership transactions increased in 2023– matching 2021’s record—as 32 percent of transactions completed during the year were multi-dealership transactions, resulting in 126 multiple dealership transactions.

In terms of the dealership sellers, Kerrigan Advisors estimates 50% or more of the industry is in the process of transitioning their business from one generation to the next. In many cases, the next generation is choosing to exit the industry rather than manage through the formidable changes expected as a result of EVs, AI and digital retailing.

“These dealers are choosing to capitalize on historically strong blue sky values and retain the capital they earned during the pandemic, rather than reinvest and risk their pandemic profits,” said Kerrigan.

Surviving Economic Headwinds

While worries about the economy and higher interests’ rates, affecting deals, Kerrigan Advisors estimates dealers have amassed a quarter of a trillion dollars of pre-tax earnings since the pandemic, resulting in historically low leverage rates – 38% below pre-pandemic averages.

“As a result, buyers are using equity rather than debt to finance their acquisitions and are not as impacted by rising interest rates,” said Kerrigan.

Additionally, buyers are subject to OEM-imposed leverage limitations on acquisitions. These limitations create a ceiling on debt deployment and a bias against acquisition leverage, mitigating the impact of higher interest rates on the dealership buy/sell market.

Blue Sky Report Highlights

The report offered that auto dealership outperformance is due to the majority of dealerships are owned by private dealers, who on average own three dealerships, which minimizes the impact of the public capital markets on transaction fundamentals.

“The private, fragmented composition of auto retail translates into a very insular buy/sell market, driven primarily by its own internal dynamics often unrelated to the broader public financial markets,” commented Kerrigan.

Among the other highlights from the 2023 Annual Blue Sky Report include:

  • The industry saw a significant increase in the percentage of dealers with 11 or more dealerships in 2023 and those with five or fewer dealerships continued to decline, reflecting an industry in the early innings of regional consolidation as a precursor to eventual national consolidation of the major metro centers.
  • The domestics represented 54% of the buy/sell market in 2023 taking 4% share from the import luxury market and 1% share from the import non-luxury market.
  • In 2023, public dealer groups acquired 61 franchises for $2.7 billion, the second highest US acquisition spending level on record (albeit 70% below 2021’s record of $9 billion). The only mega transaction completed in 2023 was the acquisition of Koons Automotive by Asbury for $1.5 billion.
  • 87% of the acquisitions made by the publics in 2023 were in the South, with just 11% in the West and 1% in the Northeast, consistent with the broader market bias towards business-friendly, higher growth markets.

Kerrigan offered disproportionate activity in the South is due to the region having the most attractive economic and population growth dynamics, including 9 of the 10 fastest growing major metros in the U.S. are in the South.

“The South haves some of  the strongest franchise laws and business friendly regulations,” she commented. “These high growth markets have significantly outperformed since 2023, maintaining peak dealership earnings, a stark contrast to the industry’s earnings contraction in 2023.  As a result, buyers are very bullish on the South, particularly the highest growth metros.”

Dealership Valuations Decline

With an active buy/sell market driven by strong buyer demand, dealership valuations sustained historically high blue sky values in 2023, albeit lower, on average, than their peak in 2022. Kerrigan Advisors estimates that blue sky values declined on average 8% in 2023, far less than the estimated 26% reduction in industry earnings. The modest decline in blue sky is driven by buyers’ expected future earnings, not past performance.

“When earnings soared in 2021, buyers correctly projected that pandemic earnings were unsustainable and normalized earnings for valuation purposes. When earnings declined in 2023, these normalized expectations were already accounted for in most valuations and thus had less of an impact on blue sky,” said Kerrigan.

The Detroit Three franchises represented the majority of the buy/sell market in 2023, taking significant share during the year. Kerrigan Advisors attributes the rise in domestics market share to an increase in the number of domestic sellers coming to market, as well as buyers’ attraction to their lower multiples.

Many domestic sellers are concerned by their OEM’s electrification plans and are choosing to sell rather than manage through the EV transition.

2024 Buy/Sell Trends

A Kerrigan survey in November 2023 found nearly half of the dealers planned to acquire one or more dealerships in the next twelve months, while only six percent expected to sell dealerships in the same period..

In the 2023 Annual Blue Sky Report, Kerrigan Advisors identified the following three important trends that are expected to meaningfully impact the market in 2024.

  • Buyers increasingly focus on last twelve months’ financial performance to determine blue sky value
  • Top import and luxury franchises in growth markets continue to achieve record valuations
  • State electric vehicle (EV) mandates, if left unchecked, will have negative implications for blue sky values

Kerrigan officials said 2023 was the start of a shift in valuation methodology for blue sky as buyers are becoming increasingly focused on the last twelve months’ financial performance to determine blue sky value, according to the report.

Buyers Active but More Judicious

Kerrigan sees  2024 as being another active buy/sell market at or near 2023’s level.

“This predication is based on our current experience—Kerrigan Advisors had a record first quarter selling 49 dealerships,” she said.  “While I believe activity will remain robust, I do expect blue sky values will continue to decline, on average 10 to 20% from their peak—though still about double pre-pandemic averages.”

Additional, the industry is entering a period where there are more winners and losers in the buy/sell market with buyers being more judicious with their capital when investing in a declining earning environment.

“Dealerships in high growth markets and top franchises will experience minimal valuation deterioration, while those in low growth markets and weaker franchises will see significant discounting,” according to Kerrigan.

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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