Report: While profit margins fall, dealership acquisitions continue to rise

Written by:
Auto Remarketing Staff
April 12, 2024

Regardless of the obstacles, dealership groups are determined to keep growing.

That’s the big takeaway from Kerrigan Advisors’ newly released 2023 Blue Sky Report, which showed dealership buy-sell activity up 6% year-over-year, with a record 397 completed transactions in 2023.

Among those sales, the sell-side advisors for auto dealers said, was the third-largest transaction in auto retail history – the sale of Jim Koons Automotive’s 20 dealerships, generating $3 billion in revenue, to Asbury Automotive Group.

The report said thanks to “significant access to capital” 680 franchises were sold, up 5.4% from 2022, even as the overall corporate merger and acquisition market declined 30% in 2023.

“Despite negative headwinds of higher interest rates and declining profit margins, dealers continued to seek acquisitions, powered by their belief that scale is not only critical to future success, but essential to sustaining their businesses in the face of an evolving industry,” Kerrigan Advisors founder and managing director Erin Kerrigan said in a news release.

“We expect the consolidation trend, ignited by the pandemic-induced surge in industry earnings, to continue in 2024, as the industry has amassed nearly a quarter of a trillion dollars of pre-tax earnings since the pandemic.”

Kerrigan noted that nearly half of the more than 650 dealers surveyed by Kerrigan Advisors in November said they planned to acquire one or more dealerships in the next 12 months, while only 6% expected to sell.

As a result of that strong buyer demand, Kerrigan Advisors said, dealership valuations remained near historically high levels in 2023, though they were down slightly from the previous year. The report said estimated blue sky values dropped by an average of 8%, which it said was far less than the estimated 26% reduction in industry earnings, as buyers were driven by expected future earnings rather than past performance.

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

The report showed public dealership groups spent $2.7 billion to acquire 61 franchises, the second highest U.S. acquisition spending level on record. Dealerships in the South were particularly coveted, accounting for 42% of all sales last year — more than twice the next-strongest regions, the West and Northeast.

Looking forward, the Blue Sky Report offered three trends Kerrigan Advisors expects to impact the market in 2024: Buyers are increasingly focusing on the past 12 months’ financial performance to determine blue sky value; top import and luxury franchises in growth markets continue to achieve record valuations; and state electric vehicle mandates, if left unchecked, will have negative implications for blue sky values.

Highlights from the report include:

  • The 126 multi-dealership transactions in 2023, matched 2021’s record number. That represents 32% of all sales last year.
  • The industry is consolidating, with the percentage of dealers with 11 or more dealerships rising and that of dealers with 5 or fewer dealerships declining.
  • Public dealer groups ended the year at a blue sky multiple below the 7.3x average of the top franchises, and mostly in line with the 3.75x average of domestic franchises, often leaving them priced out of the buy/sell market for top assets.

A preview of the report can be downloaded here. Click here to subscribe for the full report.

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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