Before the holidays arrived and political strife caused another federal government shutdown, Kerrigan Advisors released its third quarter report that highlighted dealership buy/sell transactions increased 20 percent year-over-year.

The Blue Sky Report generated by the firm also pointed out that 2018 will be the fifth consecutive year of more than 200 buy/sells transactions and among the most — if not the most — active years for buy/sells on record.

Kerrigan Advisors explained that the underlying catalyst for the robust buy/sell market is the growing U.S. economy. The firm mentioned the average dealership has achieved record sales during the last 12 months.

But Kerrigan Advisors also acknowledged potential future challenges to the economy and auto retail are also impacting the market, driving sellers who are concerned that today’s high valuations may not last into the next year.

The firm then stated these factors, combined with increasing consolidation that promises stiffer competition for smaller players, an increase in generational transfers, and a growing pool of investors, has set the stage for today’s robust buy/sell market.

“With rising interest rates and the changes coming to auto retail, we find sellers more motivated today, concerned that current valuations may not replicate in the future,” said Erin Kerrigan, managing director of Kerrigan Advisors. “And many of these sellers are willing to accept creative transaction structures as part of their exit in order to achieve their valuation goals, a new industry trend and one we expect to continue into 2019.”

Ryan Kerrigan, managing director of Kerrigan Advisors, added, “Capital markets are attracted to the sustainability and resilience of the dealership business model, even in the face of a more volatile stock market. These investors believe in the business case for consolidation, particularly as technology becomes an increasingly critical part of retailing and scale improves profitability.”

The firm noted another force contributing to an active buy/sell market is the generational shift occurring within the dealer body.

Kerrigan Advisors indicated much of auto retail is family-owned with most dealers being second generation or greater. The report noted that an estimated 50 percent of dealers are currently in the process of transitioning generations — something many will find challenging, particularly since the odds are stacked against them. The firm believes only 12 percent of family businesses make it to the third generation and only 3 percent to the fourth.

The report also determined that the domestics’ share of the buy/sell market increased in Q3 and will dominate the buy/sell market in 2019 due to their low blue sky multiples.

In addition, Kerrigan Advisors went on to mention high real estate values are, and will continue to be, a value driver of most buy/sell transactions. Millennials also have a key role to play in future valuations: according to the report, franchises with meaningful millennial market share are well positioned for future higher valuations.

The report’s bullish view of the market, however, is tempered by some concerns over the potential impact of higher interest rates and proposed tariffs.

“High import tariffs should be of great concern to auto dealers as they will have a negative impact on auto sales and franchise values,” Erin Kerrigan said. “Buyers will be unwilling to pay current blue sky multiples as earnings growth prospects turn negative. We can see no positive outcome from auto tariffs and encourage all industry participants to employ their political capital to ensure these tariffs are not implemented.”

Other highlights from the Q3 Blue Sky Report include:

• 179 dealership buy/sell transactions were completed in the first nine months of 2018, according to Kerrigan Advisors’ research and The Banks Report. This compares to 149 transactions in the first nine months of 2017.
• Year to date, domestics’ share of the buy/sell market increased to 52 percent, up 68 percent from 2015.
• The publics acquisition spending, year-to-date, declined 24 percent compared to 2017, although they are on track to spend $802 million on US dealership acquisitions, which would be the third highest year since the recession.
• While the number of smaller dealership groups shrinks, the number of larger dealership groups (greater than nine dealerships) has grown 50 percent since 2012.
• Private dealership groups continue to represent the largest share of dealership acquirers and are expected to do so for the foreseeable future. Of the estimated 296 franchises which changed hands in the first nine months of the year, 271 were acquired by existing private dealers and new private capital entrants to the market.
• Non-luxury and luxury import franchises saw their market share decline.
• Transaction pricing when including real estate remained at record levels through the third quarter of 2018, though average blue sky is down an estimated 10.3 percent from its 2015 peak. This decline in blue sky value is offset by the increase in real estate value.

The report also identifies three trends that are expected to impact the industry into the new year, including:

• Generational transfers increase the number of sellers coming to market.
• A growing pool of financial investors support consolidation and innovation.
• — To achieve pricing goals, sellers increasingly accept structured transactions.