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