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Kerrigan sees franchised dealerships continuing record-setting year

The parade of records connected with franchised dealerships just keeps on marching.

According to the Second Quarter 2021 Blue Sky Report by Kerrigan Advisors, the dealership buy/sell market hit yet another historic high, with 320 transactions completed in the 12-month period since the economy re-opened in June 2020.

Mostly driven by today’s unprecedented dealership profits, the firm said values for dealerships have soared to record levels, reaching an average of $9 million of blue sky per dealership for Q2, with 2021 on track to be the most active buy/sell year in history.

There were 144 dealership buy/sell transactions in the first half of 2021, a 27% increase over the first half of 2020 and a record number for the period, according to a combination of research Kerrigan Advisors as well as information from The Banks Report and Automotive News.

Kerrigan Advisors expects transaction activity to rise dramatically in the second half of the year as more sellers seek to complete their transaction before year-end to potentially lock in a lower tax rate and avoid a tax increase in 2022.

“Today’s activity level is a byproduct of the industry’s explosive profitability,” said Erin Kerrigan, founder and managing director of Kerrigan Advisors.

Kerrigan noted in a news release that in the first half of 2021, the average dealership earned $1.96 million, 164% more than the industry’s average between 2015 and 2019, with the average dealership achieving a record trailing 12-month profit of $3.51 million.

“Even with the removal of PPP funds received in 2021, most dealerships are achieving profitability levels several times higher than historical averages. Dealerships currently provide an incredibly high ROE of over 57% on average, and dealers have more capital than they have ever had. This is fueling buyer demand that is well outstripping supply and creating a seller’s market, further heating up the market and increasing blue sky values,” Kerrigan continued in the news release.

The newest report also discussed the impact of the semiconductor chip shortage that continues to limit the supply of new vehicles.

With the resurgence of COVID-19 cases further disrupting the entire auto industry’s supply chain and impacting inventory availability and pricing, Kerrigan Advisors recapped that new- and used-vehicle prices are up 10.6% and 29.6% respectively since January 2020, the largest rise in an 18-month period.

Intersecting with these factors, according to the report, is robust consumer demand for new and used vehicles, spurred by access to quarantine savings and government stimulus, low financing costs and a growing appreciation for the safety and importance of personal mobility.

These elements, combined with dealerships’ increasingly productive and efficient business operations, is leading to record gross profits per vehicle, according to the report, which mention that this metric now is more than double for new compared to pre-pandemic levels, with used-vehicle gross profit per vehicle rising 79%.

“Given the industry’s incredible profit performance over the last 12 months, and positive outlook for 2022 and beyond, we find most dealers are buyers, not sellers, and few are willing to accept the status quo,” said Ryan Kerrigan, managing director of Kerrigan Advisors.

“Today’s dealers, both private and public, want to grow and have tremendous access to capital to do so. Few alternative investments provide the risk adjusted returns available from dealership acquisitions,” Kerrigan went on to say.

Kerrigan Advisors identified the following three trends it expects to meaningfully shape the buy/sell market for the remainder of 2021 and into 2022.

— Buyer pool of existing dealers expands as cash accounts rise and access to debt grows

— Sellers become less flexible on valuation as their profits soar

— OEMs are increasingly overwhelmed by 2021’s buy/sell volume and less flexible on framework terms

Other highlights from the Q2 2021 Blue Sky Report by Kerrigan Advisors included:

— Including real estate, the average dealership’s enterprise value is approaching $21M, a 19% percent increase over 2019.

— There were 51 multi-dealership transactions in the first half of 2021, a 96% increase as compared to 2020 — representing 35.4% of the buy/sell market — the highest percentage ever recorded during the first half of the year.

— Average dealership blue sky values rose to another peak in the second quarter to $9 million, up 42% from 2019.

— More efficient business operations and higher gross profits contributed to increased dealership profits in the first half of 2021— an average of $1.96 million, more than any pre-pandemic 12-month period, leading to a trailing 12-month profit of $3.51 million, 147% more than the pre-COVID average (2014-2019).

— The Kerrigan Index continues to outperform S&P 500, as it’s up 1,038% since 2009, topping the S&P 500 by 179%.

— Import franchises represent a disproportionate share of the buy/sell market at a combined 58% (41% non-luxury and 17% luxury), relative to their franchise 31% market share of just 34%.

— The public auto retailers continued to allocate capital to acquisitions, spending a record $4.45 billion over the last four quarters.

— In the first half of 2021, Toyota represented 10% of the franchise buy/sells, in line with Ford’s, Stellantis’ and Chevrolet’s buy/sell market share, which the firm called “impressive” when considering that Toyota has only 1,238 franchises in the U.S., as compared to Ford’s 3,006, Stellantis’ 2,461 and Chevrolet’s 2,924.

A significant trend potentially impacting blue sky multiples, according to the Blue Sky Report, is the slow-paced OEM approval process as OEMs are inundated with transactions.

The firm said that OEMs are increasingly requiring more terms from buyers, including more stringent framework agreements and facility upgrades.

“We expect the challenges of OEM staffing on buy/sell approvals to become a crisis issue in the fourth quarter, given the economic fallout of missing a 2021 close,” Erin Kerrigan said. “The old adage ‘time kills deals’ is still alive and well. OEMs that take too much time to approve their buy/sells and subject the process to unnecessary red tape and restrictions will likely find a larger number of their buy/sells fall apart, ultimately leading to less buyer demand and potentially lower blue sky multiples for their franchises.”

Also of note, Kerrigan Advisors said it did not adjust blue sky multiples in Q2, but did make changes to the outlook for certain franchises due to fluctuations in buyer demand.

Chrysler Dodge Jeep Ram (CDJR)’s multiple outlook was upgraded from steady to positive.

“Buyer demand for CDJR is on the rise as Stellantis defies the odds with higher vehicle inventory levels, resulting in impressive sales gains (32.4%) in the first half of 2021 and high sales per franchise (787 sales per franchise) in the last 12 months,” Ryan Kerrigan said.

Meanwhile, Nissan’s multiple outlook was also upgraded, from steady to positive.

“We expect to see an increase in Nissan’s multiples by the end of 2021,” Ryan Kerrigan continued. “Nissan franchises improved in sales and profitability this year with buyers once again interested in acquiring Nissan franchises, particularly in strong, high growth markets such as Florida, Texas and Nevada. We saw this firsthand when Kerrigan Advisors represented on the sale of Fuccillo Nissan of Clearwater, Florida to Morgan Auto Group in August 2021.”

Kerrigan Advisors had one multiple outlook downgrade for the quarter, moving Ford from steady to negative.

“Buyer demand for Ford dealerships is on the decline, relative to its domestic competitors. Ford sales rose significantly less than its top competitor and dealers are skeptical of the ramifications for future dealer profitability of its imminent shift to a build-to-order model,” Ryan Kerrigan said.

To access the report and more resources from Kerrigan Advisors, go to this website.

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