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Serra Automotive sees no drop in dealership valuations post-crisis, exec says

Serra Automotive, a dealership group with operations in seven states, sees no decline in dealership values as a result of the coronavirus-related market disruptions, said Joe Serra, president.

“Everybody’s waiting for the values to come down, but they’re not going to come down,” the executive said. “Why? Because this is still a good business, there are only so many franchises, and guys like me are willing to pay.”

Fenton, Michigan-based Serra Automotive, a top-10 privately held automotive group with 48 dealerships and revenue of more than USD 2bn, continues to be an active buyer. On 23 March, Serra Automotive closed on the acquisitions of Honda and Mazda dealerships and a collision center, all in Michigan, for undisclosed terms.

The executive said he expects to close on two more dealerships in an existing market in early August. In addition to Michigan, where Serra Automotive owns 27 dealerships, the company does business in Colorado, Illinois, Indiana, New Jersey, Ohio and Tennessee. The business was established in 1973 as a single Chevrolet store by the president’s father, Al Serra.

For the pending deal, Serra said he has been courting the seller for approximately three years. Some of his acquisitions are the result of direct
approaches; others are brought to him by bankers, brokers or the sellers themselves. The executive said he sees approximately 15 opportunities a month. “You have to look at a ton just to get one.”

Serra, 60, said he likes to identify potential business partners within the ranks of his dealership group, and then invest with them to acquire dealerships. He prefers his partners to have ownership stakes of up to 20% in newly acquired dealerships.

“If I don’t have the right talent, then I’m not a buyer,” he said. Occasionally the partner comes from the acquired dealership but more likely it’s someone from within the Serra Automotive structure. “I prefer to have someone who knows how I think.”

Acquisition finance has been affected by the coronavirus pandemic, Serra said. “The question going forward with COVID is where are the lenders going to be, and they’re all asking themselves that same question. It’s shocking but most lenders are still sitting at home.”

Serra said one commercial lender recently asked him what other banks were telling him, as a way to gather market intelligence. “In previous years, lenders were stretching, now they’re a little hesitant.”

Serra said he likes to finance his dealership deals with an even split of cash and debt, and with the real estate transactions handled separately and owned by a separate Serra Automotive entity. He works with banks that he declined to name.

Many variables factor into sale multiples, including EBITDA, brand, location, facilities, presence of unions and management team, the executive said.

Erin Kerrigan, founder and managing director of Kerrigan Advisors, an Irvine, California-based auto industry sell-side advisory firm, said she agreed with Serra’s assessment on multiples holding steady. There has been very little M&A in the past two months, she added.

“Most transactions were either postponed, renegotiated or terminated,” she said. “For those that were postponed, we will see those transactions start to close in the second half.”

In 2017, Serra Automotive sold majority stakes in four dealerships in Colorado Springs, Colorado, to Maroone Enterprises, and was advised by Presidio Group on the sale. For this report, Serra said he had no plans to divest assets. Serra’s son is active in the business and represents the third generation of ownership, he said.

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