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Specter of Tax Hikes Driving Dealership M&A Activity

December is putting an exclamation point on what's likely to be a record year for dealership mergers and acquisitions.

According to firms that broker dealership buy-sells, that’s because the sellers want to get deals done before Jan. 1, out of concern that Congress may pass higher capital-gains taxes that could take effect next year.

“Sellers are laser-focused on closing before the end of the year,” because the potential tax changes could greatly increase the tax bill for selling dealers, says Erin Kerrigan, co-founder of Kerrigan Advisors, Irvine, CA.

Major deals that close this month include: on Dec. 17, Asbury Automotive Group’s acquisition of one of the nation’s biggest, privately held megadealer groups, Utah-based Larry H. Miller Dealerships, for about $3.1 billion. The deal, first announced Sept. 29, represents a total of about $5.7 billion in annualized revenue. Asbury is based in Duluth, GA.

On Dec. 7, Sonic Automotive, Charlotte, NC, announces closing a $700 million deal, which was announced Sept. 17, to buy another big privately held group, RFJ Auto Partners, representing about $3.2 billion in annualized revenue.

In a recent webinar hosted by the American International Automobile Dealers Assn., Kerrigan predicts industry buy-sells for full-year 2021 will be a record high, with a total of at least 350 transactions representing more than 600 franchises.

In separate phone interviews, a couple of Kerrigan’s competitors agree the proposed tax changes are a factor behind the sense of urgency among sellers to close deals before Jan 1.

“It’s the sellers’ desire to exit before the end of year,” says Alan Haig, president of another dealership advisory firm, Haig Partners, Fort Lauderdale, FL.

Earlier this year, Haig said there was concern in the dealership community that a sharply higher capital-gains tax could be part of President Biden’s Build Back Better plan in 2021. That hasn’t materialized, but he says selling dealers don’t want to take a chance it could pass in 2022.

George Karolis, president of the Presidio Group, Duluth, GA, says it’s not clear how high capital-gains taxes could go, but “they’re not going to be lower,” he says. “Those that are under contract now would much prefer to get them done this year.”

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