For many years, domestic franchises were a challenge to sell. Buyers were unwilling to pay up for blue sky and were rightly concerned about declining market share and potential OEM bankruptcies. As a result, the prices offered for these franchises were very low, sometimes as little as zero, particularly in 2009. Even highly profitable domestic franchises were unable to garner significant blue sky.
How times have changed! For the first time in almost a decade, the sale of domestic franchises is not only possible, it can be profitable. Domestic franchises are in greater demand and have increased in value for several reasons:
As a result of these trends, we have seen domestic franchises return to the top buyers’ shopping list. Chart 2 shows the breakdown of franchise acquisitions by the top 10 dealership groups in 2010 as compared to 2011 (YTD November). As you can see, the leading buyers are once again acquiring domestic franchises and spending less of their acquisition capital on non-luxury import franchises.
In a lot of ways, the shift in buyer interest is not surprising given the potential return on investment available to buyers of domestic franchises. If you compare the blue sky multiples as published in Presidio’s August M&A Report (available at www.presidioautomotive.com), to manufacturer sales growth, you can see why buyers are once again interested in domestic franchises, see Chart 3. Buyers feel they can buy a franchise with above average sales growth at a low blue sky multiple, which could result in a high return on investment.
Despite the domestics’ market share increases, there are a number of factors that may keep domestic’s blue sky multiples lower than those of the high volume imports:
In the end, one of the factors that determine the blue sky multiple a buyer is willing to pay for a franchise is the franchise’s perceived investment risk. The greater the risk, the lower the multiple, while the lower the risk, the higher the multiple. As it relates to domestic franchises, we may be at a tipping point where the perceived risk is beginning to decline – particularly if market share gains stick. If the risk associated with domestic franchises declines, those who bought them at three to four times blue sky will certainly look like geniuses. Only time will tell. In the meantime, it is nice to see domestic blue sky value return and it will certainly be interesting to see where it heads in the future.
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