How long will this imbalance last?
Over 340 people attended my NADA workshop dedicated to the current buy/sell market. Based on that attendance level and the confident mood at NADA, it appears deal making is back. So, if dealers are in deal mode, why aren’t we hearing about more buy/sells? Presidio’s recent conversations with both buyers and sellers lead us to believe there is a supply/demand imbalance in the market today. There are currently more buyers than sellers.
Why is this? First, let’s look at the buy side. We at Presidio believe the increase in the number of dealership buyers is driven by the following:
Clearly, buyers have good reasons to be bullish. So, where are the sellers? Sellers are hesitant to come to market today for several reasons, including some listed below.
While some of these reasons may ring true, they are not necessarily great reasons (or excuses) for a seller to wait. As we know, timing is everything when it comes to selling your business. Today, we are in a rare and likely short-lived period in which dealership demand outstrips supply. This creates a strong seller’s market, particularly for successful franchises in good locations.
Economics teaches us that when demand outstrips supply, prices tend to go up. The same economic theory tells us that these types of markets do not last for long. Once sellers see transactions close at premium prices, more sellers enter the market, creating a market equilibrium in which supply meets demand. Sellers then lose some of their edge on the market, as buyers have more acquisition opportunities from which to choose.
Presidio expects the market to reach this type of equilibrium sometime in 2013/2014, when a number of sellers have indicated they intend to enter the market. Once we have reached equilibrium, Presidio expects the supply of dealerships for sale to continue rising, potentially surpassing demand, for the following reasons.
When more sellers enter the market, we will be reminded that our industry has a relatively limited number of deep-pocketed buyers. Many dealerships and dealership groups are very expensive assets to acquire and require a great deal of capital, even when debt is available. Manufacturers’ limitations both on who can acquire a dealership and how many they can acquire, create a barrier to entry that limits the number of buyers. This structural limitation on the demand side of the market ultimately will put pressure on prices.
In closing, dealers understand the effect of supply and demand on vehicle prices; it is time to apply this understanding to dealership prices. When there is less supply and more demand for dealerships (today), prices tend to go up and the seller has many options. When supply meets demand or even worse, supply exceeds demand, prices tend to go down and the buyer has many options. It’s pure economics! Plan your exit accordingly.
Kerrigan Advisors is honored to work with auto retailers throughout the US to enhance the value of their enterprise. Learn more about our services below:
Customized and confidential sell-side services for higher value dealerships and dealership groups nationwide, with a proven record of achieving the highest sale price per transaction of any firm in the industry.
Capital raising and partnership structuring for growing dealership groups, supported by the largest investor database in the industry.
If you are a buyer in today’s market, Kerrigan Advisors welcomes the opportunity to learn about your acquisition criteria and include you in Kerrigan Advisors’ proprietary Buyer Database.
We welcome the chance to learn more about your acquisition criteria so that we can contact you in the event a client matches your investment profile.
Contact us to learn more about Kerrigan Advisors’ client services, or to have a conversation about the buy/sell market. All of our conversations are 100% confidential.