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What is driving all the buy/sell activity?

As we have covered extensively, the strength of the buy/sell market continues.  For each of the last five years, there have been 200 or more transactions, which marks a notably strong transaction market for auto retail.  Recently in Dealer Magazine, we characterized the different types of buyers currently making acquisitions, but that does not automatically explain this increased level of activity.  Why are so many dealers choosing to sell?  In addition to generational transfers, which have been a driver of transaction activity for decades, we believe that smaller dealership groups are competing at a significant disadvantage to larger groups in today's environment, and that is accelerating transaction activity. The number of dealership groups with 10 or more stores has increased dramatically over the last seven years, climbing from 82 to 160.

Chart I
Dealership Groups with Greater than Eleven Dealerships, 2011-2017e
Source: NADA and Kerrigan Advisors Research

A key driver in this growth relates to the expense structure. We are seeing SG&A (sales, general and administrative) expenses rising significantly in recent years, even as many dealers continue to enjoy rising top and bottom lines.

Chart II
Average Dealership SG&A Expenses as a Percentage of Gross Profit, 2011 to 2018
Source: NADA and Kerrigan Advisors Analysis
Chart III
Sales, General and Administrative Expenses as a Percentage of Gross Profit, 2017
Source: NADA, Public Company Filings and Kerrigan Advisors Analysis

This is a powerful rationale for consolidation for both buyers and sellers, and a trend that will continue for the foreseeable future.

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