In recent years, many of our clients have attempted to grow by acquiring additional stores. Most of these efforts have been unsuccessful. With supplies limited and demand high for those on the market, acquisitions have been few and far between. If a deal is done, it is most likely an acquisition by a large mega dealer. A large mega dealer has the resources to pay a premium for the store.
In recent months, several of our dealer clients have received unsolicited offers for their stores. On first pass, the dealer will be overwhelmed by the offer. The dealer’s initial reaction is to accept the offer. However, more often than not, the dealer will decline the offer.
Why didn’t the dealer take the offer? There are several reasons, both financial and non-financial.
In most cases, the dealer/owner has worked hard his/her entire career and doesn’t have significant outside interests to occupy his/her time. They enjoy being a dealer! Perhaps it is the dealer’s desire to have the business pass to the next generation. Typically, the second generation is already involved in the business.
From a financial perspective, most successful dealers have accumulated a significant net worth and really don’t need the money. On the flip side, by waiting, the dealer brings in a certain amount of financial risk. What is the financial risk to turning down the offer? Let’s assume a dealership generates $1,000,000 per year and has a standing offer to sell for $8,000,000 of “blue sky.” If the dealer keeps the business, he/she will continue to generate the $1,000,000 a year and will still own the franchise. Assuming the business remains stable and the dealer runs it for another five years, he/she would have accumulated five million dollars in cash flow and will still have an opportunity to sell. Even if the “blue sky” factor is only half of what it was, or $4,000,000, the dealer would still be in an advantageous position.
Another financial factor that may influence the dealer’s decision is the business real estate. Usually, the dealer also owns the real estate and equity in this asset grows. Through the combination of the appreciation of the real estate and the reduction of any mortgage through monthly principle payments (made via the rent charged to the dealership), the dealer may be unwilling to part with the real estate.
Dealers in the acquisition mode should identify potential targets that have the following characteristics:
- The dealer is not a “car guy” that lives and breathes the car business.
- The dealer does not have significant cash flow that justifies keeping the business in the medium or long term range.
- The dealer does not optimize the cash flow potential from the store and you feel you could generate higher cash flows.
- The dealer is not the owner of the real estate and has no incentive to remain because of it.
- The dealer doesn’t have a family succession plan that would hinder a sale decision.
If you have any dealership management questions, please contact Paul McGovern at 800-849-6022 or pmcgovern@downeycocpa.com.
