As a member of the National Alliance of Auto Dealer Advisors, our firm participated in their fall dealer conference. NAADA is an association of dealer CPA firms from across the nation. In one of the webinars, we were updated on the state of the auto dealership buy/sell market by Erin Kerrigan of Kerrigan Advisors, creators of the Blue Sky Report® and the Kerrigan Index™. The pandemic has had a profound impact on the buy/sell market for auto dealerships; let’s take a look at what the industry can expect as we close out 2020 and open 2021.
How the Auto Dealership Buy/Sell Market is Recovering
The auto dealership industry has made a drastic recovery following the economic shutdown. Kerrigan Advisors data shows that earnings jumped to an all-time record high for the month of June with an increase of 89% compared to June of 2019.
Investors are finding dealership investments highly attractive as compared to returns in traditional financial markets. This has driven up the demand for dealerships. As a result, dealership valuations and “blue sky” multiples have grown significantly.
According to Kerrigan Advisors research, OEM support has been strong likely due in large part to the strength of the financial markets buttressed by a Federal Reserve committed to keeping funds flowing and credit markets functioning. More important for auto dealers, actions taken by the Federal Reserve have driven interest rates to near zero. This is critical as the auto dealer industry is very sensitive to interest rates for the following reasons:
- Lower interest rates reduce the monthly loan/lease cost to the end buyer, this helps spur sales. Dealership floorplan expense declines.
What Are the Characteristics of Buyers and Sellers During this Time?
There are a few common characteristics of auto dealership buyers following this crisis:
- They are ignoring the economy and flocking to dealerships because of the opportunity in ROI.
- They are looking to invest alongside management or invest outright.
- With access to low-cost financing and lower cost of capital, investors are better positioned to meet seller’s pricing expectations.
- Potential buyers have successfully navigated the crisis with significant cash on hand.
- Buyers are seeking creative acquisitions where they can employ new cost savings from scale and digital retailing to enhance profits and increase returns.
- According to Kerrigan, many buyers are focused on southern markets in the U.S. likely due to population growth in those markets and a favorable climate. Internally, we have seen the publics and large chains pursuing stores in the Northeast as well.
Why dealers are being driven to sell is also coming to light:
- The fun has been taken out of the business. Many dealers have faced a horrifying experience with the pandemic and realized scale will be a success driver in the future.
- Greater access to capital on the part of large/public dealers makes it hard for small dealers to compete.
- Larger groups are effective in managing expenses and inventory, placing smaller dealers in a challenging position.
- Concern exists over future tax rates going up under a new presidential administration.
Although 2020 has been a tumultuous year for everyone, auto dealership buy/sell transactions have increased, and Kerrigan Advisors believes 2020 will be the most active buy/sell market for the auto industry yet.
If you have any questions regarding this article, please contact Paul McGovern at PMcGovern@DowneyCoCPA.com or at 800-849-6022.
