The auto industry has shattered records in 2021. Auto sales escalated to $118 billion in the first quarter, besting sales numbers in 2019 and surpassing 2020 first and second quarter sales. Dealership profits soared 82% in the first quarter with a historic 4.1% net-to-sales margin, compared to a six-year pre-pandemic average.
But what makes these numbers even more interesting is that as profits and sales reach greater heights, the auto dealership buy/sell market did too. The First Quarter 2021 Blue Sky Report by Kerrigan Advisors finds the buy/sell market busted previous first quarter records, with 66 completed transactions. This capped off 12 months of consolidation activity that resulted in an unprecedented 300 completed transactions.
Average dealership blue sky values also climbed to a higher peak in Quarter 1, hitting $8.5 million, a 10% increase over 2020 and a 33% increase over 2019, the report found.
As some dealer principals hedge their bets and acquire more storefronts to take advantage of a soaring automotive market, other owners are choosing to exit this space. But why? Why are dealer principals selling as profits reach record levels? What is the ceiling on dealership blue sky values? And when will this activity end?
Brady Schmidt, president and CEO of National Business Brokers (NBB), shares his thoughts on the current and future buy/sell market. Under Schmidt’s leadership since 2004, NBB sales volume, gross revenue and geographic reach flourished. As the largest new car dealership brokerage firm in the country, the firm has transacted over $12.5 billion in value for dealership sales and is closing in on the 900-deal mark.
Schmidt calls today’s buy/sell market “a perfect storm” and cautions that “everything is always cyclical.”
“I think we will see three to four years of very good profits at dealerships, and plenty of buy/sell movement before activity starts to level off,” he says.
Why the Increase?
Several dynamics converged to quicken the pace of consolidations, according to Schmidt.
The No. 1 reason for the change—the pandemic. He explains the labor-intensive nature of automotive dealerships (dealerships employ an estimated 1.1 million workers) made them perfect candidates for Paycheck Protection Program (PPP) loans, which the federal government forgave after the pandemic.
“Almost every dealer I know received a PPP loan. These loans were significant, and they were forgiven,” Schmidt says. “As a result, large family-owned dealers now have cash sitting in their balance sheets that they didn’t have 18 months ago.”
U.S. consumers also emerged from their pandemic cocoons with money to burn. Government stimulus checks and reduced spending during COVID shutdowns sparked a desire for new vehicles. Service revenue also soared as consumers began getting vehicles serviced again.
“Now you have pent up demand to purchase vehicles, and a heightened need to service them,” he says.
Factor in limited supply because of pandemic-fueled supply chain challenges, including a critical semi-conductor chip shortage and a crippling parts shortage. Demand has escalated, while has inventory decreased.
“When you have less supply, you get higher grosses on available product,” he says. “Dealers are more profitable than ever before.”
Cash-flush dealer principals now seek new investments. Yet, other dealers worry about the capital expenditures needed to address disruptions down the road. Electrification and direct-to-consumer models threaten to disrupt the market’s current business model, he says.
“Those dealers who want to stay in the car business realize they need scale, and are very motivated to grow,” Schmidt says. “Dealers with one to four rooftops realize they either need to grow or get out. Higher dealership valuations are encouraging those dealers to sell.”
Age is also a factor for many dealers. “The average age of single rooftop dealership owners is 72 years old,” he says.
The record prices for buy/sell transactions and the threat of higher capital gains taxes under the Biden Administration also motivates dealers to sell now rather than later, he says.
What’s the attraction?
Erin Kerrigan, founder and CEO of Kerrigan Advisors, says, “The industry attracts buyers for several reasons. Auto retail has shown through thick and thin that it can remain profitable, and even make more money in challenging times, as it has proven in the last 12 months.”
Schmidt agrees the industry’s resilience attracts would-be buyers. The industry survived and grew during the pandemic just like it handled the financial market collapse of the Great Recession, interest rates of 21% or more in the early 1980s, and the oil embargo of 1973.
“Dealers figured out pretty quickly how to sell more cars digitally during the pandemic and deliver cars to buyers,” he says. “And the move to sell digitally accelerated dealers’ ability to retail vehicles outside their immediate areas.”
He adds, “Dealer principals, who are by nature very entrepreneurial, drive the business model. They act quickly and are well capitalized. If dealers run these businesses well, they can make a lot of money.”
Schmidt ties dealership resilience to a business model that operates five separate businesses under one umbrella. “You have new car sales, used car sales, finance and insurance, parts sales, and service,” he says. “When one or two of these areas struggles the other areas become more robust. When people are not buying new cars, for example, they service their cars more often or buy more used cars. This allows the business to make money whatever the economic conditions. Everybody needs transportation.”
Who are the Buyers?
Things get interesting when one looks at who is behind these record transactions, says Schmidt, who stresses the buyer dynamic has changed.
Consider some recent buy-sell transactions:
- Actor Mark Wahlberg acquired an automotive dealership in Cleveland, Ohio, his fifth in the state with business partner Jay Feldman, an automotive industry veteran.
- Retired NBA star Karl Malone recently acquired three new vehicle franchises in El Dorado, Arkansas.
- Lithia Motors Inc. continued its buying blitz, acquiring Michael’s Toyota dealership in Bellevue, Washington. The recent acquisition doubled Lithia’s presence and offerings in the largest automotive retail market in the Pacific Northwest and added $235 million in combined annualized revenues.
- Family-owned Unmansky Automotive Group of Memphis, Tennessee, acquired five dealerships, representing six brands, in the San Francisco Bay Area. Owner Dan Umansky, said in a statement, “This strategic acquisition of strong brands and significant volume is the ideal way for us to enter the California market.”
These transactions represent the growing popularity of entering the market or expanding an existing dealership group. And the pool of interested buyers continues to grow as well.
“The publics recognize the car business as a solid business. Likewise, you have people already in the business interested in growing their rooftops and owning more stores, understanding from the inside how successful and good the business is. Then in recent years, since Warren Buffett entered the market, there’s another section of buyers—high, net worth individuals,” he says. “The automotive market attracts institutional money, family money and private equity.”
But Schmidt warns that would-be buyers hoping to turn a fast buck may experience disappointment. Getting into the auto dealership space involves more than buying property, building a showroom, and hanging a shingle.
“There are significant barriers to entering the car business,” he says. “You must have experience. You can be the richest person in the world and still not qualify to own a dealership. It’s essential for outside buyers to partner with someone who understands the business and can operate a dealership.”
Though some barriers have come down in recent years, he says, “new entrants have recognized the need to partner with excellent existing operators, general managers and minority partners.” Partnering with an experienced industry expert clears barriers to entry, one of which is having the requisite experience to get manufacturer approval.
A Bright Future
The First Quarter 2021 Blue Sky Report predicts the buy/sell pace will continue throughout 2021 for three key reasons: attractive interest rates, current low tax rates, and a dealership valuation model based on revenue versus earnings. Schmidt agrees saying he foresees the quickened pace continuing for a few years.
He also predicts the consolidations will benefit the entire industry.
“The more consolidation we see, the more professional the individual entrepreneurial dealership becomes. When dealerships are part of a larger group, dealers and manufacturers make more money, and the consumer has a better experience,” he says. “The future is very bright for dealers who decide to stay in this business, scale up and own more dealerships.”
Ronnie Wendt is an editor at ADT and owns In Good Company Communications, a business focused on writing for the automotive and RV industries.
Originally posted on Auto Dealer Today