Industry veteran Jim Polley has an inside track on the buy-sell market for agents in the automotive space. He has sold his own business three times in the past six years and twice in the past 18 months for over $1.5 billion. He also has participated in over 25 successful mergers & acquisitions (M&A) over the last six years.
This industry expert is a logical person to help agencies sell. He started his career selling cars and F&I at 17 years of age. Later, JM&A recruited him, and he worked there for many years as an F&I specialist and divisional manager before owning several New York automotive dealerships. In 1999, he launched Vanguard Dealer Services, then partnered with private equity in 2015 to expand Vanguard to a national level, giving rise to Spectrum Automotive Holdings.
Polley leverages his decades of industry experience and first-hand expertise in the buy-sell market to help other agents sell their businesses. These businesses, he says, are ripe for a sale even as COVID-19 turns the industry on its head.
He explains the pandemic and resulting semiconductor chip and raw material shortages pushed automotive inventories way down. Dealers began charging unprecedented prices for new and used cars. As they did, F&I sales grew and became a greater part of the business, and profits soared.
“It’s an incredible time in the car industry with record-setting profits, so it’s a great time to sell,” he says. “Most sales are based on your last 12 months of profits, and these are profits companies have never seen before.”
Now private equity groups are zeroing in on the automotive industry. “It’s such an attractive business. Some agents doubled and even tripled their business in the past year,” he says. “It’s a perfect storm. You have F&I at car dealerships way up, agency profits way up, and private equity taking a real interest in the agent businesses at the same time. Agents’ businesses now have what we would call a Blue-Sky Value (the value of the business above the value of its tangible assets).”
Why Do You Want to Sell?
Polley advises agents to first consider what they seek to do. Are they looking to sell their agency to become part of a bigger company and continue to work and grow their business? Are they hoping to retire today or in a few years?
“They need to know their reasons for selling,” he says. “That will guide them toward the right type of transaction in the marketplace.”
There are three types of buyers: Private equity, administrative, and outright strategic partners.
A private equity buyer works best with owners who want to stay on to continue autonomously operating and growing the business. It’s mostly available to larger companies; some firms may be too small to attract private equity interest. A private equity firm has “more capital, more experience, more access to products and services, and better pricing,” Polley says. These transactions give owners a large amount of cash up front, stock ownership and options, and future investment opportunities.
Administrative buyers also exist. These buyers represent existing industry businesses trying to expand. This buyer type also allows owners to keep operating their business. The deals provide cash up front but offer an employment agreement and benefits. These transactions are a good fit for those who want to work in the business or retire. “You might stay on as an employee with benefits, but you no longer own the business,” he says.
An outright strategic purchase is a walk-away sale. It is a great fit for those who want little to no involvement in the business after selling. It allows full retirement after a single transactional payment.
It’s Time to Get Your House in Order
Just as you paint your walls, clean up your house, and make repairs before listing, you need to do the same for your business, according to Polley.
“Agents need to get their financials and all their agreements in order,” he says. “This involves thinking about the people who work for you and if they will be part of the transaction. Are family members or partners involved? How will the sale affect them?”
He adds, “It’s important to consider these things before selling, so that they are not an issue once an agent aligns himself with a potential buyer.”
Owners must know how much their business makes annually. “A lot of times businesses think they make a certain amount a year, and when they start the transaction process, they find out their business doesn’t make as much as they thought,” he says. “The outcome is far less money than expected.”
Agents often manage accounting themselves, he says, making it important to hire a good accounting firm to audit the books before trying to sell. “These professionals can get their financials in order and ready for the sales process,” he says. “look at it as an investment as you will need to provide all this information anyway.”
The agreements agents have with their providers “can be a deal breaker,” Polley says. “In many cases, the agent cannot sell their business and are handcuffed by a primary provider because they signed a poor agreement 20 years ago. Now they worked hard to build a business and they want to make a sale and the provider stands in their way.”
Polley advises having a business lawyer review all the agent’s agreements and especially the change of control aspects of the agreements before entering the sales process. Though it's difficult to resolve these issues, Polley says in most cases it’s possible to modify these agreements. “Some provider agreements, however, are to the detriment of the agent. If they can’t resolve the issues then the agent has a business that’s not sellable,” he says.
Evaluate Your Worth
Before entering a transaction, it’s important to have some idea of what your business may be worth, adds Polley.
“The best way to evaluate an agency’s value is to determine its annual profits and multiple it by a range of five to seven,” Polley says. “That’s a starting point of an agency’s value.”
This calculation doesn’t get into the future value growth of the company, or if the seller will be a shareholder moving forward. For example, if an agent makes $1 million a year and sells his agency for $6 million to a private equity firm, that agent might get $5 million today and $1 million in stocks. If the new company gets sold again in the future, the agent might receive another $5 million. If it sells again, he might get another $5 million. And the stocks he receives could net him $15 to $20 million in payouts.
Now, if that same agent sells his business for $6 million to an administrator or a strategic partner, he will receive the $6 million on Day One and that’s it. “He doesn’t have ownership,” he says. “That’s one reason why a person who plans to continue to work and grow the business is better off with a buyer who offers ownership and a business strategy of constantly selling the business.”
He recommends when talking to a prospective buyer carefully evaluating their offer and vision, to insure they are the best fit for your business. Ask them:
- Is this a onetime deal?
- Are there future opportunities for sales?
- What is my involvement?
- How can I grow within the organization?
Polley also advises hiring an attorney who specializes in mergers & acquisitions. “A good M&A attorney can walk you through the transaction,” he says. “There are a lot of legal steps along the way with contracts, financials, commitments and employment agreements. It’s critical to have a solid professional who specializes in these transactions.”
Consider Company Culture
As agency owners talk to prospective buyers, they should also evaluate their company culture. The best transactions are with a company who shares your vision for the future outcome of your transaction. “Clearly define what your company culture is and compare it to the potential buyer,” he says.
Evaluate how the buyer takes care of their people, he says. “What do they offer employees? Do they have good benefits? Have they had successful transactions with other sellers? Can those sellers be a reference? What can they share about the culture?” he asks.
Polley advises paying attention to your gut. “You will get a first impression and a gut feeling about the company and their people,” he says. “If you feel good about the people you are working with, they’re very professional and very honest, then just keep moving forward.”
But, if red flags pop up, pay attention. “If you have a lot of skepticism or there are surprises you don’t like, it may be a sign that things are not going in the right direction,” he says.
Another red flag crops up when the deal promised in the beginning differs greatly from the final contract language. “That’s a red flag because they didn’t honor what they said up front, which happens frequently,” he says. “That’s because there are things an agent doesn’t always know to look for when selling the first time and are new to this.
He adds, “That’s why a proven track record from people who have sold to them in the past is so important.”
Be in it for the long haul, he adds. At a minimum, these transactions can take three to four months to complete. “But they can take up to a year,” Polley says. “It depends on the seller and how fast they can move and how organized their financials are. If they are highly organized, they could have a three-month closing. If they are not, it could take over six months.”
Ronnie Wendt is owner of In Good Company Communications and an editor at Agent Entrepreneur