Coming retail changes make for a brisk buy-sell market

Dealership M&A activity is heating up across the country, and it's not hard to see why.

Buy-sell experts say more sellers are coming to market — including publicly owned groups and families without succession options — at the same time that many dealers are looking to expand to prepare for a changing retail environment.

It's a combination that makes for a brisk buy-sell market. Still, the increased volume did not prevent a decline in store values in the first nine months of 2018, according to estimates from two industry reports that track dealership acquisitions.

"We're seeing a lot of auto dealers that have decided now is the right time for them to exit, and so there are a lot of opportunities for buyers out there," said Alan Haig, president of Haig Partners in Fort Lauderdale, Fla., which produces the Haig Report quarterly.

According to the report, more dealers appear to be putting stores up for sale as they get older and as dealership values decline. Other factors include concern over higher capital requirements, new technology risks and growing control of dealership profits by automakers.

Haig estimates that 106 dealerships traded hands in the third quarter, up 26 percent from the same period a year earlier.

The number was significantly impacted by a single deal: Ken Garff Automotive Group's acquisition of total ownership of 28 stores from a joint venture with Leucadia National Corp. called Garcadia. Garff Automotive of Salt Lake City ranked No. 8 on Automotive News' 2018 list of the largest dealership groups based in the U.S., with 69,888 new-vehicle retail sales in 2017.

Without the Garff deal, dealership buy-sells were down 7 percent in the third quarter, according to Haig. But for the first nine months of 2018, U.S. dealership sales were estimated at 317, up 35 percent over the same time in 2017.

Similarly, the third-quarter Blue Sky Report from Kerrigan Advisors in Irvine, Calif., estimates the number of auto retail buy-sells at 179 through the first nine months of 2018, up 20 percent. It estimates 296 franchises were sold over nine months, up 22 percent, and multi-dealership transactions jumped 44 percent.

Kerrigan Advisors expects consolidation to continue. Citing National Automobile Dealers Association data, the report noted that the number of dealership groups with more than nine stores has grown 50 percent since 2012, while the number of groups with one to three stores has fallen by 12 percent.

"We have seen our businesses transfer to the next generation quite successfully, especially to the second generation," Kerrigan said. "It gets more difficult to continue to defy those odds into the third and the fourth [generation], and we estimate a large percentage of the industry is facing that today."

Kerrigan also expects to see more transactions in which outside capital acquires an ownership stake in dealerships.

"I think 2019 is going to be a really interesting year," she said. "I think we are going to see a tremendous amount of activity in part because I think sellers that have sort of been on the fence are realizing they have to make a decision next year most likely because it's going to be a more difficult market thereafter if we continue to see interest rates rise."

Despite rising sales, buy-sell transaction prices are down slightly as dealership profits have declined and interest rates have risen.

The Haig Report estimates that dealership values are down 4.6 percent, from the end of 2017 through the third quarter of 2018, and it reduced blue sky multiples on 12 of 22 franchises. But Alan Haig noted that dealerships still make a lot of money and have benefited from tax law changes.

"There's still plenty of interest in buying dealerships," he said. "That's our business. It's cyclical. Businesses went straight up in value for nine years, and now they've leveled off."

Kerrigan's report estimated that blue sky values are down an average of $100,000 during the first nine months of 2018.

According to the Haig Report, publicly traded auto retailers have been net sellers through the first nine months of 2018, spending just $125 million in the third quarter on U.S. dealerships and $625 million through three quarters of 2018. That was down from $925 million during the same nine months in 2017.

Kerrigan estimates public companies spent $602 million on U.S. dealerships through the first nine months of 2018, down 24 percent from the same months in 2017.

In the third quarter, AutoNation bought a BMW dealership in the Los Angeles market, while Group 1 Automotive Inc. bought two Honda dealerships, one in San Antonio and one in the New Orleans markets, according to Kerrigan's report.