Auto dealers began combining forces with previous rivals during the recession as a way to make ends meet. But now, several years into the economic recovery, consolidation has continued to be a smart decision for dealers looking to gain leverage.
From 2013 to 2014, the number of dealership acquisitions rose from 116 to 217; buyers increased from 96 to 171; and the number of dealerships that changed hands jumped from 202 to 324. Those gains were significant for the industry, and the upward trend is expected to continue through 2015.
In fact, 183 dealerships had already changed hands as of May 2015, and “prices are probably as high as they’ve ever been,” says Cliff Banks, founder and president of the online retail automotive newsletter The Banks Report.
Acquisitions have accounted for the majority of the consolidation within the auto space, with mergers being most significant among small dealers who come together to combine resources, cut expenses and strengthen their profit margins, Banks says.
So what’s driving growth?
An improving economy has certainly benefited the dealership industry, but increased activity in the auto dealer sector has in turn been a major force in the economic recovery.
Automobile sales have been steadily increasing, contributing to the health of the industry as a whole. Growth has been steady for five consecutive years, averaging 9 percent per year since 2010, according to an annual NADA data report.
Increased sales have encouraged current owners to grow their companies. “Dealers who have been successful are looking for ways to increase their portfolio,” Banks says. As more dealers plan to buy other businesses, the price of acquisition is climbing. “We’ve seen some obscene numbers,” he says, including dealerships for luxury vehicles going for as much as $75 million.
While huge companies and transactions garner the most attention, “the majority of deals really are being completed in the tier-two or tier-three markets,” Banks says. Many of these acquisitions are in metro-area markets, which have significantly more family-owned businesses consisting of one to three dealerships. As these dealers approach retirement, many are looking for exit strategies, and the current market is favorable to sellers.
The relative lack of competition in regional tier-two, and local tier-three markets compared to the competition at the national level has been a benefit and hindrance to midsize dealers. One one hand, the low price and low competition has contributed to a higher level of growth and M&A activity. But on the other, Banks says having fewer buyers to compete for a sale can make it harder for midsize sellers to get deals done quickly.
Financing and changing owner demographics fuel deals
Increased interest from hedge funds and the private equity sector has also helped the auto sector, and dealerships are expressing more willingness to work with these firms, Banks says.
Traditionally, dealerships have been hesitant to partner with hedge funds or private equity firms because they viewed these organizations as uninterested in the long term. The expectation was that firms were primarily focused on making quick cost cuts that would enable them to flip the business for a profit.
Now, dealers are beginning to differentiate between firms, partnering with those that have a strong management team in place for the dealership and are committed for the long term. “Those are the perfect investors for this space,” Banks says.
A generational flux has also impacted the dealer industry over the last few years. “Demographics of the dealership are starting to change,” Banks says. “We’re seeing a lot of people exiting the business who are looking to retire.” In many cases, owners reaching retirement are interested in making a final profit through the sale of their business.
What to consider
For dealers looking to merge with or acquire a new business, one of the most important considerations is finding the right financial team to negotiate the deal. An experienced financial partner can ensure a buyer isn’t overpaying for a dealership, confirm everything is done correctly and evaluate the past performance of a dealership along with its profit potential.
Making a lucrative purchase or merger “depends on how good your financial people are and how they structure the deal,” Banks says.
Finding a reliable, knowledgeable and experienced team to negotiate the fine print of your finances is key to successfully navigating what has become a high-stakes market.