Digital Dealer - May 2019 - 10

D E A L E R OP S & M ANAGEM ENT: Bu y/Se ll Mar ket Continued from pg. 9

BUSINESS MODELS
INCREASINGLY
DETERMINE BUYER
DEMAND

Post-recession dealers
were very eager to expand
their enterprises and willing
to consider a broad set of
franchises for acquisition.
However, as industry sales
started to plateau and ultimately decline, buyers have
become more discerning in
their franchise acquisition
preferences.
We have found that the
pool of buyers only interested in specific high performing franchises with attractive, long-term investment
characteristics is growing.
Specifically, buyers today
are focused on franchises
with better business models,
namely high sales per dealership, strong fixed operations, consistent sales incentive programs, well-funded
captive finance companies
and excellent dealer relations. These requirements
are not surprising when considering how franchises with
these characteristics fared
during the last recession.
Most maintained dealership
profitability and saw their
sales quickly rebound after
the credit crisis.
We expect top franchises,
such as Toyota, Honda, and
Subaru, to experience continued growth in their buy/
sell market share in 2019
(see Chart 2), while weaker
franchises to experience
declines in their buy/sell
market share due to anemic
buyer demand. Today's
buyers are particularly
unattracted to franchises
with poor dealer relations,
10

M AY 2 0 1 9

highly variable incentive
programs, less supportive
captive finance companies,
low sales per dealership and
weak fixed operations. We
are finding more buyers are
avoiding these franchises
unless they are included in a
larger platform transaction.
With regard to luxury franchises, we would expect the
top franchises to grow their
buy/sell market share in today's selective environment;
however, as interest rates
rise, these franchises' high

of interest are becoming
increasingly limited. Growing
population centers and
business-friendly states
are in very high demand,
while smaller markets or
those with less economically
attractive characteristics
garner much less interest
from buyers.
Buyers are increasingly
wary of cities and states with
high taxes and regulations,
as these are more difficult to
overcome revenue challenges in the face of a potential

THERE IS NO
QUESTION THAT THERE
HAS BEEN A SHIFT IN
THE MARKETPLACE, AND
THERE IS A DISCERNIBLE
MIGRATION TO HIGHER
QUALITY INVESTMENT
OPPORTUNITIES."
multiples can be challenging
for buyers to justify, thus
reducing transaction volume.
This does not drastically reduce the value of top luxury
franchises, and for those
buyers with a long-term
investment horizon, top luxury franchises are attractive
"buy and hold" investments,
even at today's valuations.

TRANSACTION
ACTIVITY INCREASINGLY
VARIES BY MARKET

Today's buyers are not
only selective on brands,
they are also selective on
geography. While growing
dealer groups, particularly
those backed by professionally managed capital,
are still willing to enter new
markets for the right platform
acquisition, the markets

D I G I TA L D E A L E R . C O M

downturn.
Buyers are also increasingly focused on acquisitions
in their existing markets,
seeking to enhance their
auto retail market share and
gain greater economies of
scale. Dealership groups
that "own" a market are better positioned to adapt their
business model in a changing auto retail environment.
Many expanding dealership
groups believe high MSA
market share is key to future
success. Likewise, buyers
often place a higher value
on groups with significant
existing geographic concentration over groups that are
dispersed across multiple
markets. Dealership groups
that can provide an attractive platform from which

to grow are more valuable
than those that lack a strong
geographic presence.
The dealership model
remains highly profitable,
and attractive to many
buyers. There are frankly
few industries with the return
on capital offered by sound
dealership investments.
And there remains strong
appetites for good dealerships representing attractive
franchises and attractive
markets. But there is no
question that there has been
a shift in the marketplace,
and there is a discernible
migration to higher quality investment opportunities. For
those that have positioned
themselves with strong
brands in strong markets,
rest well knowing that there
continues to be good liquidity options for you as you assess your strategic options.
For others, a hard-working,
focused dealer can generate
profits with virtually any franchise; however, the window
of opportunity to monetize
some of those franchises
has diminished.
RYAN KERRIGAN is managing
director at Kerrigan Advisors.
Kerrigan Advisors is a leading
advisor to sellers of higher
value dealerships and dealership groups throughout the U.S.
Ryan works with private equity
clients advising them on their
auto retail investment strategy
and works with sell-side clients
seeking private equity exit. Ryan
has extensive experience in both
private equity and auto retail,
having run his family's dealership.
He started his career at McKinsey
& Company as a management
consultant, advising Fortune 500
companies on growth strategies,
organizational issues, pricing,
and business valuation. EMAIL:
ryan@kerriganadvisors.com.

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Digital Dealer - May 2019

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