Digital Dealer - November 2019 - 14

D E A L E R OP S & M ANAGEM ENT: Bu y/Se ll Continued from pg. 12

sky values (see Chart VIII).
"If I go back six months
ago, nine months ago, and I
looked at the forward curve
you could have expected a
higher interest rate environment in the second half of
2019 going into 2020. And
now from today's perspective, there's a very good
chance that we're going to
be seeing rate cuts not rate
increases. So that's a huge
change in mindset."
-Mike Jackson, Chairman, AutoNation, Second
Quarter 2019 Earnings Call
Furthermore, lower
interest rates render the
financing of vehicles more
affordable, potentially
increasing new vehicle sales
or at a minimum reducing the decline. Like blue
sky, new vehicle sales are
inversely correlated with
interest rates. Thus, rate
reductions will provide clear
benefits to the auto retail
industry and support sustained industry profits, high
levels of buy/sell activity and
strong valuations.
"From a consumer point
of view, the lending environment at the moment is
very favorable. We haven't
had any issues obtaining
financing for our consumers,
but I think as interest rates
decline that can only be positive for the consumer."
-David Hult, President
& Chief Executive Officer,
Asbury Automotive Group,
Second Quarter 2019
Earnings Call
In summary, the buy/
sell market continues to
power through a period of
flat SAAR and tepid top-line
growth. However, dealers
14

NOVEMBER 2019

CHART 7

Average Dealership Transaction Financing Assuming 80% Leverage
on Real Estate and 50% Leverage on Blue Sky
2014-2019 LTM, $ in Millions

Source: NADA and Kerrigan Advisors Analysis

CHART 8

Effective Federal Funds Rate vs. Average Dealership Blue Sky Value,
2015-2018, First Half 2019, $ in Millions

Source: SEC Filings and Kerrigan Advisors Analysis

have pivoted to the elements
of the business model that
remain healthy and have
higher margins. As such,
profits remain robust, and
deal activity remains strong.
The public markets are
also reflecting these positive
developments, and the
public auto retailers' stocks
are up sharply year-to-date.

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

And, the lubricant of all
transactions, interest rates,
remain low and have been
dipping yet lower. These factors underline the conditions
for continued health in buy/
sell activity in 2019 and into
2020.
RYAN KERRIGAN is
managing director of Kerrigan
Advisors, the leading buy/sell

advisor to auto dealers in the US.
Ryan oversees capital raising and
private equity/family ofﬁce investor
relations, in addition to transaction
and consulting work. He started
his career at McKinsey & Company as a management consultant,
advising Fortune 500 companies
on growth strategies, organizational issues, and business valuation.
Ryan also has extensive experience in auto retail, having been
a general manager of his family's
dealership. EMAIL: ryan@
kerriganadvisors.com
http://www.DIGITALDEALER.COM
Digital Dealer - November 2019

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