In the late 1990s, publicly owned companies gobbled up a lot of car dealerships. Today, most dealership buy-sell activities involve private parties on both sides.
So says Alan Haig, president of Haig Partners, a Fort Lauderdale, FL, firm that brokers such transactions.
In 2018, there were 245 dealership buy-sells involving 375 so-called rooftops, according to TheBanksReport.com. The first quarter of this year saw 54 transactions involving 82 rooftops.
In a Wards Q&A, Haig talks about his specialized business, who are the main buyers and the reasons some dealers opt to cash out.
Wards: What’s the landscape today of dealership buying and selling?
Haig: Most the activity now is privately owned dealers buying privately owned dealerships. There is some public activity, but the big volume is private-to-private.
Dealers are saying this remains a great industry, a great return on investment, mostly in the high teens, which is hard to get anywhere else. People that have a management team, energy and confidence in their abilities are going to buy more stores.
On the other hand, a number of people are saying they don’t want to get bigger. Some of them are saying, “I don’t see this getting better for me; it’s getting harder. So I’m going to take today’s high valuations, get out and do something else with the rest of my life.”
Wards: More than a few dealers have kids who aren’t interested in becoming the next generation of dealer principals but instead pursue other things altogether.
Haig: That’s pretty common.
Wards: The auto industry is ever-changing. How much angst does that create?
Haig: The auto consultant, Glenn Mercer, says people tend to over-predict change. Just because one day there might be a robo-taxi, doesn’t mean it is around the corner. But some people think it is, and they overreact.
We’re conscious of these trends, because if people feel personal car ownership won’t be around in the future, they are not going to want to buy dealerships. For us, that’s scary. That’s our livelihood. So we try not to scare people.
Wards: They do a good enough job scaring themselves sometimes.
Haig: I think so. It comes back to the kids and dealerships. In the 1980s, there wasn’t much technology that was going to change the car business. The Internet came in the 1990s. People thought, “Oh, we’re going to sell cars totally online.” Only now, 20 years later, has that happened (in a limited way) with Carvana (selling used vehicles).
Wards: How involved is private equity in dealership buying and selling? (Alan Haig, left)
Haig: It’s gone up and down. About five years ago, there were a handful of interested people from private equity.
In 2015, Warren Buffett acquired the Van Tuyl group of stores. People thought, “If Warren is buying dealerships, we should too. There was a big uptake for a couple of years in private-equity investment. It was representing a pretty big chunk. Then we saw private equity get cold. A couple of companies sold their dealership investments.
They looked at interest rates going up, the prospects of a possible recession soon, public companies’ stock prices being relatively low. It was difficult for a private-equity partner to go into a Monday morning meeting and say, “We should buy car dealerships.”
Now, we are meeting with investor groups again who think it is a good time to get in, because dealership values have come down, maybe 15% in the last three years. They peaked in 2015, 2016. Some investors are saying it’s still a good cash investment. With some leverage, it’s a great return on investment. We’ll see some capital like that coming back into this business.
Wards: They can’t directly get into the business themselves, can they? No OEM would allow that.
Wards: How do you deal with that when it comes up?
Haig: We were retained years ago by the Bechtel family that wanted to buy dealerships. We found Morrie’s Auto Group (based in Minnesota). The majority owner was Morrie Wagener in his 70s and ready to retire. He had a couple of kids in the business, but they wouldn’t be able to buy him out.
He also had a CEO in his 50s who had equity in the group and wanted to continue running it. So that was a good fit. A new family bought out the existing family, and the CEO and the rest of the management team stayed. That’s the formula. The manufacturer figures, “What’s really changing?” It figures there now is fresh capital to do things such as facility improvements they want.
Wards: Do auto dealers compete with each other to buy available stores or groups?
Haig: It depends on the transaction. Every manufacturer has its own favorite children whom they’d like to see get more of its stores.
In some cases, they can try to exercise a right of first refusal, taking the deal from one party and giving it to another.
We’ve not had that happen in our transactions. But manufacturers certainly are a key part of the approval process. That sometimes frustrates an investor who negotiates a deal with a seller. Then they get to closing. You have to educate them that they need to apply and fill out a long application that, by the way, asks all about you and all your investors. That was very uncomfortable for some of these private equity firms.
There have been enough of these institutional investors now that have gone through the process. The manufacturer’s position is to approve, as long as it likes the management team that is staying and that team has equity.
Wards: What is the typical dealership worth?
Haig: About $6 million, plus real estate worth about $7 million more, plus about $3 million in assets. If you have a group of five or six stores, it can approach a $100 million transaction.
Wards: In the old days, good salespeople who aspired to own a dealership themselves could get one, often with financial assistance from the manufacturer. That’s rare today.
Haig: It’s very difficult. We have a transaction we’re working on now, our smallest. I feel like it is going to be sold to a general manager who has been saving his money for his first store. Conversely, we’re working on a transaction that is going to be in the $500 million range.
Wards: Why do dealers typically sell their stores?
Haig: It varies. There can be multiple shareholders with different interests. And nobody wants to write a check to buy out the other one. So they sell the company and divide up the cash.
In another situation, I’ve recently met with a dealer moving towards retirement. The circumstances would be the financial investor buys most but not all of the company at closing. The selling shareholder retains 10% or 20%, continues to run the business for a while and then sells the rest of their equity in five or 10 years.
That’s a good structure to allow business stability. Buyers feel more confident if the seller is going to remain operating it for a period and retains ownership, which keeps him in the game.
We think that will be a more common transaction. Especially in large transactions of five 10, 15 or 30 franchises, the buyer doesn’t necessarily have the extra management team that will just come in and take over. They really need to “buy” some talent. They want to make sure that talent will stick around.
Wards: This would be a general manager?
Haig: No, it would be on the level of operators above the general manager. In a 15-dealership group, there is going to be a CEO, a chief financial officer and a layer of (management) that oversees stores.
If it’s a public company coming in, they have their layers of overhead in place. But a financial investor doesn’t have extra people like that.
Wards: Is it hard to find a good operator?
Haig: It’s difficult. Nobody, including AutoNation (the No.1 dealership chain) has developed a system where they can have the processes and technology that allows them to plug anybody into a store. Dealerships are still very dependent on the strength of the general manager. That hasn’t changed in the 22 years I’ve been in the car business.
Wards: Some of those general managers have a piece of the action. That was the Van Tuyl model.
Haig: Yes, absolutely. That’s still a very effective model.
Wards: Is it a model that’s increasing in use?
Haig: That’s a great question. We’ve thought about the strength of that model, but it’s hard for us to get enough data to meaningfully compare performances of stores with a general manager with equity vs. stores with a GM who’s merely on the payroll. If I had to bet, I’d think stores with GM partners outperform regular GMs.
Wards: What is the frequency of a deal falling through?
Haig: It depends on the seller’s expectations. Before we get hired, we spend a few weeks with a client, giving them a valuation estimate range. We want to make sure they understand a likely outcome. If we think that offer is going to be $30 million, and they expect it to be $45 million, there’s a likelihood they’re going to be disappointed.
Wards: Your primary clients are buyers or sellers?
Haig: We almost always represent the seller.
Wards: How do you find the buyers?
Haig: Some of them approach us. When we approach them, it is important for us to be able to say, “We’re just approaching a handful of potential buyers, and we’ve selected you as one of them because of our knowledge of what you are interested in, our relationship, your credibility.”
We’re not going to talk to someone who we don’t think has sufficient funds. Or if they’re potentially going to be a bit rough in a transaction. Some (would-be) buyers will offer an attractive price to get a seller interested, then try to pull some of that purchase price off at the closing table.