During the past few years, the majority of dealership buy/sell transactions have been prompted by either distressed or strategic situations.
From late 2008 through most of 2010, those transactions primarily involved what could be considered very motivated sellers whose only other alternative was to close shop or file for bankruptcy.
Since many of these transactions traded at below market value, the motivation of buyers in these distressed/strategic acquisitions was based more on seizing an opportunity and less on taking an investment risk.
With the rebound of the industry underway, the buy-sell transactions this year have been under much less distressful scenarios than before. They present several challenges to buyers.
The biggest challenge is the buyers' willingness to re-engage into a valuation mentality where risk and uncertainty are major factors.
Unlike opportunity acquisitions that were made in previous years, most of the transactions now on the market are priced closer to what we have known to be “retail price.”
With car dealerships beginning to trade for upwards of five to seven earnings multiples, buyers are finding themselves in a position where they have to weigh multiple variables in determining how much they are willing to pay for a store.
Some of the purchasing variables that buyers now face are:
How they feel about the recovery of the economy and auto industry.
Will the recession double dip?
Has commercial real estate hit bottom? Is the current facility over-priced?
How they feel about the brand being acquired.
Toyota and Lexus brands have been strained. Do they still command a top-tier multiple?
Ford and Hyundai values are booming. Are these brands worth it?
General Motors and Chrysler seem back from the brink, but is it sustainable? Those looking to acquire dealerships today are hedging that the economy is getting better. The bigger question is whether they are over paying for these dealerships.
Since most stores in the current market will be sold based on a multiple of somewhere between three to seven times earnings, getting to a true normalized earnings multiple presents a challenge to buyers.
With all the fluctuation in the industry and economy over the last few years, how does a buyer obtain an objective and normalized earnings figures? The answer is through financial and operational due diligence.
Otherwise, you are just taking the word of the seller, broker, manufacturer representative or even your own staff. These can be unreliable sources. Here's why:
The selling dealer's primary motivation is to obtain as much money for the dealership as possible. The seller will present the dealership in the most appealing way.
The broker's primary motivation is to close transactions. This is how brokers make a living. Whether a deal is right for the buyer can often be secondary to a broker.
The manufacturer wants a dealer who can move as much new vehicle product as possible. However, it takes more than just selling new cars to run a profitable dealership.
The prospective buyer's employees' primary motivation is often to keep the owner happy and to preserve their jobs. They may hesitate to question whether to acquire a certain store at a certain price.
Consider the objectivity of the individuals sharing their insights, then determine if you are willing to commit millions of dollars based simply on that.
Phil Villegas is a principal at Axiom Advisors, a dealership consulting firm specializing in mergers, aacquisitions and enterprise management. He is at at [email protected] or 786-472-2800.