In the late 1990s major consolidation started in our industry. The consolidators were either public or going public. Wall Street wanted them to get big, fast. These companies did not just buy single stores; they bought whole groups and spent many millions on each transaction.
How times have changed! Since the “shock and awe” of initial consolidation, buy/sell activity has continued, but at a much slower pace. It’s been more like a marathon, than a race. A testament to this change is the relatively small number of large public acquisitions over the last 10 years. Since 2002, Presidio estimates the publics completed only 23 acquisitions between $50 million and $100 million, and six over $100 million (see Chart 1). Some larger private groups also did sizable acquisitions during this time, but not many.
Public company dealership acquisition spending by quarter since 2002
Source: Corporate SEC Filings (AutoNation, Penske, Group 1, Asbury, Sonic and Lithia) and Presidio Estimates
Today, Presidio estimates there are at least 300 private dealership groups valued at over $45 million (blue sky, assets and real estate), see Chart 2. Many of these groups are led by dealers who are at, near or beyond retirement. Some are starting to think about their exit strategy. A few plan to pass along their businesses to the next generation; however, for many, these businesses have become too valuable to finance a generational buyout or too large to pass along. Few expect this to change in the near future.
Estimated number of dealership groups valued at greater than $45 million
(excluding the top 10 groups)
Source: Presidio Analysis and Automotive News Published Top 125 Dealership Groups (March 2012)
For those dealers who plan to sell their group, most are hoping to receive top dollar from a single, large buyer. However, a single exit (as Chart 1 demonstrates) is no longer a likely outcome.
- Small buyer pool: There are few buyers capable or seeking large group acquisitions. The current public dealership groups are no longer in “shock and awe” mode. Instead, they are selectively filling out their portfolios with specific strategic acquisitions. A new round of dealership group IPOs is also not on the horizon. As for private groups, few are looking to make large group acquisitions, in part due to the significant leverage required (the credit crisis spooked many) and the management challenges associated with multi-store deals. For some private groups, it is easier/less risky to improve sales and profits at their existing stores, rather than grow through acquisition. As such, the buyer pool for a dealership group is relatively small, making it more difficult to run a competitive sale process and obtain top value.
- Framework limitations: When dealerships were initially being consolidated, buyers ran into fewer framework limitations. Today, most large groups either have formal manufacturer framework agreements or face franchise ownership limitations (Lexus limits a group to six franchises). These manufacturer restrictions can make it quite difficult to identify a single buyer for multiple franchises.
Given these challenges, Presidio recommends dealership groups form a strategic exit plan – one that may contemplate not only a potential single sale to a single buyer, but also several sales over time to multiple buyers, perhaps two or three transactions over a 10-year period. There are several benefits to this approach:
- Maximize group value: Some franchises will not be of interest to a large buyer. Thus, in a single transaction, each franchise does not usually receive maximum market value. The dealership group’s parts are likely more valuable than the whole. By selling a group in parts, a dealer will have a larger pool of buyers competing for the acquisition. Greater demand should lead to higher values. This is not to say that each dealership should be sold separately, but rather strategically. For instance dealerships located in an urban area could sell to one buyer, while those in an outlying area could sell to a different buyer at a different time.
- Remain a dealer: Being a dealer isn’t a job, it’s a lifestyle. Selling a group in a single transaction is a shock to the system that isn’t necessarily prudent or desired. By planning an exit over time, dealers can remain active in the industry (and enjoy it) for a longer period of time, while better preparing themselves and their estate for the future.
- Diversify investments:Today most dealers’ investments are highly concentrated in auto retail. Few have portfolio management experience. By systematically selling off a group, dealers can diversify their portfolio over time and learn how to better manage their capital.
- Reduce market timing and transaction risk: By methodically pruning a dealership group, dealers will likely reduce the market-timing/transaction risk associated with selling their business (usually their single most valuable asset). By doing so, the risk of a forced sale at a bad time is likely considerably reduced.
Preparing for the sale of a group is not fun. However, dealers should be honest with themselves about their own longevity. No one lives forever. Coach Wooden said, “Worthwhile results come from hard work and careful planning.” The hard work is done. You have built a valuable business. It’s time to start the careful planning.