What's up with the dealership M&A market?

Dealers— the last few years have been incredible for the retail automotive sector. But as we all know, the good times can't last forever.

With the car market becoming more consumer-friendly by the month, analysts like the ones at Cox Automotive expect 2024 to be a year of normalization. So, that means the high profit margins and easy sales environment we've enjoyed recently are not going to hang around for much longer.

That's not a problem for most dealers, who know how to run their businesses successfully in any kind of market. But for those who are looking to leave the auto sector, whether to pursue other ventures or enjoy their well-earned retirement, the decline in profitability that experts are telling us to expect has another meaning: lower dealership valuations.

Here are some of the questions dealers looking to sell their business have been asking me:

• Should we sell now or wait?
• Are buyers still looking for dealerships?
• What are buyers willing to pay?

To answer these questions, we'll have to take a deeper look at what's going on in our industry. Let's start by hearing what the experts have to say.

Despite how it may appear, the expectation that M&A activity in the retail auto sector will be high this year is near-universal among both dealers and buy-sell firms. For instance, during the 2024 NADA Show this February, Dave Cantin, CEO of the Dave Cantin Group, told me that this year was the “perfect storm” for both buyers and sellers. “What we are going to see is there will be a heavy focus on consolidation that will continue throughout 2024,” he explained. “The opportunity for any industry to grow is when the industry finally gets normalized. We ARE normalized.”

On the ground, sellers feel much the same. In Kerrigan Advisor's most recent dealer survey, published last December, researchers found that 52% believe valuations will remain high in 2024, with some even expecting an increase. Only 27% were worried about a decrease.

What's most interesting about Cantin and Kerrigan is that both have high expectations for the M&A market in terms of pricing and demand, EVEN THOUGH they expect profits to shrink back to normal levels. That's quite shocking for those of us who know how this market tends to work.

But if you have any more doubts about the scale of activity or valuations, just listen to this comment from Lithia Motors CEO and President Bryan DeBoer from his fourth-quarter earnings call: "Right now acquisitions are demanding 'massive multiples,' requiring prices of even 10 to 20 times earnings."

And need I remind you we've seen some of the biggest dealership transactions of our lifetimes in just the last few months? Lithia’s takeover of Pendragon, the U.K.’s biggest dealership? February. Asbury's $1.2 billion buyout of Jim Koons? December. Dream Motor spending $700 million on just two Florida dealerships? November. Ciocca Dealerships acquisition of Apple Automotive? October. Morgan Automotive’s record-breaking purchase of the world’s biggest Toyota store, Al Hendrickson Toyota? June. Need I go on? Fact is, big groups are making big moves right now.

So, why are dealers getting such good deals right now?

For buyers, it's not about how the market looks right now. It's REALLY about what things look like down the road.

Buyers, especially the public dealership groups, know that if they slow down, they'll have to work harder to get ahead down the road. The stores on the table now won't stay around forever, and the longer they hold off on an acquisition, the more likely they are to lose a fantastic market with a loyal customer base to a competing retailer.

There's another reason, too. Inflation and interest rates are frequently cited as the number one reasons business has been hard the last few years. But with inflation starting to cool and the Federal Reserve actively discussing cutting rates as early as this year, those problems now have an expiration date. In fact, in my interview with Farid Ahmad, president and CEO of DSMA (Dealer Solutions Mergers and? Acquisitions), he told me there could be as much as a one to one-and-a-half percent reduction in interest rates over the year which “could really stimulate the M&A world.”

Better rates and slower inflation could also bring more customers to the market, driving up sales. Think about all the potential customers you've met who can't afford a vehicle, so they're stuck driving the one they have until it falls apart. If costs of living ease and car prices drop, you can bet many of those buyers will be popping into showrooms. The ones who don't will be popping into the service center instead. Either way, that's a good thing for dealers.

That's not all. Lower interest rates mean cheaper debt. In my recent interview with Willie Beck of Bel Air Partners, he brought up an interesting point: when rates come down, what are loan borrowers going to do? They're going to refinance. It's the same for the dealership M&A market.?

Some groups are banking on better rates down the road so they can renegotiate their terms with lenders. Sure, it might be expensive to shell out money for a successful dealership today, but the long-term costs might not be as bad as you might think. That, combined with the possibility of returning customers, helps explain the unique market landscape we're seeing today.

Of course, whether you're looking to sell now or later, the most important question you have to answer is whether this is a good time for YOU. Are you ready to exit the business? Do you have a succession plan? Do you have an exit strategy?

Whatever your answers, one thing’s for sure: there's no better time to start thinking about those questions than NOW. If you have thoughts about the M&A market, please shoot me a DM.

Until next time,

Jim Fitzpatrick