You believe this is the top of the curve. You have built your dealerships to heights you could never have predicted. You worry that market conditions can only decline and you want to take advantage of the current sellers' market or maybe you are just ready to retire. Although you have successfully sold thousands of automobiles and negotiated with even more buyers, this will be different. This will be the mother of all deals. You have decided to sell your dealerships.
It wasn't that long ago that a dealership's intangible value or "blue sky" was merely the icing on the cake. Expectations were limited to finding a way to liquefy hard assets and possibly get a bonus for the ongoing value of the business. Now, though, "blue sky" is no longer the icing. It's the cake and pie too. It can represent three or four times or even more of net assets in a buy/sell agreement. That's because public consolidators emphasize earnings power over tangible assets and real estate.
If the industry has a new class of buyers with their own formulas for valuing dealerships, I would argue that the techniques for selling dealerships needs to be revisited. The proverbial "back of an envelope" approach is appropriate only for dealerships with minimal prospects. Successful consolidators like AutoNation (Republic) and Group 1 are nothing if not sophisticated financial creatures. Be prepared to conduct your transaction on your terms, not theirs.
Here are ten considerations that are the framework for achieving your goals. They are directed toward transactions with consolidators but apply to virtually any buyer.
Be prepared. Selling dealerships is a process and preparation is key. Do your homework before approaching the market. Assume that potential buyers know little about you and the essential facts of your dealerships. Identify and be prepared to illustrate your strengths. Know your weaknesses ahead of time. What you perceive as weaknesses may be seen as opportunities in the eyes of the buyer.
Estimate dealership value. Assess potential value, which in most cases will be a major determinant of your decision to sell. Sellers who have unrealistic price expectations waste their time and frustrate buyers. You should calculate potential value from several different perspectives, including as a multiple of pre-tax earnings, cash flow, discount to public comparables, and discounted cash flow, as well as conventional "blue sky."
Restate financial statements. Restate your income statement to eliminate personal compensation, non-recurring expenses, and private company expenses like ranches, yachts, and jets. Prepare pro forma income estimates for the next two years using reasonable assumptions. A stable history is an advantage, but the ability to grow can justify a higher price.
Be flexible with real estate. You may get a higher overall price if you sell your real estate apart from the dealership operations. But it's not that simple. Although many buyers, particularly most public consolidators, prefer to buy dealerships sans real estate, just as many buyers insist on owning it. Additionally, sale-lease backs will often contain prohibitions and stipulations that are inimical to the easy conveyance of a deal to a new owner. The best course of action is to negotiate the sale of the operations first and dispose of the real estate in concert with the overall transaction.
Pre-qualify your best buyers. Screen for attributes that will produce a well-qualified pool of buyers. In most cases, your best buyer will be a strategic buyer. Typically that will be a consolidator or someone who has a need to own your stores. Obviously, you want to avoid bottom fishers and tire kickers. Before they are ever contacted, know the buyers' motivations, their ability to win manufacturer approval, and their ability to finance the transaction. Assuming consolidators are on the target list, you should be familiar with their operations and strategy from public filings. Become knowledgeable about their acquisition philosophy to determine your fit with them.
Showcase the goods. Accumulate all the relevant information that a buyer could reasonably need into one document. This is not a puff piece but a fact-filled document to support a buyer's ability to make a reasoned bid without visiting the dealership or needing to meet with your management. Be thorough in order to avoid customizing information for each buyer. Anticipate questions and include pictures and graphs that highlight dealership strengths. Be sure to highlight opportunities for improvement.
Control the process. You should control who gets to see your information, when they get to see it, and how long they have to evaluate the material. Don't let the deal get shopworn. Use a smart bomb to hit your target, not a shotgun. Limit prospects to no more than ten well-screened prospects. If you include too many, serious buyers may become disinterested. They are too busy and have too many opportunities to waste time in protracted bidding wars. Release the document simultaneously to all pre-qualified targets and specify a deadline for an expression of interest.
Maintain confidentiality. The world doesn't need to know your business. Get confidentiality agreements from your target buyers before they are exposed to any proprietary information. Limit the "walk around" to two or three finalists, who have already established their serious interest in buying the dealerships. If the above points are followed, the actual exposure will be limited to very few people and, since most of the effort went into the preparation, public exposure will be quite limited.
Talented managers are assets. Good product is plentiful today, but that's not true for good people. In most cases, especially for bigger deals, the acquirer needs your team and won't consider a deal without local management. They are often granted handsome packages with performance incentives and stock options to retain their loyalty.
The role of intermediaries. If you decide to enlist the help of an intermediary, make certain that their interest is congruent with yours and they are working for your best results. Avoid the inevitable conflict of interest that will accrue if the "broker" is working for both you and the acquirer.
Dealerships can be valuable and unique businesses. Although our suggestions might be a departure from past practices, more is at stake now than ever before. It pays to be organized and professional if you are dedicated to "making the best deal." Good luck!
Sheldon Sandler is CEO and a founding partner of Bel Air Partners. Bel Air advises its clients on capital market transactions including Initial Public Offerings, REITs, franchise loans, private placements, and mergers and acquisitions