Selling Your Dealership(s)-Did You Miss the Boat?
By Sheldon Sandler
Originally, in this case two or three years ago, the newly created public consolidators were paying unprecedented valuations for dealerships. That's because consolidators were driven by the stock markets' addiction to earnings growth, which could only be achieved by "buying" the earnings of highly profitable dealerships. As long as their stock continued to go up, consolidators were willing to pay what was sometimes derisively referred to as "stupid money" to feed the habit.
Historically, dealerships were valued much more conservatively. They were sold on the basis of operating assets first. The intangible value awarded to earnings (blue sky) was almost considered a sweetener. Often it was no more than one or two times pre-tax earnings.
It's my sad duty to report to you that we are already returning to those not-so-good old days. Just as public companies lead to the expansion of valuations expectations, they are now responsible for their retreat. We need look no further than the faltering stock prices of those very same public dealership groups to find out why. Their problems have little to do with actual performance. A review of 1999 earnings statements for Sonic, Group One and Lithia reveal that earnings year-to-year grew on average 93%. Nevertheless, from year-end 1998 to February 25, 2000, the date this letter was prepared, their stocks prices fell an average 41%. More importantly to this conversation, their P/E multiples fell from an average of 20.0 to 7.6. Not good.
Just as the market fell in love with the "consolidation" story three years ago and paid irrational prices for car dealer roll-ups, now sentiment has swung in the other direction and car dealers are regarded as part of the "old economy." Wall Street analysts never really understood the complexity of the retail automobile business in the first place. Those same experts now predict that dealerships as sure to be replaced by the Internet or direct manufacturer sales. They believe that car dealers are dinosaurs hanging on to protective franchise laws but inevitably doomed to extinction by such forces as Internet buying services and the desires of manufactures to streamline their distribution system. More immediately, they project that the economy can't continue to support the record vehicle sales of the past several years. Consequently, in Wall Street's view, the public dealership group's steady stream of earnings success is eclipsed by its gloomy view of "old economy" companies and of the future of traditional automotive retailing.
Not surprisingly, consolidators are rethinking their strategies and the prices they are willing to pay for new acquisitions. This is a period of rationalization, not boundless buying sprees. Generally, the public companies have pulled back from new acquisitions. In certain instances, they will make strategic acquisitions based on fill-in brands in geographically strategic locations. Since the market no longer pays for their earnings improvements, anyway, it doesn't make sense for them to pay top dollar for the mere sake of acquiring earnings. Often they now prefer the lower valuations of under-performers where some up side can be found.
How does this impact you? First of all, while you were delaying your decision to sell, you did benefit from some of the best earnings years on record. Secondly, there is still a healthy market for dealerships. However, we are retreating to a privately driven marketplace where buyers are more conservative in their pricing formulations. We have not yet retreated to one and two blue sky multiples, but the trend is not your friend. Furthermore, an anomaly has occurred whereby the value of the real estate under the dealerships is still highly valued. Consequently, by shifting income to rent factor, overall sales prices can still be somewhat buoyed. There are alternative ideas to explore, such as ESOPs and refinancing your real estate.
As more and more dealers assess their prospects and decide to become sellers, it becomes more important than ever to evaluate the attractiveness of your operations to gain a realistic idea of your value in what is sure to become increasingly a buyer's market.
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. ssandler@dealeronline.com
