Dealership Marketability: A Buyer's Market
By Sheldon Sandler
Don't look now, but the once vigorous market for car dealerships is on the opposite slope of the bell curve. We have shifted from a seller's to a buyer's market.
For the better part of the last century, the only market for car dealerships was local. Buyers were other privately owned local dealers. Yes, there were some chains that grew through acquiring existing dealerships. Potamkin and Van Tuyl, among others, spring to mind. But their valuation methodology was consistent with conventional private buyer philosophy. Return on investment had to be above 20%, which limited valuation calculations.
The conventional belief was that restrictive manufacturer franchise agreements and the cyclical nature of the business blocked the possibility of public car dealerships. Then, in the last half-decade and to the dismay of many, five or six dealership groups successfully completed IPOs. These newly minted public companies needed to buy the biggest and the best dealerships to more quickly gain critical mass. Several wanted to build national chains and all wanted to acquire substantial regional dealerships in order to execute their now familiar "hub and spoke" strategies. Everyone–Wall Street as well as dealers themselves, suddenly discovered that car dealerships were really valuable commodities.
In July of 1996, Automotive News quoted me as saying that the halcyon days for car dealers had arrived. That foretold the coming of a major sellers' market. Dealers were right in the middle of an unprecedented sales boom and public consolidators were willing to pay huge multiples for dealers as long as the stock market pumped them full of cheap capital. Old valuation ideas, it seemed, no longer applied.
That was then. And this is now.
As this article is being written, sales of domestic cars are taking a header. It may be that, with higher gas prices, a struggling stock market and a looming recession, even America's addiction to SUVs could be broken. High lines and imports, however, continue experiencing robust sales. Nevertheless, the recent pullback of GE and others from lease financing in the wake of multi-billion dollar losses creates concern for all. Could it be that dealership prosperity was, to a greater or lesser extent, due to overly optimistic new car residual values? It appears that those aggressive financing schemes will not be repeated soon. Unfortunately, this indirect subsidy is being lost just when it is probably needed most.
Even though the experts predict a "soft landing" for the economy and maybe only 10% fewer cars will be sold in 2000, many dealers will fall on a rock, not a pillow. The swollen fixed expense structures and recently added debt burdens required to refurbish or build extravagant new facilities will be tough to overcome in this low margin business. The very existence of some dealerships will be threatened.
It's no surprise that Wall Street has decided that investment in the automotive sector is about as desirable as a new set of Firestone tires. Public auto retailer stocks are now selling at private company multiples, if not below. The window for public financing, even for high yield debt, is slammed shut. Of course its not just auto stocks that have been eviscerated. In fact, you could say that public automotive retailers were just ahead of their time when they dissembled over a year ago.
It's no surprise then, that the pace of acquisitions has slowed. Just as consolidators have adopted a more limited acquisition strategy, so have they rethought their valuation assumptions. No longer can they use their stock price as justification for paying premiums for deals. Their pencils are much sharper now and they have grown in sophistication. The good old days of competitive bidding for dealerships and outsized blue sky is behind us. In current times, private and public buyers alike approach new acquisitions from similar vantage points. Neither will base their offers on what is now universally perceived to be peak year earnings.
That's not to say that consolidators and others aren't buying deals on a selective basis in markets where they already have a presence. Overall, dealerships in the right locations and with the right products are still marketable at good valuations. As a client recently told me, you may not be able to go first class anymore, but at least you can still get on the boat before it leaves the pier entirely.
Many mature dealers who otherwise would have sold their dealerships in less exciting times delayed their decision for several years to take advantage of the good times. With the market turning, you can be sure that will contribute to an overabundance of sellers over the next several years, further exacerbating the buyers' market. There are more than a handful of well-financed private dealership groups that have been patiently waiting for the tables to be turned. They have kept their powder dry and will be the best buyers now. The strong will get stronger and the weak willwell you know the rest.
A word of caution is necessary here. Many selling dealers, when faced with the new reality, are prepared to wait it out until multiples return to their previous lofty levels. That's just wishful thinking. Unless you believe that the public market for car dealers will undergo a phoenix like resurrection, valuations are not going to return to the "halcyon days" anytime soon.
To summarize, the dealership community has now passed through an unprecedented sellers' market fueled by a robust climate for car sales and the introduction of cheap public capital. Now however, sales are off, public capital has dried up and more dealerships will be available for sale. You can anticipate that well financed dealership groups will be feasting in the new buyers' market.
Sheldon Sandler is CEO and a founding partner of Bel Air Partners. Bel Air advises its clients on capitol market transactions including Initial Public Offerings, REITs, franchise loans, private placements and mergers and acquisitions. ssandler@dealeronline.com
