Record Surge in Auto Dealership Transactions
The auto dealership buy/sell market has experienced an extraordinary level of activity in the first half of 2024, with a total of 204 dealership transactions completed, resulting in the sale of 381 franchises. This impressive surge reflects nearly double the activity compared to pre-pandemic averages, marking a significant milestone for the industry.
Driving Forces Behind Increased Transactions
The rise in dealership sales is largely due to a wave of sellers eager to take advantage of historically high blue sky values, which measure the intangible worth of a business's ongoing operations. On average, these blue sky values have surged by 74% compared to pre-pandemic figures. Additionally, the recent CDK cyberattack has led many dealers to reconsider their business strategies, prompting some to sell as they navigate new technological and management challenges.
A Robust Buy/Sell Market Outlook
Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors, states that the buy/sell market for 2024 remains strong, driven by ongoing industry consolidation that shows no signs of slowing down, despite high interest rates and challenges such as low vehicle affordability and sluggish electric vehicle (EV) sales. Buyers, particularly well-capitalized consolidators, are actively pursuing these deals to secure current elevated values and mitigate potential future valuation risks.
Evaluating Franchise Earnings Trends
While current blue sky prices have decreased by 17% from their peak, they are still considered highly attractive from a historical standpoint. Average dealership earnings have dropped significantly by 35% to $4.4 million per year, following a notable decline in industry earnings since 2022. However, many dealerships are expected to stabilize their earnings, particularly after factoring in the unique effects of the CDK cyber event, bringing them closer to pre-pandemic levels.
Buyer Preferences Shifting Toward Quality
As profitability stabilizes and cash flow remains strong, leading consolidators are sitting on record liquidity—approximately $7.4 billion, which reflects a $370 million increase since the last quarter. However, buyers are becoming more discerning when it comes to franchises and locations, increasingly favoring high-quality, low-risk franchises and often willing to pay a premium for those that meet their standards.
Market Disparities Among Franchises
The gap between top-tier and underperforming franchises is becoming more pronounced, creating a clear divide between the haves and have nots. Concerns regarding OEMs’ electric vehicle strategies are making buyers cautious, especially toward brands that are heavily invested in EV production. Toyota and Lexus, which are projected to maintain the lowest levels of EV production at just 18%, continue to be among the most desirable franchises.
Key Trends for the Second Quarter of 2024
Kerrigan Advisors has identified four significant trends that are expected to shape the buy/sell market as we move into 2025:
- Increased Capital Deployment Internationally: Public dealership groups are increasingly seeking acquisition opportunities beyond the U.S.
- OEMs’ Active Involvement: Original Equipment Manufacturers are becoming more engaged in managing their dealership networks and buy/sell transactions.
- Financing Challenges for Weaker Franchises: Loan availability is becoming tighter for underperforming franchises, making acquisitions more difficult.
- Tech Challenges Prompting Sales: Many dealers are reevaluating their exit strategies due to growing technology demands.
Moreover, OEMs are increasingly exercising their rights of first refusal (ROFR) to influence deal structures, which could lead to a consolidation of dealership ownership into fewer, larger groups, potentially reducing market diversity.
Shifts in Retail Network Strategies
The changing approach of OEMs indicates a growing interest in owning customer relationships and data, reminiscent of Tesla's direct-to-consumer model. This shift in mindset among some OEMs involves standardizing their dealership networks, raising concerns about the future viability of independent dealers.
Commercial Financing Environment
The market has also seen a reduction in bank lending to U.S. corporations, leading to stricter underwriting standards. These changes are impacting the commercial real estate sector and are anticipated to pose further challenges for acquisition financing.
Technology Integration in Dealership Operations
Technology is playing a crucial role in shaping data-driven sales strategies, prompting many dealers to consider early exits from their businesses. Smaller dealerships may struggle to meet modern tech demands without significant operational changes. The urgent need for investment in technology is overwhelming for many private dealers, leading them to contemplate selling instead of adapting.
Conclusion: The Future of Auto Dealership Transactions
The landscape of auto dealership buy/sell transactions is continuously evolving, reflecting a dynamic market filled with both opportunities and challenges. As the industry adapts, stakeholders should remain vigilant about market trends and be prepared for further developments as 2024 progresses.
Frequently Asked Questions
What major changes have occurred in the auto dealership industry?
The auto dealership market has seen an unprecedented surge in transactions, nearly doubling pre-pandemic activity.
How have OEM strategies influenced dealership sales?
OEMs are taking an active role in managing dealership buy/sell processes, impacting network diversity and ownership structures.
What are the key trends predicted for the buy/sell market into 2025?
Increased international acquisitions, tighter financing for weaker franchises, and a focus on technology integration are key trends.
Why are buyers becoming more selective in their franchise choices?
With many dealers focused on securing high-quality, low-risk franchises, buyers are willing to pay more for top-tier brands.
How might technology challenges affect dealership operations?
Many dealers may consider selling rather than investing in significant technological upgrades, particularly post-cybersecurity incidents.
