Succession has in recent years been a major driver behind the decision by auto dealership owners to sell. To be sure, that is still motivating many. But there are myriad other reasons owners sell, some unique to the ownership structure.
We estimate family-owned dealerships account for more than 85% of the more than 16,600 franchised dealers in the United States, and family-owned dealerships most commonly face succession issues. But they sell for other reasons, as well. Other ownership structures include publicly listed dealership groups — who own about five percent of dealerships — and corporations, family offices and private-equity groups.
The Presidio Group sees motivations for selling falling under broad headings including:
- Succession issues
- Opportunistic timing
- Portfolio management
- Investment aversion
- Partnership differences
- Existential fears
Succession is behind a number of family-owned dealership groups’ decision to sell. The auto retail business demands long hours and very hard work. The next generation of potential owners don’t want to make the work-life sacrifices their parents did, so the family business is sold. Or, as in a large transaction we recently handled, no family member was available to take over the business.
Opportunistic sellers are those who simply see now as a good time to sell. Demand is strong and valuations are high. The decision is based on financial considerations. These owners have been through several business cycles, they’ve created value, and feel it is the right time to monetize their asset. “They may or may not have a successor, but it is a smart financial decision,” says Presidio President George Karolis. A tiny fraction are owners such as corporations, family offices, or investment firms who have decided it is “time to make a move,” he adds.
Portfolio management was behind another recent transaction we advised on. The seller wanted his franchises to be more concentrated in a specific geographic area. Other portfolio strategies might be to focus more on premium franchises or to add more volume brand franchises.
Investment adverse sellers see the need on the horizon for significant capital investments they are reluctant to make. Manufacturer image programs are a classic example of this decision driver. Dealership owners have long railed against demands to sink millions of dollars into facility upgrades or new facilities that offer dubious returns. That has become especially acute in recent years as consumers have shifted ever-greater amounts of their buying decision process online.
COVID-19 accelerated the timeline for a seamless, online sales process from years to a few weeks. As Cox Automotive CEO Sandy Schwartz told us during our October E-Conference, before the COVID shutdowns Cox was selling 50% of its vehicles in some digital form. Today it is selling 100% in some digital form.
Dealerships that have dragged their feet in offering an online experience are now faced with large investments in technology and training, not to mention having to parse the many technology options available and decide which best meets their needs. Some dealers see this as a distraction, says Presidio founder and CEO Brodie Cobb, others as an opportunity. “For those that see it as a distraction, they want to let someone else figure it out, so they cash out,” he says.
Partnership differences fall into several categories. Ownership is often divided among multiple parties, both family and non-family. One or more partners may want to sell. Even if the other partners don’t agree, sometimes the only route out of this situation is to sell. We handled just such a transaction this year.
A smaller category is no longer happy with the relationship they have with one or more of the manufacturers their franchises represent. “They want to get out and move on, so they decide to sell,” says Karolis.
The most varied is what we call the existential fears group. They may have been sufficiently scared by the initial COVID-induced downturn to sell. The market is good, they reason, and they don’t want to go through that again. They want to “make hay while the sun is shining.”
Others (or the same ones) are unsettled by the election results. They worry about higher taxes, an economic downturn, or other potential headwinds. Others are worried that the dealership model as we know it will be changed or eliminated by disrupters. That includes new business models such as subscription services and new technologies such as electric and autonomous vehicles.
While these factors and others are boosting the supply of dealerships, The Presidio Group is still seeing more buyers than sellers in today’s market. Interest rates are very low and money is available. We are as busy as we have ever been, selling 37 dealerships this year for more than $2 billion.
Yes, succession issues are still there. But today’s dealership mergers and acquisitions market is far more complex. Knowing and understanding the potential buyers and sellers, and their motivation, is crucial.
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The Presidio Group provides M&A advisory services through its wholly-owned investment bank, Presidio Merchant Partners LLC, Member FINRA and SIPC.