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The Market for the Purchase and Sale of Dealerships is as Hot as Ever

What is Driving the Continued Activity?

The Market for the Purchase and Sale of Dealerships is as Hot as Ever

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We have all heard about the incredible demand for the purchase of new vehicle franchises over the past year and a half. There does not appear to be any let up in the activity. For 2015, BSM is on pace to close approximately 30 transactions, representing both buyers and sellers, over the record-breaking 26 transactions in 2014. As the market for dealership transactions has evolved over the last couple of years, there are a number of important factors driving the increase of dealership buy-sells. The obvious thrust behind the activity is the huge increase in vehicle sales coming out of the 2008-2010 “Great Recession.” Dealership profits have been as strong as ever due to the increase in sales combined with a reduction in expenses which was forced upon dealerships during the economic downturn.

The less obvious reasons for the heightened buy-sell activity, from our viewpoint, begin with the fact that more dealers than ever have no generational succession plan. The children of the current generation of dealers simply aren’t interested in continuing to operate their parent’s dealership (considering the financial strength of those dealerships I question the wisdom of these decisions but that is a topic for another day). This phenomenon has placed an unprecedented number of well-run dealerships on the market.

The second less obvious reason for the increased buy-sell activity is an unprecedented effort by manufacturers to cull supposed poor performing dealers from their dealer ranks. A number of manufacturers, including Audi, Chrysler, General Motors, Nissan, Mercedes-Benz and Toyota, have ramped up the pressure to meet sales performance criteria over the past 2 years. Because these manufacturers measure dealer performance based upon an average market share in the State or Region, and do not take into account unique market circumstances, a significant number of dealers will always be considered to be performing at below expected sales efficiency. This dynamic has always been present in the manufacturers’ sales performance measurement, but the new wrinkle is that the manufacturers are sending letters and conducting meetings which threaten termination of the franchise and “encourage” sale of the dealership. As I have described in this column recently, the manufacturers are following through with the threat of termination at a greater pace than we can remember in our almost thirty years of representing motor vehicle dealers.

The third less obvious reason for increased buy-sell activity is that the manufacturers have shifted strategy with regard to ownership of multiple stores by the same dealer. Over the past two years, the manufacturers have not only allowed, but encouraged certain high-performing dealers, usually large private dealership groups, to acquire more of the

manufacturer’s stores. Nissan North America has gone so far as to publish a policy which expressly states that it desires a single owner of contiguous stores within the same market. This shift has resulted in the manufacturers having established a bullpen of willing and well-heeled buyers (again, typically large private dealership groups) who are put in touch with dealers out of favor with the manufacturer to encourage a sale. Although not always better performers than the existing dealer, these most-favored dealership groups are willing to expend a huge amount of capital to relocate, renovate and/or build fully-imaged dealerships and to market the manufacturer’s products for sale at below-cost with the hopes of making an after-the-fact profit on the manufacturer’s various incentive programs. Smaller dealers must be more prudent to insure a reasonable return on investment.

For the multi-point dealership operations, the key to identifying available dealerships for purchase is to insure that you are communicating that desire to your manufacturer and that your existing dealerships are performing to your manufacturer’s specifications. Sadly, it would appear that the trend is for the family-run dealership operation to be a thing of the past.