By Richard N. Sox
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 closed 26 dealership transactions, representing both buyers and sellers, and is on pace to close well in excess of that number in 2016. As the market for dealership transactions has evolved over the last three or so years, there are a number of important factors driving the increase of dealership buy-sells. The most 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. At the same time, dealership groups along with non-dealership investment entities are looking for a better return on capital than offered in other “traditional” markets. This perfect storm has brought many more buyers to the table offering top dollar for dealerships.
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 or grandparent’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 an alternative to a long legal battle. As we have written about extensively, the manufacturers are following through with the threat of termination at a greater pace than we can remember in our 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 three 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 huge amounts 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.
Sadly, it would appear that the trend is for the family-run dealership operation to be a thing of the past.
Reasons for Continued Pace of Dealership Transactions:
- Perfect storm of excess capital chasing profitable dealerships;
- No dealership succession plan;
- Manufacturer culling of dealer networks; and
- Manufacturers encouraging contiguous market ownership.