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2017 M&A Market Slows for Dealerships

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May 31, 2017—The number of auto dealerships sold in the US declined 29 percent from 113 rooftops in Q1 2016 to 80 rooftops in Q1 2017, according to data published in the Q1 2017 edition of The Haig Report.  

This decline may have been partly because of the uncertainty caused by the Presidential election in the Fall of 2016, Haig claimed. 

"Buyers were uncertain if Congress would pass tariffs that would raise the costs of most autos sold in the US, or if taxes would be cut, thereby leaving more proceeds for sellers," Haig said in a statement. "Buyers are also increasingly concerned about future profits at dealerships so they are proceeding cautiously.  And some sellers have not yet adjusted to new market conditions and may be asking too much for their dealerships."

Continuing the trend from 2016, demand for dealerships shifted from luxury and import brands to domestic brands that are heavier in trucks and SUVs. Purchases of domestic dealerships comprised 49 percent of total purchases in Q1, up from 43 percent in 2016. Purchases of luxury dealerships were just 14 percent in Q1, down from 22 percent in 2016.

Demand for dealerships remains strong with public dealer groups, private dealer groups and institutional investors all looking for fairly priced acquisition opportunities. Dealership buy-sell activity should be robust in the rest of 2017.

The Haig Report tracks developments in auto retail and how they impact dealership values. It includes data and analysis on the performance of auto dealerships, identifies noteworthy events to the industry, discusses trends in the M&A (mergers and acquisitions) market for dealerships, gives guidance on estimated range of values for different franchises, and provides an outlook for the M&A market in 2017. The Haig Report is based on data gathered from many public sources, as well as interviews with leading dealer groups, and bankers, lawyers and accountants who specialize in auto retail.

Other key findings from the Q1 2017 Haig Report include:

  • Macroeconomic indicators such as GDP, interest rates, employment, number of miles driven and consumer sentiment remain highly favorable for dealers.
  • Other trends such as used car pricing, incentive spending by the OEMs, and rising inventories are growing less favorable to dealers.
  • Retail sales are flat for the first four months of the year, although total sales, including fleet, fell by 2.4 percent.
  • Declines in new and used gross profits per vehicle are being offset by gains in F&I and fixed operations.
  • Sales and gross profits continue to increase at dealerships, but expenses are rising faster.
  • Average profits per dealership fell 8.5 percent in Q1 2017 from Q1 2016.  The average dealership pre-tax profit over the last 12 months was $1.437M.
  • Average estimated blue sky value per dealership dipped 2 percent from the end of 2016 to $6.92M.

Public auto retailers are spending more of their capital outside of core US franchised vehicle dealerships including stand-alone used car stores, international acquisitions and collision centers.

Private equity firms and family offices continue to make substantial investments in auto retail.

Trump's proposed plan to tax pass through entities like most dealerships would increase the amount of after tax income to many dealers by an estimated 24-35 percent, thereby raising the value of dealerships.  If passed, dealership values should remain stable or rise, even if pre-tax profits continue to drift lower.

Alan Haig, president of Haig Partners, said, "Despite the sharp dip in the first quarter, we expect dealership sales for the rest of 2017 to be robust.  There are many buyers, financing is still readily available, and more sellers are realizing that if they want to sell their dealerships before the next recession they will likely need to accept today's offer since tomorrow's offer could be lower."

Haig Partners is seeing these conditions in its current engagements that include domestic, import and luxury dealerships that range from Florida to New York to California. The value of the transactions they have closed over the past two and a half years is approximately $900M, including two of the largest transactions of 2016, so they have unique insights into current market conditions and how they impact dealership values. 

 

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