Before the COVID-19 pandemic, determining a dealership’s value was a pretty straightforward process. However, after 2019, buy/sell valuations became trickier. After weathering the brunt of the pandemic in 2020, the retail auto market revved up again, and profits soared. Joining us today on CBT Now is Alan Haig, President and Founder of Haig Partners, to take a closer look at the rapidly changing landscape of dealership valuations.
“2021 was the most active year ever in our industry, probably by double,” Haig says. Although, 2022 has yet to see the enormous deals that happened in the previous year. However, he says the number of sales this year is ahead of last year’s pace.
Haig says the uncertainty of the market has made valuation more difficult. He explains that profits have more than tripled from 2019 to the first half of 2022, a fact he calls “fantastic.” He also points out that all dealers recognize that margins are likely to come down.
About a month ago, Haig says his company looked closely at how accurate valuation estimates have been. In 2019, he says those estimates were dead on, falling at 98% of the midpoint of the company’s high-low range. In 2020, because the company didn’t anticipate the pandemic when giving estimates, the offers that customers accepted were 86% of the midpoint of the range.
“As profits took off the market was running faster than we could keep up,” Haig says.
Haig says the industry is looking in the rear-view mirror to estimate value and anticipates some decline because of rising interest rates and inventory levels. He says he expects that the formula the company uses to evaluate valuation probably needs to change again.
Haid says the market still has a significant amount of instability but believes dealers won’t suffer as much as other businesses because of the pent-up demand. He does expect valuations to come down slightly during the second half of this year, something the industry is already starting to see.
When asked about Ford’s EV certification for dealers, which cost between $900,000 and $2 million, Haig says many dealers are evaluating their future plans and measuring how the investment will affect their future return.
Haig believes that Ford will need to change their strategy of taking orders and selling EVs online because competitors offering traditional retail models will likely sway those customers looking for instant gratification. He believes customers will have no problem traveling to competitor stores with EVs in stock and available to take home the same day. “Why make them wait,” Haig asks. Whether or not Ford will adapt its strategy has yet to be seen and is likely several years into the future. However, Haig says dealers need to have inventory on the ground.
Regarding prices averaging well over MSRP, Haig says he believes it’s a temporary issue and that OEMs are just as responsible for the situation. Haig says standardized pricing is a possibility for the future that would simplify the life of dealers and could offer many benefits.
Haig says he’s not afraid of changes to the dealership model because of its flexibility. He points to how dealers have already found ways to increase profits by focusing on their fixed operations and parts and service business. “Fixed operations are up 17% over the last year,” he says.
He explains that buyers are currently receiving multiple competitive offers with a significant range compared to the past when one solid offer likely stood out. That gives buyers more options and increases competition between sellers as well. “Sometimes the best buyer is down the street; sometimes he’s 1,000s of miles away,” Haig says.
Haig believes it’s easier to understand people’s motivations and strategies once the company can get out into the market and talk to people. He says the industry needs to look to the market for input. “Because the future is a little hard to predict, it’s more important than ever to let the market speak,” he says.
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