Dealership valuations have become challenging to decipher in the post-COVID economy. On this episode of Inside Automotive, CBT News anchor Jim Fitzpatrick is joined by Alan Haig, president and founder of Haig Partners, to discuss the current trends influencing the dealer mergers and acquisitions market.
Dealership earnings, which Haig notes fell roughly 8.5% from their peak in 2022, continue to be the primary factor influencing the buying and selling of stores. Gross profits per vehicle dropped 14% year-over-year for both new and used cars, while interest rates and other tightening economic conditions have bottlenecked demand. As a consequence of these issues, Haig explains that dealership valuations are now based on future rather than historical earnings. However, he admits that it has become more challenging to predict store performance accurately.
This does not mean dealers are performing worse than they were before the pandemic. In fact, earnings remain almost double their pre-COVID average, and although dealership valuations have decreased 14% from 2022, stores are still selling for more than they were before the pandemic. “Dealership blue sky values are still more than twice what they were before the pandemic hit us in the beginning of 2020,” Haig explains. “I think any dealer today has got to be pretty pleased with the value of their business.”
To make the most out of the year, both buyers and sellers will need to set realistic expectations in terms of dealership valuations. “The buyers know that they have to pay more for stores in 2023 than 2019, that’s the only way that they’ll be able to grow, and sellers have to understand that buyers still want to get a return on investment…and so for those sellers that are hoping to price their businesses off just 2022 earnings, I think they’re going to find very little acceptance of that from buyers,” explains Haig. Despite the pace of transactions slowing in the first quarter, he also warns that the M&A market could change later in the year. “We get calls every week from somebody interested in buying stores…so the demand for stores hasn’t really dropped, I think it’s gonna pick back up in the second half of the year.”