How dealership mergers and acquisitions will change in 2023 — Farid Ahmad

The rate of dealership mergers and acquisitions continued to escalate in 2022, with news of buyouts and consolidations arriving nearly every week.

The rate of dealership mergers and acquisitions continued to escalate in 2022, with news of buyouts and consolidations arriving nearly every week. The changing market poses a multitude of questions for auto-retail owners who may be pondering their exit strategy, navigating the sales process or wondering if the economy will affect dealership values in 2023. Farid Ahmad is the founder and CEO of DSMA, a leading dealer buy-sell firm located in Canada, and has had his finger on the pulse of auto-retail for years. Today he joins host Jim Fitzpatrick on Inside Automotive to discuss what business owners can expect to see from M&A this year.

Whether buying or selling, it is always important to be aware of the brands which perform well on the market. Ahmad notes that for the last two years luxury German lines, such as Porsche and BMW, have been highly sought after by dealership groups. Franchises with quality truck lineups are equally coveted by trade associations, evidenced by the impressive sales numbers of pickups in 2022. One of the more surprising changes for dealership M&As came from Hyundai and Kia, whose dealerships have swiftly become best-sellers in American auto retail thanks to their quality products.

Established trade groups were one of the most active buyers of dealerships in 2022, and Ahmad notes this pattern will likely continue into this year. However, he notes that publicly traded associations were still catching up after the COVID pandemic, thanks to share value crashes last year. This means that until these businesses can improve their stock outlooks, dealership M&As are more likely to involve private companies in 2023.

Ahmad notes that his company has witnessed an interesting change to the valuations process used in dealership M&As over the last year. While the value of a business is normally attributed to its revenue and performance, given that these numbers have been suppressed and made difficult to calculate by economic headwinds, many trade groups now look at factors that indicate future returns on investment. “Other factors such as location of a dealership, [and] whether or not it’s an image facility, actually have more impact,” explains Ahmad. Furthermore, the last three years won’t always provide a good picture of an auto retailer’s performance, since external factors have caused performance indicators to become unreliable. Instead, the CEO suggests that buyers include numbers from before 2020 when making their offer.

When it comes to making an offer, Ahmad recommends keeping things simple. “If you’re going to make an offer on a store, make it simple, make it easy, with the fewest conditions possible,” he suggests. Given that the opportunities for dealerships M&As are now few and far between, it is essential for hopeful owners to act quickly and transparently, so that a competitor doesn’t swoop in before they have time to act.

Ahmad notes that interest rates in America could still climb in 2023. While the federal reserve has hinted that rate increases could end by mid-2023, it is still a challenging landscape for loan seekers. Rather than assuming the current percentage will remain in place, Ahmad instead suggests that buyers use exaggerated interest rates in their accounting, to make sure their finances are covered in the event of another hike.

For dealers who are looking to sell, Ahmad recommends they first get a professional to conduct a proper evaluation of their business. The market of dealership M&As has changed drastically, and will likely fluctuate even more in 2023. Having an expert valuation can provide clarity to a dealer considering a buyout. Furthermore, many business owners who sell are unfamiliar with the dealership M&A process. Ahmad notes that having realistic expectations can help dealers avoid confusion or even disappointment when putting their storefronts up for sale.

Tax laws have also changed over the last year, and with new arrivals to the House and Senate after last year’s midterms, it’s possible they could evolve even more in 2023. Sellers will need to pay close attention to any new regulations in order to successfully navigate dealership M&As.

The realities of today’s market are quite different than they were before 2020. While normalization could be on the horizon, it is not quite clear when, or even if it will actually arrive. Whether buying or selling, dealership M&As require research, pragmatism, and strategy on both sides, so that both parties can walk away with a mutually beneficial arrangement.

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