How is the automotive buy/sell market performing in light of economic headwinds?

Welcome to another edition of Inside Automotive. Today, we get an update on the latest buy/sell market news and trends from Ryan Kerrigan, Managing Director of Kerrigan Advisors.

Over the past several months, the buy/sell market has shown incredible strength, and this Summer is no different. Kerrigan Advisors continues to see many deals and robust activity in the country’s Southeast region. Recently, Kerrigan Advisors represented Alan Jay Automotive Network in the sale of Sebring Toyota and St. Petersburg Maserati and Alfa Romeo dealerships located in Central Florida. There are other robust buy/sell markets in places Texas and Arizona. However, Florida has the perfect combination of high-income residents, population growth, and favorable franchise laws, making it one of the most active markets.

Despite the talk of rising interest rates and a potential recession, Kerrigan says profit levels are not falling. While no official data has been released yet, after many conversations with dealers, Kerrigan says that Q2 was a record quarter of profitability for car dealers. 

“We are at an interesting point where the pent-up demand for cars is outpacing some of these other headwinds, so for the moment, [the automotive retail industry] remains kind of the golden child as it relates to what is going on in the economy,” Kerrigan explains.

However, the Federal Reserve has been open about its intentions to raise interest rates enough to change demand and consumer buying behavior. Presumably, says Kerrigan, this will impact demand at some point but has not so far.

Every year, Kerrigan Advisors conducts its Kerrigan Dealer Survey. The official report is not out yet, but some preliminary results show that dealers generally feel positive. In 2021, 61% of dealers surveyed thought the value of their franchises would increase in value in 2022. However, 2022 preliminary data shows that only 19% of dealers believe the value of their franchises will increase in 2023. The dealer body is showing significant changes in how they think about the next 12 months.

The combination of profitability, cash flow, and strong lending has dramatically increased the number of groups that can do $50 million to $100 million blue sky deals. In fact, according to the Kerrigan Dealer Survey, a little less than two-thirds of dealers say they’re looking to acquire more dealerships in the next 12 months.

Over the last ten years, the group of dealers that have been shrinking the most, have been those with less than three stores. The groups that have five or more stores and ten or more stores have been growing quickly.