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In the last few decades, private equity firms throughout the US have been buying up businesses across industries with the intention of turning ailing brands around that have hit hard times. They bring their deep pockets to the table under the assumption that the extra cash/credit and effort to restructure debt will give a company critical daylight to thrive for the future. 

Buyouts like Toys R Us shook the retail market. A beloved brand for generations and shuttered due to a bad deal with a private equity firm. 

Over the last three years, the automotive aftermarket has also been shaken up by not one but 10 major acquisitions of F&I administrators by private equity firms. In the last 3 years alone, Portfolio, American Auto Guardian, and Vanguard Dealer Services all fell into the hands of private equity firms. 

That’s not to say all private equity acquisitions are bad. There is a place for that level of financial rescue but it’s not without its significant downsides when it comes to the downstream impact to F&I.  

F&I Administrators Seem to Be an Easy Target for Private Equity 

There are a couple reasons why private equity firms would be looking to invest in this channel.

Established distribution channels are the biggest reason. Agents already have a direct sales reach into dealerships in their market so little has to be changed to continue that. 

Another key reason is that the relationships with dealers are already well-established with agencies/administrators who have been operating for a period of time. This level of ‘stickiness’ extends to reinsurance, private label programs, compliance training, and so on that are in place and functioning. Those relationships are already there. 

What is the Downside? 

If an administrator is struggling with profitability or reach within their target market, an infusion of cash/credit plus partnering with a larger brand can help. 

It begs the question, thoughwhat could go wrong? Wouldn’t this be a ‘win-win’ for a smaller company to be able to expand?  

Not exactly.

F&I agents and smaller administrators rely on being able to hold a certain cost for their products and services. If you have a private equity firm come in with their promises of increased sales reach and back-end support, it can come at a price, sometimes a big one.

What we’re seeing now in the market is increased pressure put on these acquired companies to turn a profit sooner and the way they force that initially is to have the costs to the dealer increase. 

Now the VSC, GAP, and other ancillaries ALL increase in cost. It gets passed on through the agents and now the dealer has to compensate for the higher cost with higher prices passed on to the customer. 

Prices go up. Margins get slim. Dealers lose profits. 

Consolidation is Bad for the Industry  

Acquisitions can also result in fewer agents in the F&I channel. Those agents who have built their business through years of cultivating relationships with local dealers could be looking at either selling their book to a larger company as a result of private equity deals. 

Consolidating the F&I administrator channel into a handful of players is likely not good for the industry. Think about what is happening in the cellular space. You had many national and regional options for your cell phone plans. 

Now? We have 3 major nationwide providers, T-Mobile. AT&T, and Verizon. That’s it. 

Does this mean F&I providers will be whittled down to 2 or 3 nationally? Not now but at the rate these private equity deals are happening now, there could be an even bigger shift in the years ahead.  

What’s the Answer? 

For dealerships, the answer is simple. Make the conscious decision to work with an F&I administrator that is NOT for sale to private equity. A company that values the relationships established with agents across the country and has the full service support your F&I department needs to be as successful as possible.

But more importantly, work with a company that doesn’t have to increase back-end costs of products and services to satisfy private equity requirements. 

As 2020 draws to a close and if your choice of administrator has been something that has been on your dealership’s mind, look for one that is in a good cash position with no big aspirations to grow too quickly. 

And if your current administrator is one of the larger players in the market and working well, that’s good, too. There’s nothing wrong with that if the backend margins are where you want them to be.   

Did you enjoy this article from Kristine Cain? Read other articles from her here.

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