With economic headwinds and the return of competitive pricing at the dealership, many storeowners want to know if now is a good time to buy or sell. On this edition of Inside Automotive, we are joined once again by Farid Ahmad, the founder and CEO of DSMA, a leading dealership mergers and acquisitions firm, to walk us through his recommendations.
As Ahmad quickly points out, the economy has complicated the M&A market in multiple ways. Inventory has built up since 2022, allowing pent-up demand to push early-year sales higher than previously expected. At the same time, however, interest rates grew rapidly, hitting their highest levels since 2007. Banks are also exercising more caution when approving loan applications, making it more difficult for businesses to acquire funds.
While the circumstances are different, Ahmad notes that the pace of M&A activity has nevertheless remained steady in 2023 and that there is no shortage of buyers or sellers. Last year, he recalls that DSMA completed just over 400 dealership valuations in total. “What we’re seeing in 2023 in our first quarter, we will surpass that 400 most likely by the third quarter,” he concludes.
However, even though buy-sell activity remains strong, the market has changed in one key aspect. Ahmad explains that companies are using different rules for dealer valuations than they were several years ago. While store values were typically based on the last three years of performance, the pandemic caused so much mayhem in the auto industry that annual reports since 2020 no longer provide an accurate picture of a business’s success during normal conditions. To account for COVID-related discrepancies, M&A firms now base their calculations on the dealership’s results from the last five years. Consequently, values themselves have slightly decreased, mainly for businesses that saw an irregular amount of demand post-pandemic.
However, Ahmad notes that none of these factors should deter dealers from their plans to sell. Even storefronts with average sales can easily find a buyer since investors know they can make their money back swiftly. Owners encountering operational difficulties, such as low employee retention, may also benefit from considering a buyout. “If you suffer from high turnover, for whatever reason that could be, I would suggest very strongly to that dealer that this may the best time to look at exiting out of this industry,” remarks Ahmad.