On today’s Inside Automotive, we’re pleased to welcome back Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors, to update us on today’s market. The buy/sell dealership market is dynamic but can be affected by several factors, including economic conditions, consumer preferences, manufacturer requirements, and regulatory changes. Understanding the valuation process and the factors that influence dealership valuations is crucial for buyers and sellers in the dealership market to make informed decisions.
So far this year, it’s been an extremely active year, “we’re still tabulating the first quarter despite the significant negative economic headwinds discussed around the second half of 2022.” Kerrigan also notes, “We had the second highest level of activity in the industry’s history with over 370 M&A transactions in 2022.”
However, Kerrigan exclaims that in the second half of 2022, the public was down by 26%, a massive decline from their activity levels in 2021. Adding, “In 2021, Blue Sky multiples were roughly at 8 multiple, while in Q3 they were operating at 2.9 multiple.” As a result, the tougher acquisitions led them to leave the market. However, in February, five of the six publics hit all-time record stock prices, and they’re still sitting at $7 billion in equity.
“We can definitely see a turnaround in the public activity level in 2023.” - Erin Kerrigan
Future forecast
According to Kerrigan, “I believe Lithia is really the public that has spared a lot of the activity you see among those companies.” She further examines how she predicts more activity to accumulate due to valuations decreasing. Which are a result of rising interest rates, the banking turmoil, and earning that are coming down. Kerrigan predicts the public may jump back into the market. To illustrate, Kerrigan Advisors just sold a high-volume Chevrolet store in Florida to Group 1 Automotive- so they are doing transactions.
But according to Kerrigan, “We haven’t seen the effects of the very recent turmoil like in other places, even though she does believe the industry will see the banking acquisition market become more expensive. And that will ultimately lead to a negative impact on evaluations. Which ultimately is a trend both buyers and sellers should keep a close eye on as we progress into 2023.
It’s important to note; businesses are valued based on what the buyer thinks they will do with the company and what they believe future profits will be. Despite the ease in value for the industry, like in 2016-2019, buyers now have to evaluate where the profit margins will settle. Kerrigan argues, “Buyers are normalizing the margins and then applying that to the sales they expect.”
