What is driving record M&A activity in the automotive industry? Erin Kerrigan has the answer.

On today’s show, we’re pleased to welcome back the Founder and Managing Director of Kerrigan Advisors, Erin Kerrigan, to walk us through the latest results from the recently released Q3 2021 Blue Sky Report®. Jim and Erin take a close look at the current buy-sell market, how it compares to previous years, and key findings from The Kerrigan Dealer Survey.

After surveying 800 car dealers, Kerrigan found that 61% of them expect an increase in the value of their dealership or dealership group in the next 12 months which is more than double than 2020. Kerrigan thinks that this is largely due to the significant rise in earnings. In fact, 79% of the dealers who participated in the survey also expect their earnings to rise in 2022, especially coming off of five consecutive quarters of record earnings.

“Most people in the industry agree we’re probably not going to stay at these very elevated earnings levels forever,” says Kerrigan. “However, few believe now that we’re going to return to the pre-pandemic lows that we were in before, of course, we experienced this unforeseen global issue.”

This theory can also be seen at work in the data. Average earnings pre-pandemic were around 2.5% as an industry net to sale. Average earnings today are now north of 5%. This is also the first time average revenue per employee top $1 million. This all indicates that car dealerships are running in a much more efficient manner. Dealers are not inclined to return to pre-pandemic levels of productivity. That will sustain some of the improved earnings, which also have tremendous gross profit margins. However, few believe those margins will eventually come down, but not to pre-pandemic levels either.

According to the Q3 2021 Blue Sky Report®, the buy-sell market was up 20% in terms of transactions closing. When the full tally for 2021 comes in, Kerrigan expects to see about 350 transactions completed, representing over 600 franchises. This is quite a significant increase over a very active 2020, and it doesn’t appear to be slowing down any time soon. Kerrigan also expects a bump in transactions for Q4 of 2021 as many dealers were looking to close out before the end of the year, and avoid any potential change in tax code.

Valuations have also become trickier to measure. Now, they are often calculated to be an average of the past three years. However, once the record earnings are factored in and with added reassurance from the OEMs regarding supply, valuations are trending higher.

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