As the retail automotive sector has adjusted to new technologies, government policies, and consumer preferences, so too has the dealership buy-sell market. Although the pace of mergers and acquisitions activity remains intense, many retailers looking to grow their businesses or exit the industry altogether are no longer familiar with what buyers are looking for.
On this episode of Inside Automotive, host Jim Fitzpatrick is joined by Erin Kerrigan, founder and managing director at Kerrigan Advisors. Kerrigan Advisors has overseen some of the largest dealership buy-sell transactions of the last few years, making them one of the most sought-after advisories in the U.S. Under Kerrigan’s leadership, the company has also helped keep dealers up to date on the retail automotive M&A market as it has changed over the years. Now, she discusses the latest trends impacting store values and what dealers can expect to see in 2024.
Key Takeaways
1. Kerrigan notes that while the dealership buy-sell market began to slowly revive following the COVID pandemic, many retailers with the capital to acquire new storefronts started to see better deals in only the last few months, leading to a sudden jump in M&A activity.
2. Dealership earnings declined more than 20% over the last year, corresponding with a 5% drop in blue sky values. However, Kerrigan clarifies that blue sky values are not based on a dealer’s current earnings but rather on the earnings buyers believe they can achieve through an acquisition. This has allowed dealership price calculations to remain mostly insulated from changing market conditions such as rising or falling revenue.
3. Although buyers have looked to 2019 numbers to determine a storefront’s value for the last four years, Kerrigan warns that too much has changed in the dealership buy-sell market to make such calculations accurate. She notes that not only has the business transformed the way it interacts with customers, but that the products have changed as well, with electric vehicles becoming a necessity for future growth. These shifts have made pre-pandemic numbers less relevant as time has passed.
4. Kerrigan adds that the uptick in dealership buy-sell transactions is also due to business owners hoping to leave the industry before it changes further. Technological innovations promise to drastically reform the way parts of the retail automotive sector function, especially in regard to fixed operations and customer service. Some dealers are opting to leave the industry rather than learn a whole new business.
5. An increasing number of buyers see leasing as a more affordable way to “own” their new properties, as opposed to purchasing the real estate outright. Kerrigan explains that it is currently more economical to lease property since cap rates have risen more slowly than mortgage rates in the post-pandemic economy.
"Not only is 2019 somewhat irrelevant because the way the business is run is different, it's also somewhat irrelevant because we have EVs coming down the pike, that are totally different beasts." — Erin Kerrigan
