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As new-car retailing slows, dealership buy/sell action rises in Q1

June 14, 2019
New-vehicle sales might be softening so far this year, but franchised dealerships themselves are turning at a significant pace.
The dealership buy/sell market rocketed to a strong start in this year’s first quarter with 54 completed transactions, representing a 38.5 percent increase year-over-year, analysts from Kerrigan Advisors reported. The company’s First Quarter 2019 Blue Sky Report indicates that 2019 is on track to be the sixth consecutive year of 200 transactions or more.
Despite a 3.2 percent new-vehicle sales decline, Kerrigan Advisors founder and managing director Erin Kerrigan noted that continued profit stability and an increase in sellers coming to market is contributing to the robust outlook for the buy/sell market.
"As Kerrigan Advisors predicted, 2019 is shaping up to be another solid year for buy/sells and valuations," Kerrigan said in a news release. "In the face of a decline in new-vehicle sales, the diversity of the dealership business model continues to demonstrate its value through its ability to sustain profits.
"In addition, the influx of older generation sellers coming to market, coupled with private capital jumping into the void left by the publics, all add up to a promising buy/sell year," she said.
Kerrigan Advisors explained the first three months of the year reflect a shift in industry focus toward used vehicles, F&I and service and parts. Kerrigan noted that this shift to higher margin profit centers (Used-vehicle gross margin is three times that of new vehicles, and F&I per new vehicle sold has risen 60 percent since 2010.) is a key reason strategic buyers and outside investors remain interested in auto retail acquisitions, with particular interest in high performing dealerships representing strong franchises in growth markets. 
And, with aging dealers increasingly concerned about their ability to succeed in a consolidating, evolving auto retail industry, the firm pointed out that buyers are facing new opportunities — although increasing industry debt poses a looming risk. 
According to the report, the healthy economy and strong financial markets means there continues to be a high rate of complex multi-dealership transactions. 
Among the franchises being acquired, domestics continued to grow their buy/sell market share, while import non-luxury franchises saw their market share decline, primarily driven by Hyundai, Kia, Mazda, Nissan and Volkswagen.
Interest in top domestic franchises, such as Chevrolet and Ford, as well and top non-luxury imports, such as Toyota, Honda and Subaru remain high, according to Ryan Kerrigan, managing director of Kerrigan Advisors.
"In the face of all these positives in the market, it must be noted that the outlook is less promising for some players, especially weaker, lower performing franchises with low buyer demand who are finding it more difficult to find a buyer, particularly at a strong price," Ryan Kerrigan said.
"Another factor to watch is that dealership rents appear to have peaked, with Q1 2019 showing a decline for the first time in 10 years," he said. "We expect that many dealers are realizing that their businesses can no longer support these high rent levels and, as rents fall, real estate values often follow."
The report also highlighted that image upgrades required by OEMs are sending sellers to market, but, because these sellers are unwilling to invest the capital required to become facility-compliant, their dealerships will sell at a lower blue sky value in 2019.
In addition, the report identified the following three trends, which are expected to meaningfully impact the buy/sell market through the remainder of 2019. They include:
• Dealership real estate values start to peak.
• Industry debt levels increase buy/sell market risk.
• Auto retail’s lack of a dominant public consolidator opens the door to private capital.
Other highlights from the Q1 report:
• Significant increase in used to new sales ratio (.96). Kerrigan Advisors expects the industry to continue to move towards a 1:1 used to new ratio.
• Fourteen multi-dealership transactions, representing 26 percent of the first quarter’s buy/sell market.
• Domestics buy/sell market share increased 5.5 percent in the first quarter to the highest level in five years.
• U.S. public auto retailers’ acquisition spending in the US decreased 68.6 percent in 2019’s first quarter compared to the first quarter of 2018, primarily driven by the downward slide in their stock prices.
• Publics sold 18 franchises, for a net decline of 13 franchises.
• Private buyers acquired 95 percent of the franchises sold in the first quarter.
• The average dealership saw a 2.2 percent decline in rent in the first quarter.
• Dealership real estate remains auto retail’s most valuable asset class, exceeding blue sky on average by 67.1 percent.
• Kerrigan Advisors’ assessment of blue-sky multiples for Q1 2019 remained relatively stable.
The Blue Sky Report, published by Kerrigan Advisors, includes analysis of all transaction activity for the year and lays out the high, average and low blue-sky multiples for each franchise in luxury and non-luxury segments.