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Dealership buy/sells in 2017 topped 200 again: 3 reasons why

March 23, 2018
Dealership consolidation, profitability, and the growing number of sellers coming to market were top factors driving dealership market activity in 2017, the fourth straight year that buy/sells surpassed 200 transactions, according to an industry report released March 19.
In its latest "Blue Sky Report," Kerrigan Advisors determined that many dealers reassessed succession plans in light of disruptive projections about the changing nature of auto retail and the belief that only large groups will be able to successfully navigate the industry’s evolution. Sellers also cited concern over reliance on OEM incentives to support dealership profitability, as well as manufacturer facility requirements.  
"The economic benefits of consolidation continued to bring new buyers to market in 2017, and these new entrants included a growing number of international auto retailers," said Erin Kerrigan, managing director of Kerrigan Advisors.
"These international buyers are primarily motivated by the tremendous consolidation opportunity in the U.S. auto retail market, considered by many to be the most fragmented in the developed world," Kerrigan said. "High net worth individuals and family offices also sought investments in auto retail in 2017. All of these new entrants are highly attracted to the economies of scale available in U.S. auto retail through meaningful consolidation."
The "Blue Sky Report" includes analysis of all transaction activity in 2017 and lays out the high, average and low blue sky multiples for each franchise in the luxury and non-luxury segments for the quarter.
"Blue Sky Report" data and analysis from the 2017 full-year report also includes:
• 202 dealership buy/sell transactions were completed in 2017, compared to 221 transactions in 2016. After hitting a plateau in 2015 at 240 transactions, buy/sell activity declined slightly. But for 2018, Kerrigan Advisors expects an increase of activity compared to 2017.
• Multi-dealership transactions declined slightly in 2017. The firm noted 51 multi-dealership transactions closed in 2017, resulting in an 11 percent decrease compared to the record year set in 2016. The size of some dealership groups is a motivating factor in the sale. Many are simply too large and too valuable to pass on to the next generation, particularly given predicted industry disruption.
• For 2017, domestics’ share of the buy/sell market remained steady at 43 percent; import luxury represented 20 percent of the buy/sell market in 2017, a disproportionate number considering that import luxury franchises represent just 9 percent of U.S. franchises.
• Public retailers’ acquisition spending increased 20 percent in 2017 compared to 2016, led by Lithia Motors.
• Private buyers, including new entrants to U.S. auto retail, dominated the 2017 US dealership buy/sell market. Of the 343 franchises sold, 317 were acquired by private buyers.
More than 60 dealership groups now exceed $1 billion in sales. That number is expected to grow considerably in the next five years, as the largest groups consolidate the industry.
The report also identified three key trends shaping this year’s buy/sell market, including:
• Tax reform benefits auto retail and results in increased buy/sell activity.
• Dealers’ investment strategies shaped by auto retail’s expected evolution.
• Dealership profit variability widens blue sky pricing ranges.
"We expect 2018 to be a very active year for buy/sells with more private and public buyers eager to put their capital to work. These buyers believe growth is the answer to a changing auto retail environment and are eager to capitalize on economies of scale and scope," Kerrigan said. 
"We also expect more sellers coming to market in 2018, particularly given the drumbeat of change reverberating throughout the industry."
Kerrigan Advisors publishes its "Blue Sky Report" quarterly.