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Tales from the front line of auto retail buy/sells

May 3, 2019
By Ryan Kerrigan, Kerrigan Advisors
 
An oft-repeated phrase we hear regularly from dealers considering selling their stores is "I already have identified a buyer." Well and good, but "having a buyer" and getting a transaction closed are very different, and often not all that correlated. For dealers who are serious about selling their dealerships, do not confuse identifying a possible buyer with a successful sale process.
Frankly, one of the unique aspects of auto retail buy/sells is how infrequently transactions close. I’d be hard pressed to find another industry in which the conversion rate of "deals" to executed transactions is so low. And, there are some basic reasons this is the case. I’d point to three specific issues that largely explain why our industry struggles with this issue.
First, it’s a common habit of dealers to respond to calls from prospective buyers. Buyers reach out to auto dealers in myriad ways, ranging from the direct dealer-to-dealer conversations at 20 Group meetings, hiring bird-dogs to scout specific regions, and even dedicating young, full-time staff to "dial for dollars."
Case in point: A southern California dealer thought he was being approached by a large public two years ago. The dealer was excited, as he was seeking the chance to grow his platform and possibly "team up" with a much larger company. He eagerly engaged with the individual who called him, signed an NDA, shared financial information and discussed the prospect of selling. As it turned out, his discussions were with a free agent, or a bird dog, working on behalf of a publicly traded auto retailer, who later informed the dealer that the public was not interested in buying his business. The dealer was crestfallen and disappointed that he’d invested months in going down this unproductive path.
The recent entrance of private equity and outside capital has further upped the game. Professional investors allocate significant resources to business development, which in this case is defined as "the process of identifying as many deals as possible, to create a large pipeline of possible investments." Business development efforts are usually staffed by junior investment professionals or can take the form of outsourced call centers that simply represent investment groups. Similarly, there are companies called "buyside firms", which are a more sophisticated version of outsourcing services to identify deals. In any case, all of these efforts represent the very top of the investment funnel. Calls, extensive conversations and even data sharing with these individuals is the equivalent of a first date. These individuals are no more authorized to buy your dealership than your newest car salesmen is to sell it.
 
When considering professional capital, it is critical to understand their business model. Professional investors are in the business of identifying a few grand-slam investments each year, usually spanning a wide range of industries. The best practice to achieve that annual goal is to identify hundreds of deals to send through their investment funnel. They often discuss "100 to 1." That  is to say, an active firm will evaluate 100 deals for each deal that they do. The business development professionals mentioned above are charged with identifying those hundreds of deals, so it’s important to view any outreach and any conversation in that light. There is a one percent chance that these early conversations will result in a sale, regardless of how much their "interest," "excitement" or "commitment" are discussed.
 
Another recent anecdote underlines this point. The management team of a large, successful group met with a private equity firm that expressed great interest in auto retail and investing in their very large enterprise. After a series of dropped balls and miscues, it became apparent that the individual was in business development (discussed above) and had not even presented the investment opportunity to the investment professionals at the firm. Many weeks later, after repeated outreach on the part of the dealer, the management team and an investment partner spoke for the first time, the deal was introduced, and the conversation went nowhere.
 
The over-arching point is that responding to an inquiry is a low probability strategy for selling your dealership or dealership group. An exciting first call should not be confused with a serious interest in your business.
 
Shifting to the second major structural issue: timing and leverage. Even assuming that there is real interest on the part of a prospective buyer, responding to buyer outreach immediately hands all of the leverage in the sale process to the buyer. The buyer has now "tied up" the conversation for a period of time, has the ability to review information on their own timeline without anticipation of a competitive sale process, and can ultimately offer a price in a non-competitive setting, which often results in a lower sale price or no sale at all.
 
None of this is to the advantage of the seller. 
 
There is no control on timing, no control on price and no guarantee that there is serious intent. To cite another recent example, an East Coast dealer received a very persuasive outreach to sell their business to a pair of auto industry executives backed by big capital. They went through a very drawn out process of due diligence, negotiation, and renegotiation. After repeated delays, the dealer learned that the buyers were drawing out the process, so they could raise the money to fund the acquisition. The dealer was pregnant with the transaction and did not have the energy to start over, so he gave them yet more time to line up the capital and see if they could close. The buy/sell did eventually transact, but only after significant delays, uncertainty and price concessions on the part of the dealer.
 
Similarly, a top dealership group was approached by a very real, deeply capitalized family office about selling their business. Calls and meetings took place, meals shared, and significant data was sent to the family office over many months. Yet, for all of this work, the transaction did not progress, and the family office indicated they were "watching the business performance to get comfortable". After 18 months and no action, our firm was hired to sell the group, and the family office did not even participate in the sale process. Ultimately, they were not serious buyers in our industry, but they were happy to tie up the investment opportunity so as to add more potential opportunities to their pipeline.
 
Finally, the third issue is that dealers often engage in transaction discussions without doing the pre-work necessary to achieve a successful sale. Finding a buyer is the simplest step in the sale process. The challenge is getting a transaction to the finish line. In the absence of clean accounting, clearly defined add-backs, updated appraisals, litigation logs, performance analysis and other disclosures, a sale does not generally go through. A real deal can only happen after reams of information are shared and analyzed and the buyer has the required information he needs to support the sale price and close on the transaction. This requires a lot of upfront work and preparation.
 
In our experience, there is an extensive list of dozens of materials that must be reviewed, analyzed and often updated in order to achieve a successful sale. We are big believers in the need to get that work done in advance of talking to buyers. Until you have done all of this work, I would argue you do not have a real buyer. You have a tire kicker. A buyer simply cannot commit to a deal, particularly one with a strong valuation, until there’s been a very thorough assessment of all of this information and more.
 
The anecdotes that I am sharing are representative of many dealer experiences in recent years, and these failed efforts to initiate transactions can be tied to three key issues: the business model of professional investors in which they review 100 opportunities to find one investable business, granting too much leverage to buyers by responding to their inquiries, and lack of preparation for a transaction.
 
In our experience, the way to maximize the odds of a successful transaction on favorable terms to the seller is to get prepped in advance and run a competitive sales process. Car dealers understand the importance of a defined, effective sales process in selling cars, and that applies to the buy/sell world as well. If you want to sell the car, hold gross, and actually transact, a best-practice sale process is key to success. Selling your dealership is no different.
 
 

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