Profits at Auto Dealerships Reached a Peak in 2022 - Driving High Demand for Acquisitions and Record-High Prices for Some Franchises
Haig Partners LLC released its closely followed Q4 2022 Haig Report, which tracks trends in auto retail and their impact on dealership values.
Profits reached an estimated $6.5M per location for dealerships owned by the public auto retailers, more than triple what they were before the Pandemic. Profits may have peaked, however, as new and used vehicle gross profits are coming down. Fixed operations have been increasing due to more recalls and higher labor rates, slightly offsetting the impact of the decline in new and used vehicle gross profits.
Last year was another highly active year in the buy-sell market. There were 566 dealerships acquired, the second-highest number after 2021, when a record 707 dealerships were purchased. Private dealers purchased 526 dealerships, 7% more than the number they acquired in 2021. Public dealer groups acquired 40 stores in 2022, making it the 2nd most active year for the public companies since 2015. However, the public retailers didn't keep pace with their record acquisition spree in 2021 as they were more focused on share buy-backs to drive their stock prices up. Most public companies will be looking for additional acquisitions in 2023 since their share prices have recovered in the early part of 2023. At the AutoTeam America Buy-Sell Summit and Dealer/CEO/CFO Forum held at NADA in Dallas earlier this year, Alan Haig asked Bryan DeBoer, President and CEO of Lithia Driveway, what they require to achieve their 2025 revenue target. In response, Mr. DeBoer said Lithia would need to acquire 100-150 additional rooftops. Based on the current pipeline of clients we are representing, along with the strong interest from public and private dealership groups, we believe 2023 will be another strong year for dealership buy-sells.
Highlights from the Q4 2022 Haig Report include:
- Auto dealers enjoyed record earnings in 2022, but conditions are growing more challenging due to lower margins and higher expenses.
- M&A activity remains robust, with dealers acquiring 566 stores in 2022.
- Average estimated blue sky value has declined from its peak value in the middle of 2022 but is still more than double pre-pandemic levels.
- Public buyers still need hundreds of acquisitions to achieve stated revenue goals.
- Private dealers are increasingly focused on gaining scale to offer more products and services to customers, reduce expenses, and provide more opportunities to employees.
Alan Haig, President of Haig Partners, said, "Auto dealers continue to generate huge profits, but the market is starting to shift due to lower margins, increases in interest rates, and high inflation. We've polled owners of hundreds of dealerships over the past few weeks, and most expect profits will decline 10-15% in 2023. From a buy-sell perspective, we would normally worry when profits decline. However, since dealers believe profits will likely remain more than twice the amounts they were in 2019, many dealers are seeking to grow. The public retailers have all announced their plans to acquire more dealerships that fit their expansion strategies. And private dealer groups remain incredibly active. The result of high profits and strong demand is that we have seen record-high prices being paid for dealerships in the last six months. We expect strong dealership values for the foreseeable future, although they may moderate slightly."
Q4 2022 Buy-Sell Trend Highlights
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Dealership buy-sell transaction volume remains elevated. There were 566 dealerships acquired in 2022, the second-highest number after 2021. Private buyers purchased 526 dealerships, 7% more than they acquired in 2021. Public retailers acquired 40 stores in 2022, 81% below 2021.
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Blue sky values are declining but remain far higher than pre-pandemic levels. Dealership values peaked in the first half of 2022 and fell in the second half as buyers became more concerned. Dealership profits are starting to decline slightly and interest rates continue to rise. We estimate that blue sky values declined 13% in the second half of 2022 from their peak in the first half. The average publicly owned dealership has an estimated blue sky value of $22.9M, down from $26.4M earlier in the year. Even with this decline, the average blue sky value is estimated to be 134% higher (2.3x!) than year-end 2019 and 15% higher than year-end 2021.
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Strong buy-sell outlook for 2023. There are plenty of buyers and sellers in the market, and therefore, we expect 2023 to be another busy year for transactions. On the buy side, profits are high, dealers have plenty of cash, many want to grow, and credit remains plentiful. On the sell side, the high value for stores is motivating dealers to consider exiting, even if they are not at retirement age. With values at elevated levels, more dealers and their families are having conversations about the risks and capital investments required to remain dealers and deciding to pursue a sale.
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Acquisitions can secure the future for dealers. One reason the level of acquisition activity has increased is due to the conviction that many dealers have that scale will matter more in the future than it has in the past. They want to offer more brands and locations to increase their appeal to a larger number of customers. Also, the Pandemic accelerated the shift towards e-commerce in auto retail. Retailers discovered that many consumers were willing to purchase vehicles online, with minimal interaction with dealership personnel. Auto retailers that can offer a large selection and an easier buying process to their customers are likely to thrive in the future, particularly as younger customers become a bigger part of the car-buying public. This "Bricks + Clicks" strategy of complementing a large physical presence with leading digital capabilities is one that we see many leading dealership groups pursuing in their local markets.
To achieve local scale, we believe dealership groups must grow to 10 dealerships within a local market. The benefits to dealers will be substantial. They can protect the value of their existing assets while building a much larger and more valuable enterprise. Using key assumptions that can be seen in detail in the Q4 Haig Report, a typical group of two dealerships could increase its equity value from $47M to $354M over a decade.
- Valuing stores will become tougher. The result of high profits and strong demand is that we have seen record-high prices being paid for dealerships in 2022 and in the first quarter of 2023. Sellers who come to market will not have issues finding buyers. But valuations could be tricky as earnings continue to decline, so reaching an agreement between buyers and sellers could be difficult. Buyers may seek lower prices than in the past, while sellers, who are still enjoying very high profits, may want to hold out for more money. In these times, it is more important than ever for a seller to run a competitive sale process to make sure that the Most Motivated Buyertm has the opportunity to pay the highest price for his business. Running a process will also allow a seller to reach an agreement with a buyer in a shorter amount of time, an important advantage during a time when dealership values may be slowly declining.
Earlier this year Haig Partners was proud to represent Jack and Robin Salzman, the owners of Lake Norman CDJR in NC, which sold for a record-high price for that franchise, according to Stellantis. And the good times are not over. Recent offers our clients have accepted in just the past couple of weeks indicate that we should set more records for franchise values later this year, given how strong earnings are and the level of demand for dealerships. Dealers who are wondering what your business might be worth, please contact any member of our team to have a confidential conversation about what we see in the market and to discuss how we may be able to assist you in Maximizing the Value of Your Life's Work®.
About The Haig Report
The Haig Report, the leading industry quarterly report that tracks trends in auto retail and their impact on dealership values, includes data and analysis on the performance of auto dealerships, discusses noteworthy events impacting the automotive retail industry, identifies trends in the M&A market for dealerships, provides guidance on estimated value ranges for different franchises, and shares an outlook for the automotive retail buy-sell market. The Haig Report is based on data gathered from reputable public sources and interviews with leading dealer groups and dealers, bankers, lawyers, and accountants who specialize in auto retail.
About Haig Partners
Haig Partners LLC helps dealers maximize the value of their businesses when they are ready to sell. They have unmatched experience with executives from leading retail dealer groups and financial institutions. They have advised on the purchase or sale of more than 590 dealerships for over $9.3 billion, including 25 on the Top 150 Dealership Groups list published by Automotive News. The team at Haig Partners leverages expertise and relationships to lead clients through a confidential and customizable sales process, helping them to maximize the value of their dealerships. They author the Haig Report, the leading industry quarterly report that tracks trends in auto retail and their impact on dealership values, and are co-author of NADA's Guide, "Buying and Selling a Dealership." For more information, visit www.haigpartners.com.
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