By Mark Johnson – President, MD Johnson, Inc.
With a rising SAAR and fears that an increase in the interest rate will slow that rise, both buyers and sellers have taken advantage of market conditions. Many sellers have attempted to time the top of the market, looking to get that “second sticker” premium for their dealerships, and many have.
Acquirers sitting on capital with no opportunity to get any return on their cash decided that paying more for a franchise was better than getting nothing from their other investments held in liquid instruments awaiting deployment into a deal. Some chose to buy down or pay off real property and become their own landlord, or pay off cap loans.
Many sellers are behind the curve on understanding value and have used their subscription to Automotive News in lieu of getting professional advice on values.
Auto dealers are the last business owners to embrace return on invested capital as the driver of value. Dealers stick to the multiple of earnings hawked by brokers as the benchmark for valuing a dealership, justifying the process by quoting the age old adage “that’s how we’ve always done it”.
When acquisition debt can be had for 3.5 percent it may make sense to pay up for certain dealerships knowing that the pace of new vehicle sales is still rising. When interest rates move up — which they just have — and it is clear that the pace of new car sales growth will slow, a normal cycle of cooling of dealership purchase prices will occur.
Welcome to 2016. No buyer in today’s M and A market is using a continuous rising SAAR to predict future earnings. In fact dealer groups with decades of experience have started to lower their anticipated future sales and profits to understand their investments and the corresponding value over time.
The long term buyers are averaging their portfolios and are not forecasting any increase in sales at dealerships that are performing at an average to better-than-average level. The end result is a disconnect on pricing between buyers and sellers.
On the opposite side of the spectrum AutoNation recently closed on a Honda dealership in the Northwest. The dealership was in a b to b- location and was known to be an “okay” store. Not good, not bad, just okay. The real estate recorded for $32 million dollars. No portion of the real estate contained goodwill to the best of our knowledge. Rent and taxes, in the real world would be $200,000 per month. That is a significant amount of money for a dealership rumored to make $3 million or so in profit per year. This would be a perfect example of a public company sitting on excess capital looking to expand an existing platform through a tuck in – adding a store in a market in which it already had a presence. Typically not the best situation to be in as a buyer but an excellent opportunity for a seller
I expect we will see more of the same in 2016, with a little more restraint on pricing. Either way it will be a good retail year and a good year for transactions. But, it will be a better market for buyers. With the rates moving up and the SAAR stalling, to become more competitive you will have to be properly priced to sell in such a market.
MD Johnson, Inc. closed 4 deals in December and will close and additional 3 in Q1 2016 with approximately 15 transactions in process throughout the US. MD Johnson, Inc. complies with the real estate laws of all 50 states through our wholly owned real estate firm MDJ Realty Inc. and carries a 50 state M and A professional liability policy through our national carrier.
Mark Johnson is president of MD Johnson, Inc., a dealership financial advisory firm located in Seattle, Wash. He can be reached at 1-702-497-5480 or mark@mdjohnsoninc.com
