By Alysha Webb, Editor and Publisher
The 2014 letter to shareholders from Warren Buffett’s Berkshire Hathaway shows that Buffett is not deaf to industry talk about the ability of a non-automotive company to successfully operate a dealership group.
It aims to alleviate concerns others – especially the manufacturers – may have about the continued performance of the former Van Tuyl Group under its new ownership.
The shareholder letter “is an admission by Berkshire Hathaway that they will be subjected to all of the same performance criteria that every other public or private group is subjected to in order to grow,” Mark Johnson, president of buy sell advisory firm M.D. Johnson Inc. told Automotive Buy Sell Report.
The two most important criteria for a dealership group are:
hitting sales targets set by the manufacturers and maintaining high customer satisfaction scores. If a dealership, or dealership group, does this, it will generally be approved to add additional stores through acquiring open points or other dealerships. That approval is also needed by an outside party.
Earning those future purchases
Last October, Berkshire Hathaway announced it would acquire the 78-store Van Tuyl Automotive group. The acquisition required the approval of each of the manufacturers whose franchises were part of the group. According to industry sources, only one store, an Audi dealership, was not approved. Now the sale has gone through.
From the beginning, Buffett stated that he intended to acquire many more dealerships. In his 2014 letter to shareholders, he clearly acknowledges that satisfying the manufacturers is the key to his automotive success.
The letter says: “Berkshire’s job is to perform in a manner that will cause manufacturers to welcome further purchases by us. If we do this – and if we can buy dealerships at a sensible price – we build a business that before long will be multiples the size of Van Tuyl’s $9 billion of sales.”
What “manner” does that mean? The manufacturers want their dealerships to “perform” well by selling a lot of cars. If the dealers themselves make a lot of money in the process, so much the better. But, sales performance is of utmost importance, said attorney Joe Aboyoun, a partner at Aboyoun & Heller, LLC.
“What the OEMs are concerned about when the equity players get in the game is that [the equity players] only worry about return and not performance,” he said. “The OEMs have to feel comfortable that the [investor] will maintain the important dichotomy between the operations people and the financial people.”
That also means maintaining brand image and pricing power “by not subscribing to lead providers that promise below-invoice pricing,” said attorney Len Bellavia, senior partner at Bellavia, Blatt & Crossett PC.
“There is a negative trickle down if they follow the low-priced Walmart strategy,” he said. “That doesn’t work in automotive retail because costs are high and the ability to attract competent sales people is always a challenge.”
That competence extends all the way to the executive suite, where having people who really know the dealership business is crucial to success. So though Buffett says in the letter than he and his partner Charlie Munger are now “car guys,” he goes to great lengths to assure the manufacturers that the real car guys will keep running the dealerships.
Says the letter: “Larry and his dad, Cecil, spent 62 years building this group, following a strategy that made owner-partners of all local managers. Creating this mutuality of interests proved over and over to be a winner. Van Tuyl is now the fifth-largest automotive group in the country, with per-dealership sales figures that are outstanding.”
The letter adds: “In recent years, Jeff Rachor has worked alongside Larry, a successful arrangement that will continue.”
That endorsement of the current management – including a reference to their decades of experience – is for the manufacturers’ consumption, assuring them that people who know the business will make the operating decisions. That kind of thinking helped smooth the approval process in the deal.
Meanwhile, private equity groups seeking to buy dealerships are facing rejections from the auto manufacturers, say industry sources.
“The stumbling block to the private equity groups is they don’t have a qualified person to run [a dealership group],” said Kenneth Rosenfield of Rosenfield & Company, a full-service CPA firm specializing in dealership mergers and acquisitions.
The manufacturers “want stronger dealers,” he said. “They don’t just want someone with money.”
One Comment
tbeno@thecollection.com
Alysha,
Well done on this site. Amazing what you have accomplished in such a short period of time. I truly enjoy having access to the report!
Tim Beno