By Mark Johnson, President, MD Johnson, Inc.
The entry of Berkshire Hathaway into the automotive buy sell world has shone a bright light on the dealership world and ignited a frenzy of speculation about the new breed of investors, including Berkshire Hathaway and private equity, eyeing the sector. Berkshire Hathaway is a listed company and so subject to shareholder pressure. Private equity, meanwhile, tends to have a five to seven year investment horizon.
These new buyers are likely unprepared to deal with the reality of retailing and servicing automobiles. It’s foolish to think Cecil and Larry Van Tuyl ended up with their stores because they had access to funding. Cecil was and Larry is successful because they have incredible institutional knowledge and instinct as rare as that of an NFL Quarterback.
All football team owners have money, but some are consistently successful; others are not. That is because some have more business acumen than others. Similarly, retailing automobiles has as much to do with knowledge of the industry as it does with deep pockets. The manufacturers are the gatekeepers of this notion. Dealership groups are long-term commitments. Simply “dumping” one stock for another does not fare well with manufacturers and especially the people that make the dealerships successful — customers.
I was in a meeting with Marshall Cogan, the then-CEO of United Auto Group years ago. He talked about the humbling experience of working with a dealer and his two sons whose dealership Cogan wanted to buy. Cogan had apparently strayed from his typical pitch and decided to use some new vernacular on this particular seller.
As Cogan told the story, he was explaining to this dealer that according to the proposed seller’s “EBITDA”, his price was unrealistic and that the counter offer was not acceptable. The dealer responded to his offer by saying “let’s go boys; we need to get back to Texas and get some more of that EBITDA”. In the future “just keep it real,” was Cogan’s conclusion. Or as I had heard another very successful, wealthy dealer advise, don’t use graphs, charts and stats in lieu of knowledge and experience.
The same logic applies to the new buyers coming into the market. Pressured to spend to satisfy investor appetite for yield has never been a good basis for making any investment decision. Investing to create yield has a bad record. In our current, unprecedentedly low-yield market, “yield hunger” has led to the near downfall of automotive manufacturing in the US, a housing debacle that will last decades, and financial misery for millions of homeowners, investors, and middle class workers.
One of the opportunities I am most thankful for in my work is to be able to spend time with really smart people who keep me really humble when I start to think I know something. They are all putting together money to start acquiring stores when the interest rate hangover kicks into full swing. It’s possible this could coincide with the exact moment Wall Street loses interest in the retail automotive sector. Then, the market could be flooded with acquisition opportunities at a good price.
No dealership group has sought a public listing in more than a decade. The likely reason is the analysts’ perception, both real and imagined, that the automobile business is too volatile, and the relationship between interest rates and dealership profitability is more than a coincidence.
Automobile dealers — particularly dealers that have been in the business for a few generations — have experienced this rate-based volatility. Time has proven that dealers don’t exit the business when it gets tough or expensive to be in. They stick it out. This is why manufacturers love dealership entrepreneurs – they have skin in the game.
That isn’t true for this new crop of investors. They are in business in general, not the car business. For them, it may be the right business right now, nothing more, nothing less.
Mark Johnson is the President of MD Johnson Inc., a dealership buy sell advisory firm. He can be reached at mark@mdjohnsoninc.com or 1-360-825-1756.
