By Adam Sanders, Moss Adams LLC.
The automotive dealership market has risen to historic levels over the past few years, providing an opportunity for dealers to consider a transition. Dealership prosperity, an aging generation of dealers, increased manufacturer attention to succession, and increasing valuation multiples have all led to the strong transaction market that exists today.
However, the success of a transaction can be measured by a seller in many different ways. Identifying the most likely or preferred buyer type based on your goals can be the key to achieving the desired transaction results.
There are four potential types of buyers, each with key characteristics:
- Large Dealership Groups – In many ways, a large dealership group may be the easiest buyer to work with since the transaction process is more likely to be routine. They often have a set transaction process; approval from the manufacturer is less likely to be an issue; they typically have sufficient capital, or access to capital for the transaction; and knowledge of dealership operations without continuing efforts from the seller. However, in a transaction with a large dealer group (public or private), the seller needs to verify that the long-terms goals for the dealership align with their vision for the dealership following the sale. Items of concern may include the retention of management and employees as well as community involvement once the dealership is sold. With all transactions, a buyer has ultimate responsibility for their best interest, but engaging experienced advisors will help with that process. Just because the transaction process is going smoothly, do not assume that it is unnecessary to have your own advisors.
- Private Equity Groups – This is a newer entrant into the market, but recent acquisitions and well-publicized interest for further investments has solidified this buyer group. In many ways, the process is similar to large dealer groups since private equity groups have significant transaction experience and set processes they like to follow. Yet, they may be inexperienced with the unique aspects to a dealership transactions and how dealerships are ultimately priced. Also, private equity groups may have difficulty being approved by the manufacturer, since manufacturers have traditionally preferred a single person or family as the contact for the manufacturer as well as a long-term investment horizon, which does not always align with the investment term of the private equity group. An additional facet is that a private equity group buyer may want the seller to remain involved in the business for a period of time to make the transition smoother or continue as a part of dealership management. While this may be desirable for some, it does not offer the full transition that others sellers desire.
- Member of Management – Sometimes the logical choice for a sale of the dealership is to a member of the dealership’s current management team. This type of sale transitions the dealership to someone who knows the business, is likely to continue to operate the business in a similar manner as how it has been operating, and can be an incentive to management in the period leading up to the sale. However, for a sale to management to be successful there are a few issues that need to be considered. First, does the manager(s) really have the experience necessary to be successful? The seller needs to evaluate if management has all the skills necessary to operate the dealership, or if they simply excel at their current role. Second, can management afford to buy the dealership? Dealerships require a lot of capital to operate and have become increasingly valuable in recent years. The seller needs to be sure that a management buyer has sufficient capital to purchase the dealership, as well as to operate it successfully. This often results in seller-financing arrangements, which may or may not be desirable for the seller, but can be risky based on the management’s qualifications.
- New Dealer – Many individuals who have had success in other fields are looking to invest in car dealerships, especially with the recent strength of the automotive market. These buyers typically have sufficient capital, but may not have the dealership or management experience the manufacturer wants; ultimately making approval difficult. Further, expect the transaction process to be more difficult, and require more patience and assistance from the seller because the buyer does not have prior experience with dealerships and may have limited transaction experience. Further, the buyer may require the seller to remain involved in the business for a period of time to ensure a smooth transition.
In the sale of a dealership, the saying that “one buyer is no buyer” is true. To sell a dealership for the best overall result, considering price, goals of the sale, and transition of the dealership, it is vital to have more than one potential buyer. But identifying the preferred buyer type, goals of the transaction, and your vision for the dealership after it is sold will help in preparing the dealership for a successful outcome.
Adam Sanders is Manager, Valuation and Litigation Services at Moss Adams, LLP, a certified public accountants and business consultancy firm with 26 locations in the U.S. He can be reached at adam.sanders@mossadams.com or 1-503-478-2334.
