By Alysha Webb, Editor and Publisher
You would have to be willfully ignorant not to know that there’s a new breed of investors in the dealership buy sell world. Family funds and especially private equity have realized that automotive dealerships are an investment that can provide a better return than many other options in the current low-interest environment.
Tim York, Managing Partner of DHG Dealerships (formerly known as Dixon Hughes Goodman), a few weeks ago hosted a webinar on these new investors, and also spoke with Automotive Buy Sell Report about the new skills and knowledge dealers should consider acquiring to more successfully attract and ultimately complete those kinds of investments.
Understanding each party’s needs — and having a strategy to meet them — is crucial, said York. “Deals may not happen, or not be approved [by the manufacturers], because of a lack of understanding,” said York. “Sitting down and making a defined plan is very important.”
For one, dealers should realize these new investors have higher financial reporting demands than the dealers may be used to. Also, many dealerships are flow-through entities who do quarterly distributions of cash, primarily for tax purposes; but private equity investors may require a monthly distribution, said York.
There is often an increase in procedures, such as the need to make quarterly financial reports and board presentations rather than annual ones. There can also be capital structure changes such as adding long-term debt or adding complex ownership structures.
And while many dealers may be comfortable negotiating a deal without a quality of earnings due diligence report, these investors will likely require that. Some private equity investors are even providing templates to dealership groups with the kind of information they want, and the format in which to present it, said York.
A dealer should support all the financial information, including expenses, volumes, margins, and add backs. And present them in a clear, crisp way. “It provides confidence when all that info is really buttoned up,” said York.
Clarify what the numbers used in determining value mean. Pricing a dealership can be more complex with these investors, who are used to working on an EBITDA basis that is looking at earnings before interest, tax, depreciation, and amortization. “Make sure people are on the same page regarding the numbers that are being used,” said York.
Be sure the investors understand the entire dealership business, including wholesale, retail, finance and insurance, and parts and service. “Spend as much time on the back end — parts, service, and collision, where applicable — as you do on the front end in due diligence,” said York.
That also means dealers may need to explain thoroughly the many complicated businesses going on in a dealership to substantiate what investors might think is too high a price. Dealers are proud of their new and used sales figures, said York, “yet some of the most profitable areas in a dealership are not new and used sales.”
The value of a franchise – part of the overall Blue Sky – can also be difficult for the investors to understand. A dealership can be very unprofitable but still be worth a significant amount of money because of the value of the franchise. “That really comes into play on some purchases,” said York.
Also, don’t forget to figure in the value of the perks that come with owning a dealership, such as having demo models to drive, health insurance, 20-group trips, and other benefits, he advised.
Getting the deal approved
Winning manufacturer approval for the acquisition is the end-game of the purchase process. That has gotten more difficult in the last year on all deals as the manufacturers have seemed to choose to exercise their right of first refusal more often. To earn that approval, investors need to have a plan, as well. “I think for many people, that step may have been minimized in the frenzy to get going in the space,” said York.
Investors should go into any conversation with a manufacturer demonstrating a thorough understanding of the dealership world, including the management team that will run the dealership after they take over.
“Getting approved by the manufacturer is not necessarily an easy thing,” said York. “They need to protect the brand. They want professional operators that know how to move metal” and also enhance the other areas of a dealership business such as parts and service, he said.
Who will actually run the store is crucial. The best candidates not only know how to sell vehicles, but also have experience running multi-store groups, and are good team builders, said York. DHG sees that some investors want to keep the dealer on board, or find someone working in the dealership to take over, he said.
All this can be a bit intimidating. Hiring professionals to help can in the end be worth the price, said York. “There are many places you can misstep and the dollars can be big,” he said.
The good news is, dealers who are looking to sell have more options than ever. “It is a vibrant market,” York concluded.
Tim York is the Managing Partner of DHG Dealerships. He can be reached at Tim.York@dhgllp.com or 205.212.5301. DHG Dealerships serves more than 1,500 rooftops across all 50 states, representing dealerships of all sizes.