By Branson Smith, Chief Operating Officer, Audientis LLC
As the M&A market begins to slow, dealers have to ask themselves how much longer the bull can run. While owning a dealership and owning a share of General Electric are similar in that in both scenarios you own a business, they are not the same thing.
Most significantly, besides the concentration of risk, owners of a private business such as a dealership garner certain unmeasurable utilities that are not received from owning a share in a public company. Herein lies a unique conundrum for many dealership owners as we continue to meander along what most industry observers agree is a peak within the industry.
Within economics there is a small sect that relates more to psychology than mathematics, and it is to this sect, known as Behavioral Economics, that we can look for an explanation to imperfections that lie within the dealership buy/sell marketplace.
In his book Thinking, Fast and Slow, Daniel Kahneman describes an individual who purchased a ticket to a sold out concert for $200 and had a maximum purchase price of $500. Then as the date of the concert approaches he hears that online tickets are selling for upwards of $3,000 and tells himself that he would sell for no less than $3,000.
In this $2,500 gap between his maximum purchase price of $500 and minimum selling price of $3,000 lies a unique conundrum that many of us have experienced, but may not have sought an explanation for. Kahneman labels this conundrum an Endowment Effect, in that the pain of giving up an asset is more significant than the pleasure of obtaining an asset.
Those of us who are actively discussing buy-sells with car dealers encounter this conundrum on a daily basis, but may not think about it such a context. Dealerships are inherently a limited asset, in 2015 there were 16,545 New Car dealerships in the US per NADA, and with the majority of owners being ‘lifers’ in the industry there is a significant amount of loss aversion and sentimental value attached to the title of being a ‘Dealer.’
This sentimental value is tied to many factors, not the least of which is a prominent role in the local community and, in good times, significant cash flow. However, as financial sector buyers emerge, dealers must start to ask themselves if dealerships will begin to trade more like true financial assets, i.e. stocks, bonds or even hotels, and less like rare goods such as Super Bowl tickets, collector cars, or fine art.
As this evolution continues to take hold and fewer dealers are of the traditional mom and pop variety that are well-heeled in a community, the availability of dealerships, especially during downturns in the economy will likely increase. Financial sector buyers will evaluate cash drains and alternative asset classes much differently than traditional dealership owners, and as a result will be much more likely to capitulate when the market contracts.
This is why manufacturers are placing limits on their ownership and typically prefer a well-heeled industry veteran as an owner, as opposed to a financial sector buyer focused more on financial measurements than the full social and financial benefits of owning a dealership.
At this point you may be asking yourself how this applies to me. For that, I turn to a story of a dealer who I first encountered in 2010 when he purchased, at a significant discount, a GM dealership in a major metropolitan area. This in itself may not seem groundbreaking, but this individual was still only in the middle of his career and in 2007 had sold his group of dealerships, taken that money and sat on the sidelines while his contemporaries trudged through 2008 and 2009. In 2010, he came back into the market with a Chevrolet store acquisition.
As dealers look around the marketplace today, the chair they are sitting in may be their dream store in their hometown earned through years of blood, sweat and tears. However, it is still a financial asset that in many ways should be valued in the same way as the stock of GM or Ford.
As we continue to see SAAR hover around what appears to be a peak 17.5 million units, we also hear stories of dealers punching sales to their rental fleet, lower average beacon scores, and a pent up tidal wave of off-lease units coming, as well as new competitors such as Tesla and technology companies developing cars of their own. In the world in general, we also are drowning in daily stories of social, financial, and political unrest.
It is under these conditions that dealers must ask themselves if it is time for them to take a seat on the sidelines. Whether it be viewed as temporary or permanent seat, the view from the sidelines can be filled with regret if you let it, but it can also be filled with a significant sense of fulfillment when you look at your bank account and don’t have to worry about making payroll next Friday.
To boot, when the market inevitably contracts, you likely will be able to be buy back in much more cheaply than you sold out. Owning stock is predicated on buying low and selling high, so dealers should at least ask themselves if the timing is right to sell high.
If you are on the fence about selling, take a look at some of key metrics in the industry as well as your local market and ask yourself if you think that your business will continue to grow in the coming years.
While it can be perilous to try and time the market, there is no doubt now that the market is high. This is especially true if you are close to the end of your career and your dealership serves as your major retirement plan. In that situation, you must ask yourself if the timing is right to go ahead and exit.
If you are not looking to exit and fully retire, then trying to time the market and sit on the sidelines could be a bit more risky – it depends on how long you are comfortable staying on the sidelines.
Audientis is a financial advisory firm. Through its Learning by Listening™ process it designs a plan to meet client objectives related to succession planning, acquisition, wealth management, and other areas. Audientis then implements the plan at the client’s direction with a comprehensive analysis of the opportunities and transactions available.
Branson Smith, Chief Operating Officer, can be reached at Bsmith@audientisllc.com or 1-770-790-5007
