By Paul McGovern, CPA, Managing Partner, Downey & Company
You may be reading about how hot the buy sell business is right now, but many of those deals involve large dealership groups. Meanwhile, many smaller parties are being kept out of the market. Let’s look at this phenomenon more closely.
In recent years, many of our clients have attempted to grow by acquiring additional stores. Most of these efforts have been unsuccessful, often because the buyers, in the end, decide not to sell. A dealer receives an unsolicited offer from a buyer. It sounds good so the dealer calls Downey & Co. to discuss the offer. He or she may initially feel compelled to sell because the offer is so high. But then they change their mind a few weeks later. The reasons for that reversal is often for non-financial reasons.
Perhaps they just like selling cars and aren’t ready to give it up. In most cases, the dealer/owner has worked hard his/her entire career and doesn’t have significant outside interests to occupy his/her time. That was the case with a dealer who belonged to the golf club but played only three times a year. He had no interested in moving to Florida. He had no hobbies other than antique cars. He enjoyed being a dealer! He didn’t want to sell.
Perhaps it is the dealer’s desire to have the business pass to the next generation. Typically, the second generation is already involved in the business and it may be an important source of income for them. One client could have sold his dealership five years ago and walked away with a lot of money, but kept the dealership to provide employment for his kids. The cash flow it provided made the dealership a valuable asset for his family, he said.
This is understandable, and from a financial perspective, most successful dealers have accumulated a significant net worth and really don’t need the money. But, there is a risk to turning down a reasonable offer. A dealer I worked with decided not to take an offer, and when he sought offers a few years later, they were much lower. That doesn’t mean the dealer made the wrong decision, however. The dealer will have benefited from those additional years of cash flow.
Let’s assume a dealership generates $1,000,000 per year and has an offer to sell for $8,000,000 of “blue sky.” If the dealer decides not to sell and keeps the business, he/she will continue to generate the $1,000,000 a year and will still own the franchise. Assuming the business remains stable and the dealer runs it for another five years, he/she would have accumulated five million dollars in cash flow and will still have an opportunity to sell. Even if the “blue sky” factor of a later offer is only half of what it was, or $4,000,000, the dealer would still be in an advantageous position.
Another financial factor that may influence the dealer’s decision is the business real estate. Usually, the dealer also owns the real estate, and equity in this asset grows. Through the combination of the appreciation of the real estate and the reduction of any mortgage through monthly principle payments (made via the rent charged to the dealership), the dealer may be unwilling to part with the real estate. The dealer doesn’t take an offer, holds on to dealership, and continues to make mortgage payments. The real estate appreciates and the debt is paid down, so now they own more equity in the real estate.
Looking for someone who will actually sell
Now you know some of the hurdles our clients have faced in trying to buy a dealership. Here are some tips for finding a dealer that is ready to sell.
Dealers in the acquisition mode should identify potential targets that have the following characteristics:
- The selling dealer is not a “car guy” that lives and breathes the car business.
- The dealer does not have significant cash flow that justifies keeping the business in the medium or long term range.
- The dealer does not optimize the cash flow potential from the store and you feel you could generate higher cash flows.
- The dealer is not the owner of the real estate and has no incentive to remain because of it.
- The dealer doesn’t have a family succession plan that would hinder a sale decision.
These are things that can’t be discovered in a short time. So start planning now for a future acquisition. Keep your lines of information in the industry open. Chat with local dealers and let them know you’re interested in buying. As a fellow dealer, you have credibility with other dealers. Plant a seed and nurture your own deal.
Paul McGovern can be reached at email@example.com or 1-800-849-6022