By Alysha Webb, Editor & Publisher
In late 2007, Stephen Dietrich wrote a prescient article for Financier Worldwide magazine. In it he predicted that private equity or family offices, attracted by increasing goodwill values and solid historical performances, would enter the auto dealership buy sell world. He also predicted they would face some resistance from the manufacturers.
But, wrote Dietrich, a partner with law firm Greenberg Traurig LLP, “the financial attractiveness of acquiring a well-run dealership … will likely cause the private equity markets … to focus energy and creativity on figuring out a structure and methodology that will meet the industry’s requirements while also addressing the nuances and unique aspects of the auto industry.”
A combination of conditions and events prevented that from occurring ten years ago. However, now Dietrich’s prediction has proven true. Indeed, the conditions are ripe for an increase in private equity and other non-traditional buyers to successfully enter the buy sell world.
“We now have more thoughtful buyers from outside the auto industry,” Dietrich tells Automotive Buy Sell Report.
As early as 2003, rising goodwill values attracted the attention of non-traditional buyers, says Dietrich. But those buyers did not fully understand the unique nature of the dealership business, especially the relationship between dealership owners and the auto manufacturers.
Investors “came in with traditional and proven economic structures from other industries and said, ‘we know how to structure a deal better than you’” says Dietrich.
However, manufacturers were reluctant to approve the acquisitions because these new players were not “car guys” and it was unclear how such buyers would operate the dealerships.
While there was interest from private equity and family offices in the early 2000’s, deals weren’t getting done because of this disconnect between the traditional buy/sell dynamics in the industry, the new players and the manufacturers.
Nonetheless, by 2007, Dietrich had a handful of private equity and family office clients who were engaging “thoughtfully” with the manufacturers. Then, in 2008, the bottom fell out of the dealership business along with the rest of the economy, effectively putting the non-auto related money infusion on hold.
A changing conversation
Stephen Dietrich, 46, is a self-described “deal junkie.” He started practicing law in 1995 and in 1998 landed at a law firm in Denver that worked with General Motors and Saturn in dealer development transactions.
As part of that task, GM would identify dealerships it thought would be more successful with different management, or be approached by dealer operators who had structured acquisition transactions.
The automaker would partner with a new dealer principal to purchase these dealerships. Over time the profits of the business would allow the dealer partner to buy GM’s ownership share.
On each transaction Dietrich didn’t work with multiple members of a legal team, he was the legal team supporting the transaction. Dietrich reviewed and coordinated all legal and diligence aspects of the transaction from the corporate matters to real estate and finance issues.
Initially it was a challenge to work and learn through baptism by fire on deals, says Dietrich, but it was a very valuable experience.
“It forced me to understand all the different parts of the deal,” he says Dietrich.
The experience gave Dietrich a special skill set. It also gave him invaluable insight into the manufacturer’s point of view, he says.
In 2004, he left that firm to work for Greenberg Traurig in its Denver office. In his new firm, Dietrich started to represent the dealers.
It was a liberating move. “The people who are dealers are a much more diverse group,” says Dietrich. “It is fascinating to work with individuals who have found success in different ways, and [it is] significantly more satisfying.”
His buy/sell business was beginning to grow then, in 2008, the recession hit. That “massive economic tsunami” put everything on pause, says Dietrich.
By 2011, new car sales, and dealership earnings began to recover, and non-traditional buyers started trying to enter the dealership market again, says Dietrich. But most still hadn’t learned to speak the dealership and the buy/sell language, or fully understand the dynamic with the manufacturer.
“If you looked at the presentations or proposals, [the investors] talked about price-earnings and ratios,” says Dietrich.
The two groups trying to work together to put a deal together were not speaking the same language, he says. “For a time [Wall Street] was a swear word at NADA.”
Over the past few years, however, the non-traditional investors who have stuck it out have changed the conversation, he says. They have taken time to talk with all the dealership buy sell participants and, to some extent, meet them halfway, says Dietrich.
At the same time, as there are fewer traditional buyers available who can afford the pricing on dealerships, the manufacturers are feeling pressure from their dealer bodies to allow this new class of buyers to acquire dealerships
Large family-owned groups are acquiring smaller dealership groups, and some of those large family-owned groups want to sell to the private equity or family office investors, says Dietrich.
There is also generational pressure on current owners because there are fewer ready and willing successors. Foreign investors are also acquiring U.S. dealerships.
With the manufacturers’ increased willingness to consider private equity and family office investors it makes for a new buy/sell landscape.
“To participate in this changing market you need to have a broader world view of your potential buyer or seller, and be thoughtful about how you put the deal together because there are many different ways to achieve your goals.” says Dietrich.
Stephen Dietrich can be reached at 1-303-572-6502 or DietrichS@gtlaw.com
