By Alysha Webb, Editor and Publisher
Scale is becoming more and more important in the dealership world, and smaller family-owned groups or single-point franchises are facing some difficult decisions regarding their future.
“It is increasingly difficult for small dealers to generate human capital and the needed cash for dealership acquisitions,” says Mark Johnson, president of MD Johnson, Inc.
Thinking about selling the family business is difficult even in the best of circumstances. If there is no succession plan, or the existing plan is controversial with some family members, the selling process becomes even more fraught.
Mark Johnson, President of MD Johnson, Inc.
Johnson was among a panel of buy sell experts at the AICPA Conference in Las Vegas a few weeks ago discussing succession issues. Moderated by Automotive News publisher Jason Stein, the panel also included Al Haig of Haig Partners and Erin Kerrigan of Kerrigan Advisors.
Often, the second and third generations are instrumental in the decision process, the panelists agree. But those family members may not be involved in succession planning.
“It is rare that all of the key family members get in the room and make a plan,” says Haig. In some situations, says Kerrigan, “Thanksgiving is more important than getting a deal done to many family members.”
Sometimes, says Haig, families don’t even want to spend Thanksgiving together because of hurt feelings when one member doubts another member’s business acumen.
Johnson says: “It comes down to having a good succession plan.” But, some dealers who “shouldn’t even be buying green bananas” have told Johnson that their plan is to just not die, let alone retire.
When some family members don’t want to sell, that can have a longer-term impact on the dealerships business, even its appearance. The family may hold off executing factory compliance initiatives and cling to their legacy operations.
There are significant benefits, however, to selling now rather than later, the panelists say. Valuations for many franchises are high on the back of record high profit levels in what continues to be a seller’s market.
So while some of those next generation family members that watched their parents work 80-hour weeks don’t want that lifestyle and are ready to sell, says Haig, there are still plenty of single-point owners generating 3-5% profit margins and even outperforming large groups in their market. Those dealers are particularly hesitant to sell, but they are becoming the exception rather than the rule.
While profitability as the basis for high multiples provides an incentive for sellers, it also continues to attract buyers, particularly on increasingly larger-scale deals. Johnson points out that few investment opportunities today can offer the same return on investment that car dealerships can.
This is driving consolidation, with money coming from private equity capital and from expanding dealership groups. They have the necessary funds. Haig points out that some dealership groups are extremely profitable, earning $10 to $20 million a year. That generates a great deal of available cash for acquisitions. Says Johnson: “Given the ambition, energy, and capital, there are many motivated buyers.”
The buy/sell advisors on the panel took different approaches to advising their clients given the complexity and family dynamics of these transactions. For example, MD Johnson doesn’t seek to tell a dealer when to sell. Rather, it believes in advising for the long-term, getting to know the nuances of a family’s business and, potentially, gradually convincing most or all family members that it is a good time to sell, says Johnson.
The ultimate goal for MD Johnson, once a seller decides to proceed, is to get that seller the price and terms they seek from a buyer that they believe will continue to provide a solid employee situation for their employees, as well as good service to customers and the community.
Linda Barnette, principal at MD Johnson, Inc., contributed to this story.
