Steps to take if you’re thinking of selling your dealership to a private equity or family office investor

By Jonathan Wilke, Partner, DHG Dealerships

The automotive retail industry is one of the largest in the United States where the majority of the entities are privately-held or family-owned. Many dealerships are now more than two or three generations into ownership and dealers and manufacturers are paying an increasing amount of attention to the issue of succession. That sometimes involves selling a family-owned dealership or group.

With the economy performing reasonably well and new vehicle sales moving towards the 17 million mark, dealership prices are arguably at all-time highs. That has made the industry appealing to diverse investors.

In the last two years, private equity and family office investors have increased activity in the industry. The recent acquisition of Van Tuyl Group by Berkshire Hathaway Inc. and reports coming out of NADA 2015 regarding George Soros and others looking to invest in the industry demonstrate that dealers have more options than ever to execute an exit strategy. Deals are being made, but it may not be as easy as it seems.

There are many unique challenges for private equity or family office investors coming into the dealership space that can prevent a deal from taking place. These include:

Manufacturer relationships and approval.
Partnering with the right dealership operational executive.
Understanding how deals are priced in the dealership world.
Understanding how this industry works and how successful dealerships operate.

Furthermore, when a dealer considers private equity or family office investors, there are challenges in understanding how those investors operate, the motivation behind their investment, new reporting requirements to that investor, and even coming to grips with having a partner after so many years of doing it all alone.

Dealers considering selling to a private equity investor or a family office should take the following into account:

Understand the extensive due diligence process for dealership buy / sells. For example, if you are looking at a recalculated earnings, it is important to understand the Finance and Insurance (F&I) products sold and if it is through a related insurance company or if they receive “retro” money paid to a related company, how chargebacks are estimated, etc. A thorough understanding of the programs and structure is necessary to determine recalculated earnings.
Review process and systems in closing (purchase) of a store like the DMS and CRM systems, among others. These contracts will impact price and closing considerations.
Identify key relationships, such as those with the franchise / manufacturer, due to approval being required before a deal can be done.
Get financial statements in order, including getting add backs / normalization adjustments identified.
Consider the financial and administrative infrastructure and its compatibility with a larger organization.
Identify additional profit enhancers as these can help drive a higher value. These can be as small as increasing the new to used sales ratio or increasing F&I penetration.
Understand the investment terminology and other cultural differences that could exist. For example, a cultural difference is how general managers are typically paid a percentage of the net profit of the dealership, which can be a significant cost when compared to other industries.
Identify how long the private equity group or family office intends to have the dealership in their portfolio. If the intention is less than five years, it is unlikely that the manufacturer will approve; or, if approved, what does this mean for the employees that are left behind?
Look at mandated facility improvements and make sure the investor understands the impacts post-closing.
Understand the market and prices in which dealership transactions are closing.

The automotive retail industry will continue to see consolidation and acquisitions along with continued growth. Dealers with the right strategy in place can help maximize the value of their dealership while also helping to close a deal in a smoother and timelier manner. Likewise, for private equity groups and family office investors, learning more about the unique characteristics of the industry can help make more deals happen.

DHG is a public accounting firm headquartered in Charlotte, N.C. with offices nationwide. Jonathan Wilke is a partner in the Ft. Worth office with more than 14 years of work with dealerships. He concentrates on dealership F&I compliance, operational analysis, forensic investigation, risk assessments, due diligence, Sarbanes-Oxley compliance and a wide range of internal audit services.

He can be reached at (817)276.4127 or jonathan.wilke@dhgllp.com.