By J. Michael Issa, GlassRatner Advisory & Capital Group LLC
Keeping an eye on the day-to-day business and profitability of the dealership is a dealer’s primary concern, and well it should be. But not considering more elusive long-term challenges and issues can prove to be a very costly mistake for a dealer.
For most dealers, the industry has been booming in the years following the Great Recession. Consumers purchased more cars from fewer dealers which resulted in robust profitability.[1] [2]
The length of this boom market has provided dealers with more time to prepare for and to intelligently execute a strategy to exit or take some risk capital off the table. But how many did prepare? When business is going well, people don’t think about the next economic downturn. The natural inclination is to believe that since things are continually improving, business will stay solid.
Stormy Weather?
Now that pent-up demand has been satisfied, new car registrations have begun to decline.
In addition, dealerships are constantly facing new threats, including reduced new car gross profit margins, growing pressure from larger dealerships that benefit from increased scale, and the emergence of external threats to the traditional dealer retail model. These threats include the “next big thing” – the subscription model – and, of course, automated automobile transportation.
In fact, some marques are now mostly dependent on continuing factory rebates to provide some modest new car gross profit. Furthermore, in the absence of new car gross profit, most dealerships could not sustain a profit based solely on sales, service and used.
Exit Time?
With growing pressure and concerns all around, the thought of selling the business is being contemplated by a growing number of dealers. Some dealers plan carefully for their business exit and derive significant value in a tax-efficient way. Others wind up having to sell their dealerships because they’ve ignored a worsening condition and have run out of options. When dealerships trend toward difficult financial results but their owners are reluctant to react, that hesitation can be financially cataclysmic.
No one relishes the prospect of selling their business in the face of increasing outside pressures. The perceived lack of control alone can be paralyzing. For some, it may be time to consider selling, but hesitation may limit their options. Sometimes the delay to act is because of purely emotional reasons. For most dealers, the day-to-day operation of the dealership is the only career they have ever known, and the prospect of leaving “the life” behind is difficult.
But remember, delays in planning for a graceful and profitable exit can be incredibly costly in forgone sale consideration and in unnecessary tax consequences.
There are challenging questions that need to be carefully analyzed when financial results become erratic. Also, external factors need consideration. Dealers should be asking themselves these questions related to how the retail car business will evolve of over the next 15 years:
- What will be the primary competition and how will the competitors operate?
- What economies of scale may the publics have, and will they result in an unfair competitive advantage over the private dealer body?
- How will dealerships be affected by the automation of transportation?
- Will the business follow a similar path to the paradigm shift of print versus electronic media?
In the meantime, all dealers should be taking steps to prepare for potential sale. They should be benchmarking performance against regional averages. They should consult with external professionals that specialize in auto dealership transactions. An outside view of their operation is invaluable.
J. Michael Issa is a principal at GlassRatner Advisory & Capital Group, wholly-owned subsidiary of B. Riley Financial, Inc. (NASDAQ: RILY). He is a CPA and a Chapter 11 Bankruptcy Trustee in the Central District of California. Mr. Issa is a well-known authority on automotive dealerships, working on dozens of transactions in his multi-decade career. He is a former banker as well as a court appointed fiduciary in corporate bankruptcies.
[1] Source: manufacturers, ANDC retrieved Sept. 6, 2018: http://carsalesbase.com/us-car-sales-data/
[2] Source 2017 NADA report retrieved Sept. 6, 2018: http://www.nada.org/2017NADAdata/
