The rise in dealership earnings at the end of the second quarter portends an increase in blue sky values in the second half of 2020.
Though new and used car margins are expected to decline as inventories return to pre-COVID levels, dealership expense reductions are likely to sustain, resulting in a higher margin auto retail business for the foreseeable future. Also, auto sales are projected to rise for the remainder of 2020 and into 2021, as OEMs increase production and incentive spending remains strong. Historically low interest rates will buoy auto sales growth, further supporting an increase in dealership earnings and rising valuations.
Another driver of improved valuations in the second half of 2020 is the reduction in buyers’ cost of capital, also a result of today’s low interest rate environment. Banks, which are sitting on record levels of deposits, are more eager to lend to growing dealership groups given the financial strength of the auto retail industry. Buyers are reporting increasing access to low-cost financing, reducing the equity required for acquisitions. The resilience of the auto retail business model is also attracting more investors to the industry. These investors believe scale and innovation will exponentially increase future industry profits, rendering a consolidation strategy highly profitable.
As valuations increase and consolidation becomes the name of the game, more single point dealers and family-run dealership groups are deciding the time is right to sell. The volume of sellers coming to market in 2020 is up markedly since 2019. In this environment, Kerrigan Advisors expects the buy/sell market for the remainder of 2020 and into 2021 to be extremely active, perhaps one of the most active on record.
Kerrigan Advisors is the leading sell-side advisor and thought partner to auto dealers nationwide. Since its founding in 2014, the firm has led the industry with the sale of over 280 dealerships representing $9 billion in client proceeds, including the third largest transaction in auto retail history – the sale of Jim Koons Automotive Companies to Asbury Automotive Group. The firm advises the industry’s leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, Kerrigan Advisors does not take listings, rather they develop a customized sales approach for each client to achieve their personal and financial goals. In addition to the firm’s sell-side advisory services, Kerrigan Advisors also provides a suite of consulting and investor services including growth strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.
Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report®, which includes Kerrigan Advisors’ signature blue sky charts, multiples, and analysis for each franchise in the luxury and non-luxury segments. To download a preview of the report, click here. The firm also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail. To access The Kerrigan Index™, click here. To read the 2023 Kerrigan Dealer Survey, click here. To read the 2024 Kerrigan OEM Survey, click here. Kerrigan Advisors also is the co-author of NADA’s Guide to Buying and Selling a Dealership.
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