Dealerships Changing Hands at Record Rate

The question for dealership buyers and sellers is how long the current, favorable environment can last, with demand outpacing supply, record average transaction prices for new and used vehicles, and pent-up demand for parts and service.

There may be some potential headwinds next year, but for 2021, brokers for dealership mergers and acquisitions report the dealership buy-sell market is still red hot.

“Our book of business is at a robust pace, and so is the rest of the industry,” George Karolis, president of the Presidio Group, says in a recent phone interview. “I think we’re at record levels.”

The question for buyers and sellers is how long the current, favorable environment can last,

with demand outpacing supply, record average transaction prices for new and used vehicles, and pent-up demand for parts and service. Cuts in dealership head counts and marketing budgets have also contributed to record profitability.

At the same time, interest rates are low, and for publicly traded dealership groups share prices are high, and that makes it more affordable to purchase dealerships partly with shares of stock, says Brodie Cobb, founder and CEO of the Presidio Group, which has offices in San Francisco and Duluth, GA.

“The one thing that is just unbelievable is how inexpensive capital is today, how inexpensive debt is,” Cobb says in the same conference call with Karolis. “And every time those stocks go up, it gets cheaper and cheaper.”

Another dealership brokerage firm, Kerrigan Advisors, says the total number of completed dealership transactions was 144 in first-half 2021, an increase of 27% vs. a year ago, and on track to surpass a record of 289 buy-sells last year. For the 12 months ended June 30, the total number was 320, up 11%, the company says.

“Today, we are tracking to hit another record,” says Erin Kerrigan, founder and managing director of Kerrigan Advisors, Irvine, CA. In a webinar hosted by the American International Automobile Dealers Assn., she predicts 2021 buy-sells will pass 350 in 2021.

One of those potential headwinds mentioned earlier is that would-be buyers may balk at high prices for dealerships, to the extent that high prices are based on the record profits they’re raking in, in the current highly unusual circumstances.

Earl Hesterberg, president and CEO of Houston-based Group 1 Automotive, says in a conference call to announce second-quarter earnings that the acquisition market is “as frothy as it’s ever been.”

Kerrigan predicts the “froth” Hesterberg describes will last at least well into 2022. “Dealers do not believe their dealerships will fully return to the low margins” at pre-pandemic levels, she says – not even when supply eventually recovers and high demand subsides. “Yesterday’s valuations seem ludicrous with regard to today’s profits.”