Prices of most new-car dealerships have declined since their peak four years ago, but popular franchises in the right locations still fetch steep prices.
Experts say prices will never climb to what they were when the publicly held dealership groups started their shopping spree in 1996. Highly profitable dealerships are too scarce. Potential sellers, used to several years of strong new-vehicle sales, will not let their cash cows go cheaply. And the emphasis on technology, customer service and fancy buildings has upped the cost of building and operating a dealership.
Experts say buyers are paying blue sky of two to four times pre-tax earnings on top of the value of a dealership's physical assets. Blue sky was four to six times pre-tax earnings when the public chains aggressively were buying stores. Blue sky is the price of a dealership beyond the value of physical assets. Typically, it is the value of the intangible assets, such as location, franchise strength, reputation, customer base and profit potential.
While large public and private chains are still shopping for dealerships, the dominant players now are private entrepreneurs with chains of three to 10 dealerships seeking another dealership or two within 50 miles of their small empires.
Like the publicly held chains, they want to dominate their markets.
Not surprisingly, the most sought-after brands are Toyota, Honda, BMW and Mercedes. Ford and Chevrolet are popular for their truck lines. And the best markets are in the Southeast and West, where the population is growing. The Midwest and Northeast are overcrowded with dealers.
Large dealership groups seek dealerships with a net pre-tax profit that is 3 percent of sales or better. The average dealership has a net pre-tax profit that is 1.8 percent of sales, according to the National Automobile Dealers Association.
Looking to expand
'We're seeing a lot of individuals with three or four dealerships who want to expand,' said Dusty Troyer, a dealership broker in Orlando. 'They are seeking nice dealerships where the prices make sense.'
Said Sheldon Sandler, founder of Bel Air Partners, a Princeton, N.J., investment firm specializing in car dealership acquisitions: 'The market for dealerships has fundamentally changed. The only way we would see a return to the old numbers is if there was a cataclysmic change' in the sales climate - such as at least two years when the industry sold only 14 million new vehicles (per year).
The market for dealerships is similar to the current retail car market. Dealers accustomed to record car sales are disappointed when sales are only good. And when they remember the seller's market for dealerships of three or four years ago, dealers resist accepting less than peak prices for their stores.
No fire sales
The economic downturn has prompted some sellers to lower their prices, though it has not generated any fire sales.
'There has been a narrowing of the bid-ask (difference between the seller's asking price and buyer's bid) spread,' said Brodie Cobb, managing director of Presidio Strategies, a San Francisco investment banker. 'I think both sides have moved. The sellers have dropped the price a little bit, and the buyers have raised their price.'
Some aspects of dealership sales haven't changed. There still are dealers who will pay a premium for the right brand in the right location to meet their specific goals. Blue sky can still be sky-high.
Gordon Page, a Tampa, Fla., dealership broker, said he is still seeing big price tags.
'One guy offered $50 million in blue sky for a dealership, and the dealer still didn't sell it,' said Page, who has a variety of clients. 'Another (potential buyer) offered $45 million for another dealership, and the dealer didn't sell it.'
The decline in public dealer stock prices is the biggest contributing factor to price erosion, experts say. When stock prices were high, publicly held dealership chains could afford to pay more than six times pre-tax earnings for the most profitable stores. Depressed stock prices have forced the public companies to pay cash.
'Three or four years ago, there was a rush to purchase stores with public money,' said Pat McNulty, a Paducah, Ky., dealership broker. 'The public dealerships were putting together deals the rest of us couldn't justify.'
The lower stock prices have slowed the pace of acquisitions and taken the large players such as AutoNation Inc. out of the market for some stores. The big public chains are now more selective, buying dealerships in markets where they are already established. These big players have snapped up the highest volume dealerships, and their latest purchases are smaller stores that fetch lower prices.
Brokers say there has been a return to reason. Public and private buyers are examining store profitability with greater scrutiny and making a deal only when they think they will get a reasonable return on investment.
'The buyers need to be able to run the stores and make a profit,' said Gary Minchew, a Valdosta, Ga., dealership broker.
Said broker Ben Hicks, chairman of Ben Hicks and Associates Inc. in Dallas: 'In some cases, prices are getting more realistic. But there are still high expectations in the market, believe me.'