Skyrocketing store values complicate dealer exits

When longtime general manager Ryan Kirkpatrick finally found the Ford dealership he would end up buying, it had fewer than 20 vehicles in stock and sales of about 13 cars a month.

Working in large dealerships his entire career, Kirkpatrick had saved his money for years. He also cashed in his 401(k) and sold his house to buy the store in Sealy, Texas. But even with a partner, he only had enough money for a fixer-upper.

"I couldn't have afforded a large store," said Kirkpatrick, 53. "My store was broken, but it was probably one of the cheapest out there."

Kirkpatrick's dilemma is the same facing other talented general managers who dream of buying their own stores. Dealerships have risen in value so much since the late 1990s, when formation of the public retailers began pushing up prices, that few managers can afford to buy out their owners. A high-volume metro store can easily cost $10 million, even $30 million in blue sky - the intangible value of the dealership. Multi-store groups often top $100 million, dealership brokers say.

On the flip side, rising values have narrowed exit paths for dealers. Not only is it harder for them to sell to a manager, it's also increasingly complicated to pass their stores down to the next generation.

That's driving more owners to the open market, dealership advisers say.

"In the late '80s or early '90s, probably the first avenue of sale was to your general manager," said Joe Ozog of Ozog Automotive Group Inc., which brokers dealership sales. "And now you don't see it because of the absolute dollar amount."

Rising values also pinch next-generation succession. Ozog handled a recent sale for a dealer who chose to sell because the prospects of handing down the enterprise proved too difficult. Ozog gave this scenario: If a group is worth $50 million, and just one of three children is involved, some dealers feel it's unfair to give the business to that one child. And despite their wealth, they likely don't have another $100 million in cash to even out the inheritance.

"It's easier to divide a dollar than it is a car," Ozog said. "You hear them saying that all the time."

For the sellers, "these are high-class problems: Finding somebody who can afford to buy my business that is so valuable that almost no one else can afford it," said Alan Haig, president of Haig Partners, a buy-sell advisory firm in Fort Lauderdale, Fla.

But it does present dilemmas for dealers who have been successful and now wonder who will end up in their chair.

General managers have the bigger hurdle, said Rick Kotzen, partner in accounting firm Crowe Horwath's automotive practice.

"Today's dealers shoe-stringed dollars together and got a store, built up capital and shoe-stringed again," he said. "These guys went from being very talented entrepreneurs with guts and savvy but not a lot of capital and built magnificent organizations.

That's much tougher today.

Kotzen once told a National Automobile Dealers Association executive that one of the most important things the industry could do is build a capital pool to stake talented general managers seeking their own stores.

That's what Eric Chelline and Tim Batchelor are trying to do. The pair founded Open Road Capital, a Washington, D.C.-based private-equity firm that aims to invest up to $300 million in dealerships during the next few years.

Chelline, who worked at dealerships for 10 years before going to business school, says he was once a "frustrated, wanna-be dealer." He now wants to bankroll people like his former self. Open Road also would help a dealer's child buy out siblings' shares of a business.

Open Road hasn't done any deals yet but is open to brands and deal terms. Transaction values could range from $15 million to $150 million. The likely scenario is for the dealer operator to start out with a stake of 15 to 25 percent and gradually buy out the firm over five to 15 years. Open Road also will consider investing with established dealers who want to expand.

While the traditional exit path can be tougher to execute, dealers can still make it happen.

Todd Berko, managing director of Bel Air Partners in Hopewell, N.J., said he is working with a dealer selling pieces of his business to managers.

Hugh Roberts, a partner in the Rawls Group, which helps dealers with succession planning, says his firm is able to help most of its clients keep a business in the family.

"It's more difficult, but that doesn't mean it isn't doable," Roberts said.

For the general manager seeking ownership, a partner is often the only way.

After working at the same Florida Hyundai dealership for 22 years, Tony Pappas, 49, finally realized his goal of ownership in 2012. But he couldn't do it alone, particularly once he set his sights on modern image-compliant Hyundai and Chrysler-Dodge-Jeep-Ram dealerships in northern California worth "multiple millions of dollars."

"It was one heck of a tall order for me without an investor," Pappas said. "There was just no way that was going to happen."

So Jason Stopnitzky of Performance Brokerage Services put him in touch with Troy Duhon of Premier Automotive Group of New Orleans, and the rest was history. Pappas now has a minority stake in three dealerships with Premier.

Partner capital also was a must for Kirkpatrick. Kirkpatrick asked every one of his employers to help him become a dealer one day. Iowa dealer Pat McGrath finally said yes. In 2006, the pair bought the Ford store in Texas. Kirkpatrick declined to reveal the price.

Though volume was tiny, it was on the interstate, just 50 miles from Houston, the largest city in Texas, where Kirkpatrick grew up and fell in love with dealerships. Kirkpatrick figured he could lure traffic from Houston's suburbs, and the gambit worked. Eight years later, the store has gone from 13 cars a month to 120.

McGrath has since sold his stake to Kirkpatrick's brother-in-law, but Kirkpatrick has controlling interest. And soon he expects to break ground on his second store, a new point awarded by an automaker.

One of the best parts of this second venture, according to Kirkpatrick? No need to pay any of that pesky -and pricey - blue sky.