SAN FRANCISCO -- Slowing vehicle sales growth rates across the industry are also likely to slow dealership buy/sell activity just as blue sky values peak, just not yet, argues a panel of experts on dealership transactions at the 2015 J.D. Power Automotive Summit.
While new-vehicle sales growth slows, lenders are increasingly willing to fund acquisitions in an industry with higher returns on investment than are available almost anywhere else.
“Dealers have gone from being the pariahs to the darlings of the financial community,” says Erin Kerrigan, managing director of Kerrigan Advisors, which helps dealers navigate buy/sell transactions. Kerrigan predicts buy/sell activity will soon begin to get weighed down by a variety of factors that include slowing new-vehicle sales growth. “2015 might not be the peak year, but it’s certainly going to be a good one.”
Kerrigan said that dealership profits and revenues are at record levels, motivating some potential sellers who feel their dealerships have never been healthier -- or more valuable. But while potential buyers are benefiting from cheap capital, they may be reluctant to come in when sales growth might not be sustainable.
Kerrigan, who spoke before a panel discussion on buy/sell activity, said dealership blue sky multiples can range from 3.1 to 9.3, depending on the potential buyer in a transaction. Blue sky is the intangible value of a dealership expressed as a multiple of adjusted pretax income.
Private purchasers were generally willing to pay lower blue sky multiples, while publicly held buyers were generally willing to pay higher blue sky multiples, depending on the transaction.
Kerrigan said buyers have shown a greater willingness to pay higher blue sky multiples for dealerships that are underperforming in their markets, and lower multiples for those that are overperforming their traditional returns.