You know it is a seller’s market when the seller can dictate all the shots, and I mean all the shots.
I was speaking to a buy-sell adviser this week, who shared an unsolicited anecdote because this adviser was so awe struck by it.
The adviser asked not to be identified, but here is the story: A buyer approached the owner of two dealerships, out of the blue, with an offer in the “tens of millions of dollars” to acquire the stores.
The two dealerships were not for sale. But the owner could not pass up the buyer’s offer, so the owner accepted it, on one condition: The buyer could not do any due diligence on the business other than environmental research.
Here’s where it gets really crazy: The buyer agreed to the terms.
That’s what I’d call a big bet by a buyer.
This buyer is essentially agreeing to buy the business sight-unseen. In fact, this experienced buy-sell adviser who shared the story had never seen such a thing.
“This is evidence of the confidence buyers have right now and the lengths they’ll go to acquire a dealership,” said the adviser. “And it’s not crazy overbidding going on either. That’s not what makes this unusual. It’s the risk, on the part of the buyer, to take this deal. They don’t know what the financials really are.”
Car dealerships are the “it girls” of the auto industry.
Take wealth management firm ZT Wealth. It spent $80 million to nab Quality Imports’ four-brand dealership group last month. ZT Wealth won Quality Imports over other bidders because it put up the highest blue-sky offer of $43 million. Blue sky is the intangible value of a dealership above and beyond its hard assets. ZT Wealth had long wanted to get into the auto space and was willing to fork over the cash to do so.
Buy-sell advisers say such trends won’t last.
First, they predict more stores will go up for sale this year as many dealers realize they lack a solid succession plan and realize it is a good time to sell. As a result, prices will stabilize.
And remember not all buyers will go to any extreme. The public retailers are disciplined. They also have other options to generate growth and returns -- such as stock buybacks. Likewise, most independent investors want a return on their investment and are reluctant to take risks.
“It’s possible with some of these new investors we’re seeing out there that they might push the multiples up a little bit on the first deal just to get in the business,” the buy-sell adviser said.
But going forward, they will want to pay market price. Said the adviser, “It’s not dumb money coming in the business. These are some of the smartest people in business. They’re not in the habit of over paying.”
That brings us back to our earlier example. I suspect the buyer knows it’s hard to find dealerships for sale that fit the suitor’s growth plans and business strategy. Under those circumstances, the buyer possibly took this offer hoping to at least break even at first.
But that may be a high price to pay initially just to find the store that pays off eventually.