Signs of a buy-sell slowdown

Dealership buy-sell activity could plateau this year after several years of strong growth, experts say.

"We expect it to be a strong year, but not up significantly from last year," Alan Haig, president of Haig Partners, a dealership buy-sell advisory firm in Fort Lauderdale, Fla., told Automotive News.

The slowdown in part reflects publicly owned retailers' opting for stock buybacks over acquisitions, given their low stock prices. Also, buyers' searing lust for luxury brands in recent years finally is cooling. Buyers still want those stores, but they are less willing to pay exorbitant prices for them, Haig and buy-sell adviser Erin Kerrigan said.

Instead, many buyers are turning to domestic brands, where dealership profits are rising on strong consumer demand for pickups and SUVs because of low gasoline prices. Domestic brands also command lower blue-sky multiples than luxury brands. Blue sky is the intangible value of a dealership, typically expressed as a multiple of adjusted pretax profit.

"The return on investment for a blue-sky value at a four times multiple [for a domestic brand] is very attractive relative to an eight times multiple for a luxury brand," said Kerrigan, managing director of buy-sell advisory firm Kerrigan Advisors in Irvine, Calif.

Both Haig and Kerrigan said a smaller number of buyers still want luxury brands. The oversupply of new cars, amid a market shift toward light trucks, at some luxury brands has eroded profit margins, which has turned off some buyers.

With industrywide vehicle sales growing at a slower rate than that seen in recent years, Haig cautions that there's "a real chance we will hit a plateau in terms of dealership profits" across all brands.

"Buyers and sellers are going to begin to factor that into their negotiations," Haig said. "So if you're a seller with high price expectations and no one's offering you that price today, there's an even bigger chance no one will offer you that tomorrow."

In his first-quarter Haig Report released last week, Haig wrote that the growth in the number of transactions will slow compared with 2015, which was one of the most active years in buy-sell history.

Kerrigan's first-quarter Blue Sky Report, to be released this week, cites the Banks Report as saying 56 dealership buy-sell transactions were completed in the quarter vs. 55 a year earlier. Kerrigan wrote that this year's buy-sell activity "seems to have hit a plateau, much like the industry's SAAR," or seasonally adjusted annualized rate of new-vehicle sales.

Kerrigan said this year's buy-sell market will be dominated by privately owned dealerships and outside investors. She said acquisition financing terms will drive prices and blue-sky values will be increasingly based on multiyear average earnings.

Meanwhile, more sellers are coming to market because of a "sense of urgency" that the current valuations will not last, Kerrigan said. But, she added, some sellers' reluctance to rethink their asking price will chill some deals.

"Luxury dealerships are highly profitable and command -- I like to say demand -- very high multiples," Kerrigan said. "There are fewer buyers really willing to pay the big purchase price. Owners of these franchises do not need to sell, so they're unwilling to sell for anything less than the top multiple. So the multiple won't decline, but the number of transactions will."