It's not just about the money, but it's clearly about the money

The sale of a dealership or group is an everyday thing in the industry right now.

At Automotive News, we've been exploring a number of sometimes-under-the-surface challenges to the dealership model in a three-part series that wraps up this week. These Triple Threats — questions around electric vehicle profitability, states' auto franchise protections and digital retail — generally tip the scale toward selling, especially now, while profits and valuations are high.

But of course, a decision such as selling a business isn't just about trying to time the market. A retail entrepreneur's store — especially an auto dealership — is more than a slice of a portfolio. It's a career, a family legacy, a big part of a person's identity.

"What I found in the last 21 years of doing this: No dealer ever sells just for money," buy-sell consultant Mark Johnson told me last week. "There's always an underlying reason."

Maybe there's a loss in the family, or maybe someone is just ready to retire and doesn't have a descendant who wants to own the business for decades into the future.

That said, once the idea makes sense, it's time to ask: How much can I walk away with?

Between the boomers contemplating retirement and a slew of favorable economic conditions, it's no wonder we're seeing a surge in buy-sells.

There have been so many deals — and readers have shown so much interest in them — that we're starting a new monthly page in the printed newspaper and a new monthly email newsletter about them. It's called Done Deals, and you'll find it when you turn to Page 14 in this issue.

There's no denying the confluence of economic reasons that valuations are soaring. Profits were at record highs last year, and they may be going up this year amid short supply and vigorous retail demand. Interest rates are low, making acquisitions attractive. Profits are high. The economy is growing. And did I mention that dealers are making a lot of money right now?

That must improve the value of the business, right?

"The first thing every buyer says is, 'I'm not paying on COVID profits,' " Johnson said on the Automotive News "Daily Drive" podcast.

And they shouldn't. No one expects that more than two-thirds of sales are going to be near or above sticker as a rule.

But the durability of dealership margins from the initial shutdowns through the chip crisis has been impressive. And Wall Street wants to get in on it, whether it's through a company such as LMP Automotive Holdings or an online disrupter such as Carvana.

A catalyst for the wave of consolidation, as Johnson sees it, is Lithia Motors and its CEO, Bryan DeBoer. DeBoer's stated goal is to quadruple Lithia's revenue to $50 billion, largely through acquisitions. To build out a true nationwide group, he aims to buy dealerships that generate a combined $3 billion to $5 billion in revenue each year for half a decade.

And in industry after industry, when one large player starts making acquisitions, others start doing it, too.

"Activity begets activity. And so I think when you get someone like Bryan out in the market buying, you know, it creates a lot of confidence for other dealers that are thinking about buying something," Johnson said. "But it also gives the impression that, hey, this might be a really great time to sell."

Another reason to sell now is speculation about tax risk, particularly on capital gains.

Aided by recent reports about how the richest Americans pay little or no income taxes, raising the government's take on capital gains — profits from investments — is a politically attractive source of funding. Tesla CEO Elon Musk, for example, is paid primarily in stock options that are taxed when he exercises them, not when they're granted. So even when he earns $11 billion in options by meeting key growth targets, that isn't technically "income" for taxing purposes. Suggestions that the capital gains tax could double — perhaps taking a year's worth of profits out of a deal — add urgency to a sale decision.

"When we work with a seller, the calculation they always want to know is, what am I going to walk with after tax?" Johnson said. "It has a major impact on their thinking."

Because even though these deals aren't all about the money, when the deal is done, what you get paid in is money.