'23 buy-sell activity to build off busy '22, '21

DALLAS — Dealership brokers and retail consultants predict another brisk year of buy-sell activity in 2023 despite rising interest rates, expectations of flat or lower store profits and the possibility of a recession.

And while there's a mix of predictions on how many buy-sell deals will happen in 2023, some professionals arranging transactions and dealers looking to acquire stores indicate it's just as busy as the previous two years. Many dealers are flush with cash after three years of high dealership profits and want to reinvest in the business, brokers and consultants say.

Mike Sims, president of buy-sell firm Pinnacle Mergers & Acquisitions in Frisco, Texas, described deal flow as strong and even more so after meeting with clients at the NADA Show here.

"One good indicator for a healthy 2023 in the buy-sell business is all of the big players are all looking to buy," Sims said, referring to publicly traded and large private groups. "That helps support the market. If those guys start saying 'Hey, we're gonna be cautious or see how things go,' that could be a slowdown. But everybody we're talking to is looking for deals."

Starting in around 30 days, Sims said his firm has several closings stacked up.

Morgan Automotive Group of Tampa, Fla., already one of the largest dealership groups in the country and an active dealership buyer in 2022, is among those private groups with eyes set on growth.

CEO Brett Morgan told Automotive News it would "be realistic that we could have five or six acquisitions under our belt in Q1" and noted the acquisitions represent five or six dealerships total.

Auto retail giant Lithia Motors Inc., perhaps the most prolific dealership buyer the past few years, also signaled a continued stretch of acquisitions.

Lithia CEO Bryan DeBoer, speaking at AutoTeam America's Dealer/CEO/CFO Forum Jan. 26, said his group will need to acquire 100 to 150 more dealerships in the U.S., and possibly elsewhere, by the end of 2025 to reach its goal of $50 billion in annual revenue that year.

Alan Haig, president of Haig Partners, a buy-sell firm in Fort Lauderdale, Fla., speaking at that event, estimated 533 dealerships were sold last year, but that 662 dealerships could trade hands per year through 2025 to help three of the public auto retailers reach increased revenue goals.

"The pipeline indicates that 2023 should be as good as 2022, just in terms of what we know so far," Haig said of his business in an interview.

2021 is widely considered the busiest dealership acquisition year, with Automotive News tracking 382 buy-sell transactions involving 707 franchised stores trading hands.

Automotive News estimates that at least 376 transactions involving 568 dealerships took place in 2022, though that's not a complete picture as four of the public dealership groups have yet to report year-end results, including possible deals that happened in the fourth quarter. The estimate is likely to grow before Automotive News reports final transaction numbers for last year. For January 2023, Automotive News estimates at least 22 transactions involving 37 dealerships took place. There were 16 transactions in January 2022 involving 23 dealerships, according to Automotive News' data.

Dave Cantin, CEO of Dave Cantin Group and DCG Acquisitions, who has a goal to close 50 dealership acquisitions this year, up from more than 30 in 2022, said he's seeing interest not just from dealers, but from outside investors who want to buy dealership platforms of all sizes.

"And to hear that, and constantly hear that almost daily, is remarkable," Cantin said. "It's a sign for an incredible '23 and possibly '24."

Erin Kerrigan, managing director of Kerrigan Advisors, a sell-side firm in Incline Village, Nev., said her company has a "significant number" of transactions already slated to close in 2023 and more in process. She said buyers have become choosier.

With "the expectation that there's going to be a more challenging economy in '23, we're seeing buyers become a little more selective," she said. "And so they're really looking for the growth market, the top franchises."

Matt McGovern, CEO of McGovern Automotive Group in Newton, Mass., bought nine dealerships in 2022 to grow to 24 franchised and used- vehicle dealerships. He has one acquisition under contract and is focusing on quality over quantity.

"I don't need to run up to 35 or 50 stores for the sake of doing it," McGovern said.

Some marginal buyers appear to be pulling back from looking for acquisitions given the economic conditions, said Todd Berko, managing director of Bel Air Partners, a buy-sell firm in Hopewell, N.J.

And changing dealership financials and rising dealership prices the past two years — some brokers and consultants say prices may have plateaued — has led to some struggles with buyer and seller agreeing on the price tag.

"There are plenty of deals to be closed still," said Ed Reinhard, partner at accounting and consulting firm Crowe. "But there are challenges in determining pricing."

This includes the impact of rising interest rates and figuring out which previous years' dealership earnings to include, Reinhard said.

Joe Ozog, president of Ozog Consulting Group in Scottsdale, Ariz., said what is top of mind for buyers differs from even the fourth quarter.

"Generally speaking, a buyer's first question is, 'What's the store make and what's he want?' " Ozog said. "Now the question is, 'What did he make in 2019? What's he making now? Is he trying to price off of all the COVID earnings? Is he going to be reasonable?' These questions started to drastically change just literally in the last 90 days."

While Hudson Automotive Group President David Hudson's phone continues to ring with possible acquisitions, "the hardest part right now is just trying to figure out valuation." His Charleston, S.C., group bought nine North Carolina stores in December from Asbury Automotive Group Inc.
Brady Schmidt, co-CEO of National Business Brokers, a buy-sell firm in Irvine, Calif., said heightened dealership profits the past few years may cause the bid-ask-gap to increase, because sellers may want to base valuation estimates off the past three years, while buyers want to base estimates off what they expect for the future.

Schmidt said this may extend back and forth between buyers and sellers, lengthening the time it takes to complete a deal.

"That doesn't mean that the volume of deals are necessarily going to slow," Schmidt said. "Because there are a lot of very good, motivated buyers right now in the market that are willing to pay top dollar for stores."

George Karolis, president of Presidio Group, an investment banking and advisory firm in Denver and Atlanta, said it's still a seller's market.

"But it's going to be different," Karolis said. "Buyers are going to be a little more diligent, trying to understand what the real true future cash flow of the business is."

Take Group 1 Automotive Inc., for example. Group 1 CEO Daryl Kenningham told Automotive News that he thinks dealership valuations were higher six months ago.

"We have really rigid criteria for what we'll pay," Kenningham said, adding that Group 1 evaluates deals based on what the stores will make in the future, not what they are making at the moment.

Jonathan Sobel, CEO of Georgica Auto Holdings, said his group, which bought three Connecticut stores in mid-December, has a robust flow of deal opportunities to review.

"We are seeing some sellers who are realistic about what they have," Sobel said. "They want to maximize their proceeds from the transaction, but they also are cognizant of the market environment that we're in and the changing market environment over the past several months. And then you have some sellers who believe the store is worth what it was a couple of years ago, or even more."

Schmidt said he expects the buy-sell bustle to continue given that there may be more motivation for some dealers to sell now that profits are slowing.

"I think that what will happen now, as profits begin to retract in stores — which we're seeing — [is] that there will be a pent-up release of people that probably would have sold two or three years ago, had those circumstances not happened," Schmidt said. "So, we anticipate more stores coming up for sale in the next 12 to 24 months."

Amy Wilson, Lindsay VanHulle, Mark Hollmer and Melissa Burden contributed to this report.