Dealership valuations dip from 2022, but remain high, experts say

While average dealership valuations through the first three quarters of 2023 dipped slightly from the same period the year before, they remain well above pre-pandemic levels, buy-sell experts told Automotive News.

Kerrigan Advisors' third-quarter Blue Sky Report found valuations for the average dealership through the first nine months of 2023 fell 5.4 percent compared with the same period in 2022 but were still about two times higher than they were before the pandemic. Kerrigan declined to provide the average dealership valuation dollar figure.

Erin Kerrigan, managing director of Kerrigan Advisors, a sell-side firm in Incline Village, Nev., said while she expects some continued decline in dealership valuations in 2024, the drop won't be too steep and may be around 15 percent for dealerships with less demand, such as those in smaller markets.

"I think valuations in my experience, particularly for high-demand assets, are pretty resilient," Kerrigan told Automotive News. "Those dealerships that are in high-demand markets, like Florida and Texas, are still seeing record valuations."

Kerrigan Advisors represented the sellers in the sale of three dealerships in May to Group 1 Automotive Inc. that fall into that category, as both are high-volume stores and located in Texas.

Buy-sell firm Haig Partners, of Fort Lauderdale, Fla., said it fetched what it believes are record-high prices for sellers in the June 2023 sale of Al Hendrickson Toyota in Coconut Creek, Fla., and for Honda and BMW dealerships sold as part of a group, in South Florida, just this month. Morgan Automotive Group, of Tampa, Fla., was the buyer for the three stores.

In its third-quarter Haig Report, the firm found the average blue sky value per publicly owned dealership was about $22.1 million at the end of the third quarter, down 12 percent from year-end 2022.

Blue sky is the intangible value of a dealership, including goodwill.Despite the decline, Haig's report also found blue sky values are still more than double what they were pre-pandemic.

Haig Partners President Alan Haig told Automotive News in an email that he thinks valuations will continue to decline in 2024, but that rate will depend on the rate of decline in auto retailers' earnings.

"I believe blue sky values will eventually level off at a value higher than pre-pandemic times, largely because profits will be higher," Haig said. "Partly due to inflation, and partly since OEMs may not overproduce as they did in the past."

Store buyers flush with cash from strong dealership earnings the past few years can use savings to finance a good portion of acquisitions, Haig said in a statement. The firm also said in its report that it is confident sellers with "realistic expectations" can expect strong values for their stores into 2024.

Kerrigan said store buyers are not factoring in the higher dealership earnings they gleaned in record times the past few years as they calculate future store valuations.

"Valuations don't rise and fall with current earnings," Kerrigan said. "Dealership valuations are based on what a buyer expects the dealership to do going forward."

As dealership valuations change, so too, do opinions on how those values should be calculated. Presidio Group, an investment banking and buy-sell advisory firm in Denver and Atlanta, revealed in its quarterly report what it calls its Presidio's Valuation Index. The inaugural report, issued in December, said the group believes applying blue sky multiples and multiplying by pretax earnings to calculate valuations is "far too simplistic and inadequate." Presidio thinks valuations should focus more on return on investment and less on blue sky.

In the Presidio model, blue sky accounts for about 60 percent of the total investment, with real estate about 30 percent and other assets accounting for the remaining 10 percent. The firm said each dealership has unique characteristics and earnings potential that affect its "predictable and sustainable cash flows." Numerous factors affect cash flow and sustainability, it said, including brand, reputation and local demographics.

"It's a more robust perspective for folks," Presidio President George Karolis told Automotive News. "Return on investment, ultimately, is all that matters. Calculating the right way is paramount."

Dealer Solutions Mergers and Acquisitions, with a U.S. headquarters in Naples, Fla., in its third-quarter Automotive Intelligence Report, found average per-brand blue sky multiples decreased 10 to 15 percent compared with the same period in 2022 in the U.S. and Canada, but that buyers remain willing to pay for the right opportunities.

Farid Ahmad, CEO of the brokerage firm, told Automotive News that his group is noticing that sellers have begun to rationalize that dealership profitability is trending downward. Some buyers and prospective buyers have been impacted by higher interest rates and their ability to borrow money to fund acquisitions, he said.

"They recognize that getting the home run, unless you have the right brand, because there are some brands that are very, very immune to all these interest rate problems, unless you have one of those brands, you had to readjust your thinking as a seller," Ahmad said.
Truist Securities, of Charlotte, N.C., in its fall 2023 Dealership M&A and Valuation Overview report, said blue sky multiples remain stable. But there are some headwinds impacting the outlook, including macroeconomic uncertainty, it said.

"Rising interest rates place upward pressure on the cost of acquisition capital and real estate cap rates, raising financial barriers for prospective buyers," the banking firm's report found. But still, "well-capitalized, growth-minded dealers remain active consolidators, able to capitalize on synergistic opportunities with platforms of scale."

Buy-sell activity remained brisk through 2023.

Through the third quarter, Automotive News tracked at least 289 transactions involving at least 428 dealerships changing hands. In that quarter alone, there were at least 96 transactions involving 145 dealerships. Those numbers were relatively flat compared with the same period in 2022, when 290 transactions involved 420 dealerships sold. In third-quarter 2022, Automotive News counted 97 transactions involving 151 dealerships.
Haig Partners said in its report that it believes 2023 will be the third-most active buy-sell year, behind 2021 and 2022.

Nancy Phillips Associates, of Exeter, N.H., also sees bustling times ahead. The buy-sell firm's Phillips Report, issued in August, covered dealership transaction trends from January to July 2023 in New England and greater New York areas. The number of transactions it handled, though not disclosed, rose year over year from 2022 to 2023, the firm said.

"We expect this [transaction] trend to continue for the simple reason that more of our dealership owners are not only approaching retirement age but have stayed extra years to take in the incremental profits the industry has provided," Nancy Phillips Associates said in its report.

Kerrigan Advisors predicted in its report that the busy buy-sell market trend will continue as dealers have "tremendous access" to capital from auto retailers' boon years since the pandemic.

The report predicted three factors figuring into buy-sell activity in 2024: Leasing dealership real estate is becoming more economical than buying it, automakers' EV strategies will impact both dealership valuations and when dealers decide to buy or sell, and weighing financial performances prior to 2019 is becoming increasingly irrelevant.

"It's just ancient history," Kerrigan said in an interview, referring to the 2019 metric. "I think the key point is that understanding the valuation is really based on what a buyer expects a business will do, and their return on investment requirements."