Dealership buy-sell frenzy creates year-end hurdle

With the volume of dealership buy-sell deals on track to reach record heights in 2021, the usual year-end rush to complete transactions is hitting some snags.

Dealership brokers, lawyers and accountants say they are experiencing delays in obtaining automaker approvals for some transactions or in getting necessary tasks completed by third-party vendors in time to close deals before the December holidays.

For example, Mercedes-Benz USA last month sent a letter to its dealers advising them it needed buy-sell proposals or other requests requiring automaker approval submitted by Oct. 22 in order to turn them around by the end of the year, subject to state laws, according to people familiar with the letter.

"For everybody that touches a deal, the bandwidth is limited," Mike Sims, president of Pinnacle Mergers & Acquisitions, a buy-sell firm in Frisco, Texas, told Automotive News. "It's hard to schedule appraisals. They're backed up. The day before closing, you'll do a parts inventory. Those guys are hard to schedule. Everybody is just booked up. Buy-sell attorneys are swamped."

It's all created a ripple effect that is slowing turnaround time on some transactions, Sims said.

Lawyer Joe Aboyoun of Aboyoun Dobbs in Pine Brook, N.J., said his firm's transaction volume is about double that of previous years.

"In terms of processing the deals, the manufacturers are overwhelmed," Aboyoun said.

He cited Honda as an example of one automaker experiencing delays.

"They said they are overwhelmed and they may not get to requests until late in the fourth quarter," Aboyoun said, adding he has clients wanting to close deals by the end of the year who require Honda's approval.

Honda did not respond to requests for comment. Mercedes-Benz declined to comment.

Stephen Dietrich, a Holland & Knight lawyer in Denver who works on buy-sell transactions, called the year-end rush "frenzied."

"It's probably as busy at the end of the year as I've seen it," he said.

With uncertainty still looming around what will happen to long-term capital gains tax rates, some dealers want to be sure to finalize deals in 2021, Dietrich said. Rate increases have been proposed by lawmakers, but it's unclear when or whether such a boost might be approved.

Dietrich said a couple of deals he is working on and had thought would close this year now likely will spill into 2022 because of the inability to get all approvals taken care of.

"I have seen more deals sort of slipping and sliding around just because you have to adjust and deal with the different timing issues," he said.

Dietrich and Aboyoun told Automotive News they were seeing dealers pay a premium to some vendors involved in buy-sells — such as environmental consultants who conduct needed reviews on real estate — to try to speed up the process.

J. Duncan Douglas, a principal for Partner Engineering and Science Inc., of Torrance, Calif., estimates his firm's automotive services revenue — which includes work such as dealership environmental site assessments and building inspections — has nearly tripled this year compared with 2020, itself a record year.

Douglas said his firm in some cases in the past five months has requested an extra week to complete work for dealership clients if it fits timelines for deal closings.

"Through our staff increases and a lot of hustle by our dedicated automotive services team in completing due diligence work, we have been able to keep deals on track," Douglas wrote in an email.

Some vendors such as Scot MacNeill, owner of Pro-Count Inc., a Ridgefield Park, N.J., company specializing in dealership parts inventory counting in metro New York, said they are extremely busy.

"This year has been insane," said MacNeill, adding he is booked through February.

MacNeill said he has four buy-sell parts inventories scheduled this month, when he typically does a couple a month.

"I've had people offer to pay me 'whatever it takes, I'll pay anything,' " he said. "I don't do business that way."

Delays can pop up when an automaker sends a buyer an application that must be filled out, deal experts said, which can take awhile depending on level of experience. Automakers then typically have 60 days to respond, said Sims, who added his firm hasn't had any deals delayed as a result of the approval rush.

Edmund Reinhard, partner at accounting and consulting firm Crowe, said the structured process by automakers to approve deals is positive and helps protect dealers.

"However, it can be a frustrating thing," Reinhard said. "And so they, like all of us, are trying to flex up where needed, but it's just not like human capital is sitting there and you can plug another group of people into this process. Some of these transactions are 50 stores — Larry H. Miller, I mean, that's a lot of activity."

In one of several megadeals announced this year, Asbury Automotive Group Inc. plans to buy Larry H. Miller Dealerships and its 54 new-vehicle stores by year end.

GM wouldn't provide specifics on the volume increase, but Blake said the company has regularly shifted staff to evaluate proposals when buy-sell activity has increased.

Sims said submitting buyer applications is not an issue for the publicly traded retailers and large private groups because of their experience.

"They know what is going to be asked of them. They get those applications turned around in a week," he said. "If it's an inexperienced buyer or they're not adequately prepared, that can take a long time. That's what starts a delay."

A General Motors spokesman said in an email the only delays it is experiencing in approving buy-sell transactions are related to not receiving all the documents it needs to evaluate the proposal and make a decision.

"We have seen a steady increase in the number of proposals being submitted throughout the 2021 calendar year," spokesman Sabin Blake wrote. "Our traffic is up for the year and our team is adjusting to the pace accordingly."

Publicly traded Sonic Automotive Inc. is aiming to close its pending $700 million purchase of RFJ Auto Partners Holdings Inc. around the first week of December, CEO David Smith said in an interview last month.

Sonic has not run into closing obstacles for that deal or others it has worked on.
"We've had no issues," Sonic President Jeff Dyke said in the same interview. "None. A lot of paperwork. That's about it."

Tim Lamb, president of buy-sell firm Tim Lamb Group in Columbus, Ohio, said he advised sellers in deals being negotiated in August and September to be prepared for it "to take a little bit longer than usual" to close by the end of the year.

Lamb said he is involved in several deals expected to close in 2021, as well as many deals on track to close early next year where the parties weren't pushing for a year-end closing.

Some groups such as Performance Brokerage Services, an Irvine, Calif., buy-sell advisory firm, have experienced closing delays, said the firm's co-founder Jason Stopnitzky.

"It hasn't cost us a deal, or [we] haven't had a buyer walk away or a seller terminate the transaction," Stopnitzky said. "We seem to find a way to get them done, but definitely [we're] experiencing longer processing times than normal."

Stopnitzky said his firm had closed 58 transactions this year as of Tuesday, Nov. 9, and had another 32 in escrow, or waiting to close.

"By year end, no way they'll all close," he said. "Probably half of them" will close.

Several transactions have been in escrow for more than four months.

"I've been doing this 24 years," Stopnitzky said. "I have not seen it like this before."