High valuations, future worries spur some dealers to sell their stores

Bruce Patchett must have fielded two dozen calls over the past two years from people who wanted to buy Bruce Chevrolet in Hillsboro, Ore., a store the New Zealand native had operated for 41 years.

Patchett, 75, had no children to transition the business to and broker Joe Beaver from Dave Cantin Group's DCG Acquisitions called him last year at "the right time," Patchett said. He sold his store near Portland in April to Dick's Auto Group. "I just felt it was time for me to move on," he said.

A range of factors — from concern over future electric vehicles impacting all-important service and parts profits to heightened talk of direct-to-consumer sales and not wanting to make investments in digital retail to compete with larger groups or to adhere to mandated facilities requirements — has persuaded some dealers to sell their stores, buy-sell brokers say.

Many simply are at or near retirement age and may not have a succession plan and, like Patchett, are exiting the business altogether, brokers told Automotive News.

Also, dealers are motivated to sell amid record prices for their stores and fears of possible higher capital gains taxes under President Joe Biden's administration, adding urgency to the uptick in buy-sell activity this year, brokers say.

Dealers are concerned about capital expenditures that may be needed for their facilities to sell EVs, coupled with worries, particularly in urban areas, that service revenue could decrease in the future with more electric vehicles, said Brady Schmidt, CEO of National Business Brokers Inc. in Irvine, Calif.

"The sole proprietor that's owning a dealership is above 70 years old right now ... [and] you're thinking about, well, 'How much more money do I want to put into my business, and how much longer do I have before I don't want to do this anymore?' " Schmidt said. "So all of these things are driving that. When you have a dealer body that is on the older side, any of these things are going to drive turnover."

The buy-sell market over the past few months has seen a lessened interest in Volvo franchises following Volvo's March announcement that it plans in the future to sell its EVs online and at set prices, said Erin Kerrigan, managing director of sell-side firm Kerrigan Advisors in Irvine.

While Volvo store valuations could be impacted, Kerrigan has not seen a rise in Volvo stores going on the market.

"Many dealers are wondering about the changes that will come with electrification and the OEM changes that may come as a result of a desire to have a more streamlined sale process that is more direct to consumer," Kerrigan added. "And that [Volvo] comment just further raised eyebrows of all dealers in their concern about the potential for OEMs to try and work around the franchise system."

Dealers' wariness isn't just with digital EV sales, Kerrigan said, but with "one-price" mandates for new vehicles.

She said the change is big because dealers last year during the pandemic and even more so during the recent inventory shortage have been able to adjust pricing to help boost new-vehicle gross profits.

"In a one-price, online format, dealers would no longer have that lever to pull in the event that inventory shrank or in the event that sales decline," Kerrigan said in April.

Dave Cantin, CEO of Dave Cantin Group, said the auto industry's move to EVs, among other factors, has dealers "maybe fearing now more than ever what the future [of auto retail] really is to bring."

And some dealers who have operated their business a certain way over decades may think now is the time to sell, he said.

"So it's a combination of EV, it's a combination of direct-to-consumer, it's a combination of, hey, look at what Amazon's done only in the last seven to 10 years," he said. "I mean, you can buy anything you want from sitting at your kitchen table going to Amazon. What stops that from being your next Toyota Camry in a year from today?"

Some brokers such as Cantin believe the industry's consolidation of dealership ownership is picking up steam amid private and public groups such as Lithia Motors Inc. briskly buying stores.

Glenn Mercer, a consultant who has authored studies for the National Automobile Dealers Association, said in a 2021 update to his "Dealership of Tomorrow" report that consolidation of dealership owners continues, but "slowly." Mercer wrote that there are now about 7,500 owners, down from 10,000 a decade ago.

The vast majority of the nation's 16,623 franchised dealers — some 93.5 percent — own between one and five dealerships, according to NADA Data for 2020. That figure is down from 96.2 percent in 2011.

The percentage of dealers who own between six and 10 stores grew to 4.3 percent last year, up from 2.7 percent in 2011. And the percentage of dealers who own between 11 and 25 stores has grown from 0.9 percent in 2011 to 1.7 percent last year.

Cantin predicts that mergers and acquisitions could cut the number of dealership owners by a third to a half in the next five years.

"You're going to see a great deal of consolidation due to this M&A frenzy from now to I think 2025," he said.