In pandemic, dealers bullish on valuations

More dealers than a year ago are bullish on the valuations of their dealerships over the next 12 months, despite the coronavirus pandemic and hits to the economy, according to a survey by Kerrigan Advisors.

The second annual survey by the dealership advisory firm found that 33 percent of dealers expect the value of their stores to rise in the next year, up from 26 percent of dealers surveyed in 2019. Another 53 percent expect values to remain the same, down from 60 percent in 2019. And 14 percent expect a decrease in dealership values in the next year, the same percentage as in 2019.

"The rebound in auto sales coupled with reduced dealership expenses and higher vehicle margins will result in record industry earnings in 2020," Erin Kerrigan, managing director of the Irvine, Calif., firm, wrote in a report summarizing survey results.

Through August, net profit for the average new-vehicle dealership was $1.1 million, up 13 percent compared with the same period in 2019, according to the National Automobile Dealers Association.

Kerrigan Advisors, in another recent report, estimated the blue-sky value of the average U.S. dealership was $6.6 million in the second quarter, an increase of 3.3 percent from the end of 2019. Blue sky is the intangible value of a dealership, including goodwill.The dealer survey was conducted from June through October and included responses from more than 680 U.S. franchised dealers. They included owners of domestic- and import-brand stores and of single stores and multistore groups.

Survey findings included that 47 percent of dealers expect the pandemic will lead to more buy-sell activity in the next year, 26 percent expect fewer transactions, and 27 percent predict no change.

Dealers were queried about how COVID-19 would affect their plans to buy dealerships. Nineteen percent said they would be less acquisitive, 17 percent said they would be more acquisitive, and the majority — 64 percent — reported no changes to their plans.

The contrast of those findings can be attributed "to a rise in dealers who are considering a sale and thus expect more dealership buy-sells," Kerrigan said in the report. "These results are consistent with our expectations for a significant increase in buy-sell activity in the second half of 2020 and a growing pool of dealerships for sale over the next 12 months."Dealers were most optimistic about Subaru, with 38 percent of respondents expecting values for those stores to jump.

Dealers were most pessimistic about Nissan and Infiniti, with 69 percent of respondents predicting Nissan store values would fall and 65 percent saying that about Infiniti stores.