Transactions soar in a seller's market

The brisk pace of dealership sales continued from late 2020 into this year in what buy-sell experts describe as a seller's market amid record-high prices for dealerships — even as some worry that a possible increase to capital gains taxes could cut into the profits.

Haig Partners, a buy-sell firm in Fort Lauderdale, Fla., estimated in its first-quarter Haig Report that 99 dealerships sold during the first three months of 2021, up a whopping 46 percent from the same period in 2020, when dealership transactions came to a standstill in the early days of the coronavirus pandemic.

"Valuations are higher today than they have been really at any time in the past," said Alan Haig, president of Haig Partners. "And for any dealer that was getting close to retirement or any dealer that's concerned about a lack of succession plan or for any dealer that is concerned about an increase in taxes, it's really an excellent time for them to sell the business."

Haig's firm already has closed 12 transactions this year — about the same number of deals his business brokered in all of 2020, he said. And Haig said he expected the second half of 2021 to be even busier than the first.
Kerrigan Advisors, a sell-side firm in Irvine, Calif., estimated in its first-quarter Blue Sky Report that dealership transactions jumped 20 percent during the first three months of this year, to 66. Transactions, as counted by Kerrigan Advisors, can be single- or multiple-store deals.

Erin Kerrigan, the firm's managing director, wrote in the report that the average blue-sky value — the intangible value of a dealership, including goodwill — reached an all-time record of $8.5 million in the first quarter, up 10 percent from $7.7 million at the end of 2020. Haig Partners estimated that peak average blue-sky was about $9 million in the first quarter, up by a third from the end of 2019 and 10 percent from the end of 2020.

Joe Ozog, president of Ozog Consulting Group in Scottsdale, Ariz., says there are plenty of buyers on the market, many of them aggressive. They have amassed a lot of cash in the past few years and aim to expand their dealership counts, brokers say.

Publicly traded auto retailers were active in the first quarter, spending $443 million to buy dealerships, up from about $135 million a year earlier, according to both the Kerrigan and Haig reports. Haig estimated the publics bought 18 dealerships in the quarter.

Lithia Motors Inc. has been a "robust" buyer, he said. It has acquired dozens of dealerships this year as part of its growth plans.
"But the other public companies are also returning to the table," Haig said. "And we have hundreds, if not thousands, of privately owned groups that have a lot of capital, a lot of confidence, and want to grow as well."
All the interest has many brokers saying they are as busy as they have ever been, with no immediate signs of a slowdown.
Performance Brokerage Services, an Irvine, Calif., buy-sell firm, said this month that it was projecting a record year for the company, already having completed 34 deals.

Brady Schmidt, president of National Business Brokers, a buy-sell firm also in Irvine, said his firm has closed more than 20 deals this year.

"We can't keep listings," Schmidt told Automotive News. "We normally carry between 25 to 40 listings over the last few years. And we are literally selling stores almost as quickly as we're listing them right now."

Don Brown, owner of Midwest Brokerage in St. Louis, said he has closed four transactions this year, with another two pending, "which is a good year for me. And I've got half a year to go."
On April 1, DCG Acquisitions, part of Dave Cantin Group, had 41 deals pending, up from just nine at the same time in 2020, CEO Dave Cantin said. Of those 41 deals, about 10 have since closed, he said. Cantin said many buyers were taking advantage of low interest rates.

For Ozog, this is the most buy-sell activity he has seen in 25 years in the business. His firm has closed on six transactions this year, and he said he expected to exceed last year's 10.

Activity is so high because earnings are at record levels for dealers, Ozog said. The threat of a capital gains tax hike under President Joe Biden also is "really starting to scare dealers a little bit" and motivating some sellers. Biden proposed nearly doubling the long-term capital gains tax rate to 39.6 percent as part of the American Families Plan released in April.

"It's just a perfect storm for a seller," he said.

Ben Hicks, CEO of Hicks Management & Consulting Group Inc. in Arlington, Texas, is seeing a similar market. His firm has closed four deals this year and is working on another four, he said. While the market is very active, some dealers are waiting to see what will happen with the capital gains tax, he said, and the proposed increase "would kill the buy-sell market."

Tim Lamb, president of buy-sell firm Tim Lamb Group in Columbus, Ohio, predicts his company will facilitate the sales of a record number of dealerships this year. Tim Lamb Group closed deals in the first quarter involving 25 dealerships.

But new listings have slowed in the first half of 2021, Lamb said, because "dealers are making great money right now."

"It's just really difficult to walk away from a business when you're doing that well," he said.

Dan Murphy has seen that.

In the past year, Murphy, managing member of D.T. Murphy & Co. in Glen Ridge, N.J., lost two listings — a Ford dealership and a Chrysler-Dodge-Jeep-Ram store, both in New Jersey.

"The business had come back to the point where they no longer wanted to sell their dealerships, and they asked me to terminate the transactions," Murphy said.

Still, many dealers are opting to list as record dealership profits drive store values to new highs, brokers say.
Presidio Group, an investment banking and dealership advisory firm in San Francisco, has closed three deals this year, including the supersized sale of Michigan's Suburban Collection and its 34 stores to Lithia.
"We were extremely active in 2020, and we're expecting to double, more than double, our pace from 2020," Presidio President George Karolis said.

But sellers in this market have to be rational, Karolis said.
With the recent record profits and sales, "some dealers that are thinking about selling want to get value just based on what they did the last month or two," he said. "And that's not quite realistic."