Buy-Sell Q&A: Future-proofing your dealership

Q: As consolidation in automotive retail continues at a record pace, what’s the most important thing smaller auto groups and independents need to consider to not only survive, but thrive?

Haig: The forward-thinking retailers we know are focused on giving the customers what they want: a huge selection, a fair price, and a convenient way to buy. It all starts online now as the pandemic accelerated the shift towards online shopping. A world-class online experience is essential for consumers of all ages, but particularly the upcoming generation. We encourage dealers to compare their digital offerings, starting with their websites along with their consumer propositions with what buyers are offered at CarMax, Carvana and publicly traded retailers.

My kids are in their 20s and have grown up accustomed to buying almost everything they want online. They want to do what is known to them - tap some buttons on their phones or laptops for all their needs. The idea of going into a store and negotiating with a stranger is not going to happen. They have a hard time even talking to strangers in person! So, what can dealers do to satisfy this next generation of customers? A couple of areas where dealers can develop out new processes and technologies are:

Sales - Just about every customer wants to choose from a big selection of vehicles, pay a fair and transparent price, and be treated well in the process. Since the average dealer owns just two stores today, they will need to add many more franchises to offer customers a large selection of vehicles. Also, the buying process, either online or in the showroom, will need to be simple and transparent, so one-price is increasingly likely for sales.

Service - Customers want to trust their technician and have the process be as convenient as possible. A growing number of customers will expect pick-up and delivery, which can also be good for the dealer since these ROs are often much more profitable than when customers are waiting. In addition, dealers who embrace leveraging digital and online tools to allow customers to schedule, see service stats, and pay online will create additional stickiness.

Retailers that offer a big selection and frictionless commerce will future-proof their dealerships. Those that don’t will be fine so long as inventory remains in short supply. But when retailers have to compete for customers again, those who haven’t expanded and evolved are likely to see their existing customers gradually defect to larger dealer groups and have a hard time attracting new customers. The good news is that there is still plenty of time for small retailers to increase their competitive strengths. For all the talk about consolidation, the Top 10 Groups still have less than 10 percent market share.

Q: How many dealerships will a dealer need to own to thrive in the future?

Haig: We don’t think there is a magic number that leads to success in the future. For instance, if you owned a Porsche dealership anywhere in the US, or a Toyota store in any single point market you will likely enjoy a comfortable level of success for decades. But, in more competitive environments, we think ten dealerships of different brands should be enough to begin to have critical mass and be relevant to a consumer searching for a one-stop transportation provider. The ten most common brands cover about 75 percent of the market. With ten locations, a retailer should be able to offer around 4,000 new and used units for sale. In a larger market, a group might need 20 plus stores to be relevant since there will be a lot more competition. And these stores need to be in the same market to be convenient to the customer.

In the words of Don Flow of Flow Automotive in North Carolina, “local scale matters more than national scale.” If you provide more choices to customers in your area than a national company, then you should win locally. Flow Automotive owns over 30 stores in that state, so it has a larger inventory and more franchises than any of its competitors. A group with 250 stores in 250 cities has little ability to dominate locally. Also, when a retailer gets to ten or more stores, he or she can afford to employ specialists such as variable operations trainers, fixed ops trainers, marketing experts, and a CFO. These specialists should allow larger dealers to further outperform smaller ones. So not only will they sell more cars per dealership, but earn a higher net to sales profit margin. Greater profits fund further growth, so larger retailers can continue to grow and become more resilient.

Q: If you owned a dealership, would you want your child to become a dealer one day?

Haig: Auto franchises have been the best family businesses that I can think of. And almost every household is a consumer and spends thousands of dollars each year on your products and services. As a result, dealerships have generated massive wealth for families across this country.

But as we discussed above, to remain successful in the future, retailers will need to be larger and more sophisticated. So that means my child would have to be willing to work hard every day and invest essentially all of their net worth into building a strong business that is capable of competing with much bigger groups. Because of the need to get big or get out, there will be fewer caretakers of dealerships in the future, and more builders of empires. An owner will need to think less on month-to-month profits, and more on how to achieve long-term objectives. The term “dealer” may evolve to “investor.” If my child had that level of intelligence, confidence and energy, then I would eagerly encourage him or her to join me or buy me out. They could have an incredible career building a business much larger than the one that I built. But if I questioned my child’s abilities to put in the work and take the risks, then I would do them a favor and suggest other opportunities.

Q: Growing from two stores to ten or more sounds difficult. How likely is this to happen?

Haig: Growth requires capital, desire, and expertise. The good news is that there is plenty of capital available for dealers who want to grow. Banks and captive lenders will typically provide at least 50 percent of the purchase price of a dealership acquisition. And there are investment firms that are willing to partner with talented operators to help them with any additional equity capital. We are even seeing situations where two dealer groups are considering merging to create a single more powerful group.

But acquisitions are not easy. We refer to dealerships as sticky assets: hard to get, and hard to get rid of. Our firm co-authored NADA’s “Guide to Buying or Selling Dealerships” that provides guidance on how to develop and execute an acquisition strategy. Among our other recommendations are to be in the market every day, collaborate with an expert team of advisors, and be prepared to buy aggressively when a dealer finds the right opportunity in the market where they want to grow. We believe it’s possible for almost any group to acquire one or two dealerships per year. Over a decade, that would mean a retailer/investor could build a powerful group capable of winning and retaining customers. Of course, the retailer needs the support of the OEMs to grow this large, and that means being sales effective and having high CSI at all locations.

Q: If a dealer decides he doesn’t want to grow but is not sure about selling, how can he test the waters without disclosing their intentions?

Haig: We regularly enter into confidentiality agreements with dealers to provide them with an estimate of how much a buyer would pay for their dealerships in the current market. These valuations are a way for us to learn about a potential client, and for the potential client to learn about us. We provide the dealer with the data and honest rationale for what we believe buyers would offer for their dealerships. There is no commitment from the dealer to hire us, although we hope that happens if they decide to move forward with a sale. Most of the retailers who engage us to sell their companies are interested in maximizing the price, so we recommend going to multiple parties at the same time, after they have signed confidentiality agreements, to make sure we capture the best offer available in the market. But for some clients, confidentiality is more important than the last dollar. For those clients we can go to the single best buyer we know who would be highly interested in their business, given the location, brands and expected price. Our valuations are different than those needed for estate planning purposes, partnership disputes, divorces, etc. We refer dealers looking for those kinds of valuations to our friends who work for CPA and valuation firms with expertise in auto retail.

Q: How do dealers recruit the best and the brightest people to create a new generation of leaders?

Haig: For starters, dealers should clearly tell entry-level people looking for jobs how much money they can make in our industry over time. If college kids knew they could make $50K in their first year out of school and eventually $300K or even $1M running dealerships, we are confident more would choose auto retail over consulting, accounting, banking, technology or other fields that attract many grads today. Young people with less education can be trained as technicians and also earn a great living. Retailers would benefit by demonstrating how young people can have enjoyable and lucrative careers, instead of just hiring to fill an empty position.

One leading dealer we know has developed a training program for future leaders. He recruits at local colleges and then rotates these trainees through various departments and different dealerships in six to twelve-month stints. After five years or so, some of these recruits are ready for management positions. After a decade, they might be ready to assume leadership of a small store, and after 15 years they could run a large store. If a local dealer can offer a wide selection of vehicles via a customer friendly selling process and have the best talent, there will be little that can stop his or her success.

ABOUT THE PANELIST

ALAN HAIG

President, Haig Partners Haig Partners LLC helps dealers maximize the value of their businesses. They have unmatched experience with executives from leading retail dealer groups and financial institutions and have advised on the purchase or sale of more than 575 dealerships for over $9.0 billion, and have represented 22 groups that qualify for the Automotive News Top 150 Dealership Groups ranking, more than any other firm. Haig Partners leverages its expertise and relationships to lead clients through a confidential and customizable sales process that also maximizes the value of their businesses. They author the Haig Report, the leading industry quarterly report that tracks trends in auto retail and their impact on dealership values, and are co-author of NADA’s Guide, “Buying and Selling a Dealership.” For more information, visit www.haigpartners.com.