Q: What are the benefits to dealers for a partial sale of their business rather than a full sale?
Haig: As for divestitures, dealers typically can reallocate capital from under-performing assets to better-performing assets. Plus, dealers can eliminate the headaches that can come from far-flung or poorly performing dealerships. The public companies regularly divest stores acquired in the past so they can invest in stores that are a better fit for their future plans. Smaller dealers also prune stores to optimize their portfolio. Not all acquisitions work out, and there is little benefit for owning a poorly producing asset.
For sales of minority or majority equity stakes to investors, the main benefit is that dealers can sell stakes in their companies at today’s high valuations, without fully exiting the business. They can continue to share in the high returns on equity that dealerships provide.
The sale of a minority stake generates cash for dealers to use to diversify their wealth into non-automotive investments. Diversification is a smart strategy. In addition, if they come across an attractive acquisition target, they can buy the stores with the help of their investor partner without putting all of their capital at risk. They can grow and diversify. And since they are only selling a minority stake, the dealer remains in control of their business. The dealer, not the investor, interacts with the OEMs, banks, management team, customers, etc.
The sale of a majority stake creates even more liquidity for a dealer, so it allows for more diversification. And if there are opportunities to acquire additional stores, the investor will provide most, if not all, of the capital needed. The dealers will likely still be involved on a daily basis, but much of the stress of being the dealer principal of a large business can go away.
Dealers who sell a minority interest or a majority interest will still retain their goodies, including health care, demos, dealer trips, etc.