Capitalize on the changing structure of auto retailing

Do I stay in the business or exit?

The auto retail market has remained strong in recent years—despite a turbulent economy—leaving many dealers in a surprisingly secure position. While that may be welcome news today, it’s only natural to wonder what tomorrow might hold for your dealership.

You’ll need to adapt to keep up with recent technologies converging on the business. That includes retooling the services you offer and training your staff as more electric vehicles (EVs) become available. Servicing automated vehicles will add even more complexity and require additional skills.

Don’t forget the rise in online customer shopping and buying. There’ll be more rebuilding needed to restructure your entire sales process from top to bottom using the latest technology.

These changes will all require investment, management time, and organizational energy. Larger dealership groups with more scale and greater access to capital should have no problem making these changes, but such opportunities could present significant challenges for smaller dealers.

This combination of capital needs and major technology-driven change in a fragmented industry like auto retailing creates the perfect conditions for consolidation. If you’ve ever thought about acquiring other businesses or selling and transitioning your own, now’s the time to consider your options.

Take advantage of the thriving buy-sell market.

Start by analyzing the state of play with mergers and acquisitions in auto retailing. Buy-sell activity in the auto retail market is booming right now. Dealership profitability continues to outperform expectations, and there’s plenty of available capital to put to work for your business. Public dealership companies want to expand, family offices are looking for investment opportunities, and private equity (PE) firms like the high rates of return on equity in the auto industry. Blue sky values remain high for top franchise brands, with sales volume—a driver of brand value—pushing the leading premium and mainstream brands above their competitors. Import brands are favored over domestic brands, and buyers today are more comfortable with longer payback periods following acquisitions.¹

“We’re seeing more and more private equity, family office, and institutional investment in the automotive retail business, which for decades was closed to outside capital,” explains James Taylor, head of Automotive at Truist Securities. “As we move forward, we're going to see even more of this type of capital infusion. Businesses will likely stay private, but the capital will be coming in from outside the automotive industry.”

Consolidation will continue as dealerships expand through acquisitions, and outside investors move more capital into the business. As the size and scale of a dealership offers even greater competitive advantages, the number of owners may decline faster than the historical 2% annual rate.

Consider transitioning your business.

Are you ready to take stock of the future you’ve envisioned for yourself and your dealership? Start by asking these questions:

• Do you want to continue working as much as you are today?
• Are there other projects you would prefer to be working on right now?
• How will potential disruptors—like EV, automated vehicles, and digital experiences—affect your business strategy and desire to continue in the industry?
• Are your plans for the future dependent upon the value of your real estate holdings?
• Should you stay and expand your business, by acquiring additional franchises/locations that would provide economies of scale and contribute to your bottom line?
• How would taking on private capital partners affect the future of your dealership? A transition decision is a major one. Considering opportunities and long-term plans now will help you and your business prepare for shifts in the economy later.

A transition decision is a major one. Considering opportunities and long-term plans now will help you and your business prepare for shifts in the economy later.

Think about the future of your dealership.

While planning your next steps, be sure to offer suggestions to help guide the direction of your business after you’re gone. There are plenty of ways your company can still support your employees, your community, and—depending on how you structure your exit—even you after the transition.

Make sure your family is equipped to handle a transition.

In an industry where privately-owned dealerships are largely comprised of family-owned and operated businesses, family transitions are common.

Do you view your business as a legacy for your children and grandchildren? Would you like to see your heirs working in the company that you built? What if your children aren’t interested in running the business? What if they need more experience or don’t have the necessary skill set to be successful owners/operators?

You might have many reasons to avoid planning a family succession. Maybe the planning cost is too high, or you don’t want to give up control. Maybe you’d rather not think about your own mortality. Families that successfully integrate the next generation into the business start the process early, providing support, education, and experience.

If you’d rather not burden your heirs with costly litigation, unexpected taxes, and contentious relationships, or if you don’t want to leave them a failed business, plan ahead. Manufacturers are more likely to approve a family transition if comprehensive planning has taken place well in advance.

Taxes are an especially important consideration for any transition plan. Tax regulations that specifically apply to family-owned businesses could reduce or eliminate certain discounts and deductions which affect transfer value, so be sure to consult your tax advisors before finalizing any transition plans.

What happens if your heirs refuse to run the business?

When keeping your business in the family isn’t an option, consider selling it to private or public groups to secure funding for the next stage of your life.

Privately-owned dealership groups are looking to add additional franchises to complement their own dealerships. They have the experience, staff, and organizational skills to take over your business with relatively little disruption. Private dealers that have strong track records often receive manufacturer approval with ease, simplifying the closing process.

Family offices that aren’t currently in the automotive sector have emerged as a non-strategic investor group. Family offices evaluate investment opportunities based on long-term viability. They want to diversify their holdings and collect a solid return on their investments. They’re able to identify with a single sector business as well as the family aspects of auto retailing. Not quite ready to exit the business? Want to take equity out of your company? Family office investors usually allow next generation dealers to remain minority partners while providing you with liquidity immediately at favorable valuations.

Private equity firms are increasingly moving into the dealership market in pursuit of promising returns. PE buyers are often willing to accept longer payback periods, particularly when investing in premium franchise segments.¹ The key to a successful PE acquisition is securing experienced management to lead the dealership/dealer group after the acquisition. PE firms typically retain dealership managers as minority partners to run the business and smooth the transition process, which helps secure manufacturer approval.

Public groups need to grow to meet investor expectations. They’re expanding their territories, shoring up existing footprints, and using their scale to invest in new technologies. Ready to leave your company, but don’t have a succession plan in place yet? Public companies might be a good fit for you and your business. They have leadership experience and performance records that can help secure manufacturer approval for your transition deal.

Create an active succession plan.

Are you a seller, buyer, or shareholder in today’s market? If meeting looming technology changes head on is a challenge that excites you, consider acquiring another dealership. Investing in a company that aligns with your goals can be a prudent and lucrative decision.

Growth through strategic purchases of complementary franchises and/or dealer locations can improve your economies of scale, making major expenditures and improvements more cost efficient. That can boost profits and business value, setting you up for even greater opportunities in the future.

Make a decision.

Should you stay or should you go? It’s a complex decision. Dealership valuation, franchise multiples, manufacturer approval, legacy, and succession considerations all come into play. Preparing for an eventual transition early on—putting your personal finances in order, preparing the business, and maximizing your company’s value—will help ensure the integrity of your dealership and your retirement funding.

Regardless of your decision to stay in the business or move on, your options are plentiful.

Our auto dealer team has decades of industry expertise and a thorough knowledge of the market dynamics impacting dealerships. We invite you to speak to a Truist Dealer Services representative today. Visit us at Truist.com/DealerServices

¹Truist Dealer Insider, January 2021.

Truist Bank, Member FDIC. © 2022 Truist Financial Corporation.

Truist, the Truist logo and Truist Purple are service marks of Truist Financial Corporation.

Equal Housing Lender

Investment and Insurance Products:

• Are Not FDIC or any other Government Agency Insured
• Are Not Bank Guaranteed
• May Lose Value

Services provided by the following affiliates of Truist Financial Corporation (Truist): Banking products and services, including loans and deposit accounts, are provided by Truist Bank, Member FDIC. Trust and investment management services are provided by Truist Bank, and Truist Delaware Trust Company. Securities, brokerage accounts and /or insurance (including annuities) are offered by Truist Investment Services, Inc., and P.J. Robb Variable Corp., which are SEC registered broker-dealers, members FINRA SIPC and a licensed insurance agency where applicable. Investment advisory services are offered by Truist Advisory Services, Inc., GFO Advisory Services, LLC, Sterling Capital Management, LLC, and Precept Advisory Group, LLC, each SEC registered investment advisers. Sterling Capital Funds are advised by Sterling Capital Management, LLC. Insurance products and services are offered through McGriff Insurance Services, Inc. Life insurance products are offered through Truist Life Insurance Services, a division of Crump Life Insurance Services, Inc., AR license #100103477. Both McGriff and Crump are wholly owned subsidiaries of Truist Insurance Holdings, Inc.

Mortgage products and services are offered through Truist Bank. All Truist mortgage professionals are registered on the Nationwide Mortgage Licensing System & Registry (NMLS), which promotes uniformity and transparency throughout the residential real estate industry. Search the NMLS Registry.

Comments regarding tax implications are informational only. Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.

"Truist Advisors" may be officers and/or associated persons of the following affiliates of Truist, Truist Investment Services, Inc., and/or Truist Advisory Services, Inc. Truist Wealth, International Wealth, Center for Family Legacy, Business Owner Specialty Group, Sports and Entertainment Group, and Legal and Medical Specialty Groups are trade names used by Truist Bank, Truist Investment Services, Inc., and Truist Advisory Services, Inc.

Truist Securities is a trademark of Truist Financial Corporation. Truist Securities is a trade name for the corporate and investment banking services of Truist Financial Corporation and its subsidiaries. All rights reserved. Securities and strategic advisory services are provided by Truist Securities, Inc., member FINRA and SIPC. Lending, financial risk management, and treasury management and payment services are offered by Truist Bank. Deposit products are offered by Truist Bank.

Limited English Proficiency Support: Applications, agreements, disclosures, and other servicing communications provided by Truist Bank and its subsidiary businesses will be provided in English. As a result, it will be necessary for customers to speak, read and understand English or to have an appropriate translator assisting them. Truist offers the following resources for consumers that have Limited English Proficiency:

• Multilingual teammates available at our Multicultural Banking Centers
• Materials for some products and services are available in Spanish, Korean, Vietnamese, Mandarin, and other languages spoken in the communities we serve.
• Phone assistance in Spanish at 844-4TRUIST (844-487-8478), option 9. For assistance in other languages please speak to a representative directly.

New York City residents: Translation or other language access services may be available. When calling our office regarding collection activity, if you speak a language other than English and need verbal translation services, be sure to inform the representative. A description and translation of commonly-used debt collection terms is available in multiple languages at http://www.nyc.gov/dca.

• Limited English Proficiency Support
• New York City residents

Borrowers with Limited English Proficiency (LEP) needing information can use the following resources:

• The Consumer Financial Protection Bureau (CFPB) offers help in more than 180 languages, call 855-411-2372 from 8 a.m. to 8 p.m. ET, Monday through Friday for assistance by phone.
• CFPB additional resources for homeowners seeking payment assistance in 7 additional languages: Spanish, Traditional Chinese, Vietnamese, Korean, Tagalog, and Arabic. www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/help-for-homeowners/