Stay or Go: Insights and Perspectives on 2022 M&A Activity
Stay or Go: Insights and Perspectives on 2022 M&A Activity
Over the last three years, dealers earned record profits, dealt with the effects of a chip crisis, inventory issues and changes in relationships with manufacturers.
On top of that, inflation and interest rates continue to rise impacting expenses and revenue. It is no surprise that there is a lot of activity that has dealership owners are asking, “Should I stay or should I go?”
Perhaps the biggest impact is the relationship manufacturers have with their dealerships. Some like Buick are rethinking the size of their network and are following Cadillac’s initiative to buy dealers out, thus decreasing their network. The impact of electric vehicles (EVs) in urban and rural markets is still to be determined but manufacturers, no doubt, are moving to them. The ROI on smaller dealers – facility renovations, equipment, and training requirements – isn’t there.
If you are an owner in this situation and don’t have a succession plan, you may be at risk to receive less for your life’s work the longer you stay in the game. Used car prices are coming down as well as new car gross profits. Due to interest rates, monthly payments for customers are going up. Last month a report showed that due to rates and inflated selling prices, over one-third of recent F-150 buyers had monthly payments over $1,000. Overall, 14.3% of all new vehicle owners are paying over $1,000 per month.
Customers are financing for as long as 84 months to get a payment they can afford. Those customers will be upside down in their vehicles for years and out of the normal trade cycle. That’s why this month and next are critical to a favorable outcome of a sale transaction.
Is it possible to stay in the game and ride it out a bit longer?
Any dealer who chooses to play the long game with EV will need to make a large investment in the next couple of years. At Ford, if you go all-in on EV it is over $1.2M. This pays for a lot of your infrastructure costs at the dealership (chargers, equipment, etc.). It will take time to recoup that investment.
Uncertain economic times also may play a factor. It may limit the number of buyers interested in buying at your dealership. In the last few years, buyers have been getting a great return on their investment. But with current trends, and the fact that smaller dealers could go away in the next 8 to 10 years, it’s not the time to hesitate.
Also, small rural dealers already have low inventory. Dealers with 20-30 locations are getting the best stock. And, in the used car arena, our experts are hearing prices are tumbling right now and are not generating the large profit margin for dealerships as they have in the last couple of years.
If you are ready to sell, who is going to buy? Three stand out:
- Tier 1 dealers that sell 400-500 cars a month and want to expand into your market area.
- Private dealer groups are buying, too, but also buying “markets.” Meaning, they want to own in larger cities up to, for example, an hour away because they are building for a future they can support.
- Your junior partners who have the money to buy and want to get into their own ownership structure. They can see the future and are figuring out how they fit into it through different management strategies. They can play the long game.
Now is the time to make the decision.
