INCLINE VILLAGE, N.V. – The auto dealership buy/sell market set new records in 2020, despite starting the year with pandemic closures and lockdowns, and swept past 2015’s previous high-water mark, redefining the value of the auto retail market, according to the 2020 Q4 and Full Year Blue Sky Report® by Kerrigan Advisors. Overcoming the standstill at the end of the first quarter, the buy/sell market came back with a vengeance in the second half: Over 176 transactions were completed after July 1, with a total of 289 completed for the year – a 24% increase over 2019 and 47 more transactions than in 2015. In the fourth quarter alone, 103 transactions were completed – another record.
Most impressive of all is that the source of improved profitability was not from high-margin fixed operations which actually declined.
“This record-breaking market was driven by a resurgence in dealership profitability,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “This happened even with a dip in revenue, thanks to improvements in new and used vehicle gross profits and floorplan and SG&A expense reductions. Most impressive of all is that the source of improved profitability was not from high-margin fixed operations which actually declined.”
“Importantly, the numbers of multi-dealership transactions continued to rise through the end of the year, setting another record (74 transactions), which is over a quarter of all buy/sells,” continued Kerrigan. “That reflects auto retail’s significant consolidation trend.”
Increasingly, according to the report, owners of large dealership groups are choosing to sell their businesses at today’s high valuations rather than accommodate the changes and investments required in terms of electric vehicles and digital retail sales. This resilient – and resurgent – auto retail performance of 2020 has increased demand for dealerships and has continued to fuel valuations. For the year, average dealership blue sky values rose to $7.7 million, up 20.7% thanks to a combination of higher earnings and rising multiples. Valuation multiples rose even higher in high growth, business friendly states such as Texas, Florida, Arizona, Colorado, Georgia, Nevada, North Carolina, South Carolina, Tennessee and Utah.
“The combination of today’s low yield investment environment, and access to low-cost financing, has driven dealership valuations upward,” said Ryan Kerrigan, managing director of Kerrigan Advisors. “Even as buyers adjust 2020 profits to offset the impact of one-time events, earnings for 2020 reached record levels – and that drove valuations to greater heights.”
Like private dealership valuations, publicly-traded dealerships also enjoyed a record year. The Kerrigan Index™, comprised of the seven publicly-traded dealership groups, reached a record level of 1,006 in March 2021, up 238.6% from the March 2020 low. The publics are shifting their messaging to focus on their distinct digital retailing strategies, and to embrace the industry’s move to electrification. Armed with strong valuations, many are committing to growth through accretive acquisitions; their advantage in the buy/sell market is their access to lower cost capital.
In the report’s analysis of specific brand valuations, Toyota’s blue sky multiple was increased to a range of 6-7 times, reflecting the value of Toyota’s partnership model with its dealer network, especially as the industry shifts to electric vehicle fleets and online direct sales.
“As the future unfolds, OEMs who value their dealer network’s contribution to their success are likely to thrive,” said Erin Kerrigan. “We increased Toyota’s blue sky multiple because we see a true partnership with its retailers. That relationship will ensure Toyota’s franchise values remain high, even as the industry evolves toward a digital and electric future.” This is important, according to the report as, in the fourth quarter of 2020, there was a dramatic shift toward electrification, with nearly every OEM presenting plans to develop an electrified vehicle fleet as a result of political pressure, as well as in reaction to Tesla’s success on Wall St. and at gaining 79% electric vehicle market share.
“Manufacturers that consider mimicking Tesla’s retailing strategy should keep in mind that 2020’s record earnings were driven in large part by auto retailers’ ability to adjust pricing,” said Ryan Kerrigan. “In a one-price, online arena, dealers’ ability to do so will be significantly curtailed, as will future fixed operations income.”
“How OEMs shift to electric and online sales will determine future franchise value,” continued Kerrigan. “Plans that are supportive of their dealer networks, and value the auto retailer contribution, will likely see their franchise values rise.”
The report also identified the following four market trends, which will meaningfully impact the buy/sell market in 2021 and beyond:
- Buyers’ tremendous access to capital leads to increased competition for dealership acquisitions
- Buyer demand in Texas and Florida drives multiples and valuations higher in those states
- Sellers increasingly expect valuations that recognize 2020’s improved profitability
- Facility investments factor into dealers’ transaction decisions
Highlights from the Q4 2020 and Full Year 2020 Blue Sky Report® by Kerrigan Advisors include:
- Average blue sky values rose 20.7% by the end of 2020, driven by an increase in dealership earnings and rising buyer demand.
- The Kerrigan Index has risen 238.6% since March 18, 2020 and outperformed the S&P 500 by 232.7%. It passed an important milestone on March 5th 2021, surpassing 1,000 for the first time in its history.
- 2020 was a record year for buy/sells with 289 transactions completed, up 24% from 2019
- 103 transactions were completed in the fourth quarter.
- Import luxury franchises increased their buy/sell market share in 2020, achieving an impressive 20% of buy/sells, up more than 50% from 2019’s level.
- Average dealership pre-tax profits rose 48.3% in 2020, despite a 4.2% decline in revenue.
- Fixed operations represented just 44.6% of the average dealership's gross profit in the fourth quarter of 2020, down 11.5% from 2019. Dealers increased gross profit margins on new and used vehicles by 32.0% and 8.2%, respectively.
- More owners of large, multi-dealership groups are choosing to sell rather than compete with consolidators who rely on corporate, rather than personal, balance sheets to expand their business and invest in auto retail’s evolving future.
The Blue Sky Report®, published by Kerrigan Advisors, is the auto retail industry's most comprehensive and authoritative quarterly report on dealership M&A activity, as well as franchise values. The quarterly report, received by over 9,000 industry recipients in 35 countries, includes analysis of all dealership transaction activity for the year, and lays out the high, average and low blue sky multiples for each franchise in the luxury and non-luxury segments. For more details and to preview the report, click here.