The automobile industry has encountered significant changes over the last 20 years. We have seen public companies come into the market. We have seen the dot-com balloon inflate and burst. We have seen banks offer money to anyone with an IQ over room temperature and then call loans from the smartest, brightest and most successful in our industry. We have seen franchises devalued, nuked, given away and arbitrated as manufacturers went belly up and gave up control to our government. And here we are with stock market returns struggling to beat inflation and the investment world recognizing that auto dealerships are a good buy at six, seven and eight times adjusted earnings.
Although private equity has been an active player in the manufacturing world, low and behold we now have private equity entering the retail auto dealership world. You may say, I don’t see them but let me assure you they are around. They have been knocking on my door for over two years and I know that I am not the hot spot for acquisitions. How I got on their hit list is beyond me, but to be sure if the kinder and more respectful of these predators are talking to me the flesh eaters are already in place.
You’re probably saying, we’ve been through this with publics so what’s the big deal? And, what does some fresh cash from private equity have to do with your dealership and succession planning? Likely nothing, but for some of us (I hate to lose a client to a dumb buyer) private equity will threaten the succession of your dealership to your grand children and/or key managers. Publics are as ambitious as you are; they only lack your passion, commitment and hard earned experience. They have shareholders to answer to; expect generous returns and therefore will not overpay for your store.
Private equity is different. They have no knowledge of the auto business and dream of creating a private or public dynasty. They deal through front men who have sold them on the great returns in this market. The actual investors lack for nothing that money can buy. Sure they are represented by knowledgeable and aggressive brokers or consolidators but these “fronters” are serving their own interests. Private equity is a challenge to your succession because their return on investment expectations is lower than yours or the Publics and therefore they are willing to pay more for a dealership. Furthermore, they are always thinking exit strategy and expect to bolster the return on sale. These higher prices will be tempting to those that are not dedicated to succession. In the presence of dangling higher multiples you or more likely your children will ask, “Why should I put up with crap from my siblings, my partners, my franchiser, my bank when I can cash that check?” Unfortunately as a succession planner, in the face of a dumb price, I cannot challenge the reasonable nature of these questions. Therefore the succession of your family legacy could be threatened by private equity; maybe to the good; maybe to the bad.
Furthermore, the private equity can become an impediment to your growth. Like most of the publics they are only interested in the stellar franchises in the “can’t lose” markets. If you have your sights set on one of these high profile deals and find yourself competing with someone who you know lacks the cash or the credit to make it happen, you have encountered a front man who has found the honey pot: a source of private cash and credit to leverage their personal aspirations. Consequently the price of this sweet deal is going to become inflated or you are going to get out-bid; your growth is going to be frustrated.
So what are you to do, while “Seeking Succession” and facing what appears to be an extraordinary temptation or frustrating impediments to growth? With regard to temptation, take your succession planning seriously and listen both to your personal instincts and the objective assessment of your succession planners. Go for succession but accept that if you don’t have capable, competent and most important committed successors, your successors could easily succumb to the temptation presented by private equity. Your legacy may not make it to your grandchildren because your children will take the money and run; which I might add is not wrong; it is just reasonable human nature to those that are presented a dumb price and not willing to accept the sacrifice and vulnerability to maintain the autonomy and independence of a business owner.
With regard to growth, you are going to have to accept lower returns or assume the loco weed has broken out of Colorado and you are not going to pay a price beyond reason. I like the second options because Dr. Merlot and I have been around long enough to recognize the auto industry leads all economic cycles; both the up and the down. There is an ebb and flow to the auto market and there is a direct connection between passion and productivity. We understand that you don’t have to be a great operator to make good money today. But this “no brainer” market will change and private equity will become worried about their exit strategy and prices for those stellar deals will come back to a reasonable level.
Fundamentally be aware of the succession challenges created by private equity. Remember in succession planning we are dealing with the marathon, not the sprint. Think long term and don’t give way to reason. We’ve dealt with worse. You’ve got this! Private who?
Loyd H. Rawls, President/CEO of The Rawls Group, has specialized in succession planning for closely-held, family owned businesses since 1973. Well respected in his field, Mr. Rawls is a highly requested speaker and has published numerous articles and publications on this subject such as “Seeking Succession: How to Continue the Family Business Legacy” and “The Succession Bridge: Key Manager Succession Alternatives for Family Owned Businesses.” For more information visit www.rawlsgroup.com
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