Buying or Selling Your Dealership: 5 Things You Must Consider
Dealership profits continue to soar, and dealership valuations are at record-high levels. This is creating a surge of activity in automotive retail buy-sell. All this activity is creating wonder around buying or selling, prompting many dealers to revisit their succession plans.
Champ Rawls, a Succession Planner with The Rawls Group, and Alan Haig, President of Haig Partners, the leading buy-sell advisory firm to retail dealers, share their thoughts for those dealers looking to buy or sell.
Dealers Interested in Growing:
Our very own succession planner Champ Rawls answers the following questions:
Q: What are the advantages of getting bigger?
Champ Rawls shares:
Generally, organizations grow because they rely upon good fundamentals: people, culture, and processes. Getting bigger grants those organizations the ability to expand these characteristics and often better a bad situation by imprinting a winning/successful culture somewhere where it could be lacking. We can usually walk into a dealership and instantly tell if they have a winning culture or not. Those who can marry a winning culture with a growth strategy will always win out.
Q: How do you approach getting bigger?
Champ Rawls shares:
There always has to be a strategic plan. And it may sound cliché, but also a vision. Many dealers have grown just to see themselves struggle. And the work associated – blood, sweat, and tears – is all for nothing when it does not work, and the store(s) must be sold. So those who think developing a strategic plan and a vision are a waste of time are more likely the ones to crawl through struggle. Those who go through the process and ask themselves, “where are we going and how are we going to get there?” are the ones who create a foundation for growth.
If you have an idea of the end goal, then the steps to get there are easy to come by. We always consider bench strength and people as two fundamentals needed to grow, and they are the areas that add value to your business.
With it being a great time for dealers to sell, what are recommendations for dealers who may not want to get out entirely?
Champ Rawls shares:
Consider selling the majority and retaining a piece of the pie. This strategy removes you from the responsibility of being the ultimate decision-maker or Dealer Principal and provides a premium on the lump sum with the sale of the majority in stock. Additionally, retaining a piece of the pie allows you the ongoing benefits of profits and owning a dealership by maintaining minority status.
For dealers who have the vision and goal of ensuring a specific financial future for their families, the current environment may prove to exceed the goals you have in your current plan. These are the times to make sure the plans you have built or the assumptions you have made regarding next-generation ownership/transfer are what your family desires.
Dealers Interested in Selling
Alan Haig with Haig Partners shares the following:
Q: Why are so many dealers choosing to sell right now?
Alan Haig shares:
Last year was the busiest year we have ever seen for buy-sells. We counted 640 rooftops that traded hands in 2021. There are a few reasons for this record year.
First, almost all of the public companies were very active last year and almost all of them acquired large platforms. But it’s not just the public companies that are active. We see many dealers of almost every size in the market looking to acquire dealerships. They like the returns on investment they are seeing in the auto retail industry as they exceed most other investment opportunities.
Second, valuations have increased significantly due to the massive increase in profits that look like they are going to be with us for some time. As in any economy, when dealership buyers signaled that they were willing to pay more dealerships, the supply of dealerships available for purchase also increased. In fact, we were surprised at some of the groups that elected to sell in 2021 as many of them had been buyers very recently. Perhaps they decided they were shocked at the price of growth, and so decided to exit. If you can’t beat ’em, join ’em!
Third, many dealers were concerned that Washington was going to significantly increase the tax rates on capital gains. As a result, some of them advanced their retirement dates to 2021 so they could exit and pay less in taxes.
And fourth, some dealers are increasingly concerned about risks they see coming in auto retail. These risks include loss of fixed operations business due to EVs, the growth of new brands like Tesla, the talk of other OEMs going directly to consumers or pushing dealers into becoming agents, the rise of digital retailing, and the ongoing trend towards consolidation that may provide larger dealers with advantages over smaller dealers. Many in our industry looked around and felt like leaving now could both enrich them from record-high valuations, while also eliminating the downside of staying in an industry that is rapidly evolving.
What are the keys to a successful sale?
Alan Haig shares:
Our clients are typically looking to maximize the value of their dealerships while maintaining confidentiality. As in anything, preparation is essential for success. We recommend a dealer start the process by gathering advisors and family members together to evaluate the goals and likely outcomes of a sale to make sure they match up. The advisors can inform a dealer what the estimated proceeds would be for a sale, the amount after-tax, and the amount needed to provide for their lifestyles going forward. A seller should have a clear understanding that their goals could be met before going to market. These advisors would include an attorney with expertise in buy-sells, a licensed appraiser or dealership broker to estimate the value of the dealership, a real estate appraiser, a tax accountant, and a financial advisor.
The next step is to prepare a comprehensive package of information that provides buyers with everything they need to know to make an informed offer. This package would include adjusting historical income statements for one-time gains and losses, creating projections based on opportunities a buyer might have to improve performance, describing the real estate including any improvements that would be required by an OEM for approval, providing information about the local economy and other factors that could impact valuation, such as add-points, relocations, etc.
Once the package is ready, dealers need to find the best buyer in the market for their dealerships. Don’t assume that the dealer who calls and asks to buy the dealership is the one who would pay the most. Many of the buyers in our sales processes are located far away from the seller, sometimes in a different country! We firmly believe that most sellers benefit by running a limited auction for their dealerships. Start with identifying a list of buyers who have demonstrated their interest in acquiring dealerships like yours, in terms of geography, brand, price, performance, etc. We often recommend to our clients to contact 8-10 of the most likely buyers in order to be confident that we can source multiple offers for their businesses. All of these buyers must sign confidentiality agreements before they receive any information.
During this marketing phase, a dealer should be in frequent contact with these buyers to review the materials with them, explain the attractive aspects of our client’s business, answer their questions, and then solicit offers. These buyers know they are competing to buy the dealership, but since the seller has provided all the information they need, buyers can decide relatively quickly if they want to make an offer. And since the opportunity has been explained clearly, they can bid with confidence and put forward their best offer. This combination of compelling and comprehensive informational materials along with a competitive process amongst a handful of the best-qualified buyers in the country should result in maximum value for the seller while still preserving confidentiality.
Once an offer has been negotiated and accepted, the transaction moves onto the stage where the definitive agreements are constructed and due diligence is conducted. And eventually, closing! A successful transaction is one where the seller receives as much or more than what they expected when they started the planning stage with their advisors and family members. If conducted correctly, there should be no surprises along the way!
Your business’s future depends upon a vision, and strategic succession planning focused on the future and legacy you wish to build or leave behind. The future is in your hands.
Contact Us and we can help you with insights, other resources, and see if it makes sense to work together. At the very least, in 30 minutes, you may get some ideas you can apply to your business right away.
The only constant one can plan for is change. Strategic planning positions the business to address the probable, possible, and potential contingencies impacting business success.