Despite forecasts predicting an uptick in annual retail sales next year, the reality is that 2011 will likely continue to be a challenging retail environment for dealers.

To gauge the future, we need only look at the sputtering economy, high unemployment rates, and fragile state of consumer confidence.

Much like the general retail environment, the buy-sell market for dealership facilities will continue to face its problems in 2011 as well.

Many of these problems will derive from a fundamental inconsistency in the way buyers and sellers view the current market environment and valuations.

Let's take a closer look at the two viewpoints.

A seller's perspective: Many dealers who are not currently in a distressed-sale situation are convinced the current market environment represents only a temporary low in what is a pending rebound of the economy within the next few years.

Many of these dealers will look past the performance of their businesses in the past few years, believing store values should be, in good part, based on pre-recession numbers.

While many of these dealers are comfortable accepting a lower multiple than in previous years, they nonetheless feel profitability computation should reflect pre-recession earning. Often, they want to exclude either or both 2008 and 2009 from earning computations.

A buyer's perspective: For this group, the auto retailing environment resembles 2010 for the coming three to five years.

They think annual growth of retail vehicle sales will be limited, leaving measured potential. These prospective buyers of dealerships feel that the purchased price should be based on earnings from the past few years and should not factor pre-recession numbers.

Unless they are working on a strategic acquisition, these buyers are using multiples that often are 30%-50% lower than they were prior to the recession.

Additional challenges facing buy-sell transactions in 2011 include the valuing of real estate, the nationwide dealer reductions and declines in commercial property values.

Many sellers will either lease their property or take a large price reduction.

This can present some real financial obstacles for those dealers who engaged in construction or renovation within the last five years. Many built and financed those projects at the height of the boom in construction prices.

Some of the issued involved in closing dealership sales in the coming year will not derive from an inability to pair buyers and sellers and have them agree on a price. Instead, these issues will involve the difficulty that exists in finding banks to bridge the capital divide to facilitate the transaction.

With financial institutions continuing to be pragmatic in lending for floor-plan, working capital and Blue Sky loans, transactional activity will continue to remain restrained.

In 2010, the few transactions that took place primarily were among distressed/motivated sellers and well-capitalized dealers not dependent on bank approval.

While many financial institutions claim they have loosened their lending criteria, the reality is that the primary lending activity for dealership transactions remains restrictive.

For many hopeful dealers looking to expand, the improvement in the lending environment is characterized by the fact that they now see their applications formally turned down after review, as opposed to being turned down upon the mere request for an application.

Ultimately, 2011 buy-sell transactions will continue to be dictated by buyers with the financial capacity to close transactions without the need of a bank.

While more transactions will likely occur in 2011 than in 2010, buy-sell activity will be tempered and limited primarily to either strategic acquisitions or distressed sales.

Phil Villegas is a principal at Dealer Transactional Services, LLC in Miami, FL. He can be reached at PV@DTSAUTO.COM or 305-318-8515.

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