Are Car Dealership Values Peaking?

LAS VEGAS – Lexus, BMW, Mercedes-Benz and Audi stores earn consistently high profits and fetch the most money when they go up for sale, according to an expert on the buying and selling of dealerships.

Those brands top the list of “franchise holders who want the most money for their dealerships,” says Erin Kerrigan, managing director of Kerrigan Advisors.

Lower price tags are on Acura, Hyundai, Cadillac and Volvo stores. Their average profits are “consistently low,” she says here at a J.D. Power automotive conference presentation entitled “2016 Dealership Buy/Sell Trends: Are Dealership Values Peaking?”

Dealerships were hot properties last year, with buyers including billionaire Warren Buffett and several investors new to the segment. “The outlook is hazier this year,” Kerrigan says. 

U.S. auto dealers sold 17.4 million light vehicles in 2015. WardsAuto forecasts that will increase to 17.8 million this year.   

Despite that, many investors, citing the cyclical nature of the auto industry, figure it’s a matter of when, not if, a downturn will occur, making dealerships less valuable.

“Investors are worried the 7-year run may be coming to an end,” Kerrigan says.

Another concern is a growing number of longer-term auto loans, says Kerrigan, noting that longer loans typically mean more time between car purchases.

Terms of 73 to 84 months now make up 29.5% of auto loans; terms of 61 to 72 months, 37.7% of auto lending, she says.

Despite investment apprehensions here and there, the dealership buy-sell arena has been lively, she says. “We’re seeing a significant increase of sellers coming to market. The average dealership is earning more than $1 million, four times what it earned in the past.”

Many stores, especially ones in urban areas, sit on valuable land, she adds. “Real-estate prices are affecting dealers’ blue-sky values.”

When it comes to dealership throughput – the average number of sales per dealership; a key profitability measurement – “Lexus is head and shoulders above everyone else,” Kerrigan says.

The country’s 236 Lexus dealers’ throughput last year was 1,466 vehicles.

More than 80% of investors new to dealership buying opt for non-luxury brands, according to Kerrigan Advisors’ tracking. “The multiples (to wit: pricing factors) are lower but the return on investment is attractively high” for many brands, she says.

Dealership buyer demand is high for Toyota, Honda and Subaru; increasing for Chevrolet and Ford; average for Chrysler-Jeep-Dodge, Nissan, Hyundai and Kia; and low for Mazda and Volkwagen. It was low for the latter even before the VW diesel-emissions scandal, Kerrigan says.

Recent dealership sellers include Patricia Swope, who had headed the Louisville, KY-based Sam Swope Auto Group, No.65 on the 2015 WardsAuto Megadealer 100 with 21 dealerships and total revenues of $782.1 million.

The decision to sell the enterprise came after the death of her father, Sam Swope, a dealer since the 1950s.

“We had winners like Lexus and BMW, but also losers like Mitsubishi and Fiat,” she tells the conference audience. “But we packaged it all together. It was all or nothing.”

Automotive Management Services purchased the Swope group. It didn’t keep the name. “We were glad of that,” Patricia Swope says. She doesn’t regret cashing out when she did. “This industry is cyclical, and we got out at a peak time.”

Karl Schmidt, CEO of the Minneapolis-based Morrie’s Automotive Group, has been both a buyer and seller of dealerships.

He doesn’t work from a play book, he says at the conference. “In any acquisition, it’s a matter of whether it makes sense or not.”

He likens dealership buying to home remodeling. “It takes longer and costs more than you expect.”

A human factor that is less tangible than financial multiples and blue-sky values is powerful nonetheless in dealership buy-sell transactions. It usually affects someone putting a long-held or built-from-scratch dealership on the market. “It can be emotionally hard for the seller,” Schmidt says.

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