Look Out for Private-Equity Firms Eyeing Dealerships

Private-equity interest in auto retailing has increased in the past several years.

This interest has exponentially increased following the announcement that Warren Buffett’s Berkshire Hathaway will acquire Van Tuyl Auto Group, No.6 on the WardsAuto Megadealer 100.

I want to raise the question as to what these PE firms need to do in order to enter the auto-retail space. Secondly, I want to question the merits of facilitating them.

To be clear, when I refer to PE firms, these are not publicly owned dealership groups or family-type investment funds that are looking for long-term investments.  My reference to PE firms here are those that raise capital and leverage for specific investment returns they aim to get in about five years.

We can simply call them Wall Street firms, although they are located throughout the country.

Unlike most other businesses that PE firms will target for investment, U.S. dealerships present a challenge. One is that to complete a transaction requires franchise approval from affected automakers.

I have written about how PE firms have been trying to get a foothold in the dealership space and the difficulties they have encountered gaining manufacturer approval. 

Manufacturers have resisted approving PE groups due to their short-term vision and decision-making process.  While I sometimes question why certain manufacturers take certain decision tracks (like standardized image compliance for dealership facilities), this is one area I support the manufacturers on limiting.

Despite this hurdle, some PE firms have managed to acquire dealerships. This has primarily been accomplished through the PE firm partnering with an experienced dealer operator whom manufacturers feel comfortable with.

Such point persons have gained a certain level of confidence from the PE firms and the automakers.

As a whole, our firm had been very selective and in many ways reluctant to work with PE firms. 

While being engaged by a PE firm can be a good source of revenues, there is a cost. I’m not simply referring to money.

Our hesitancy and ultimate selectivity of groups that we choose to work with should also be shared by other professionals in the industry who are looking to maintain their reputation beyond that of someone who is simply financially motivated.  For any individuals or firms that exclusively represent auto dealers and are considering working for or with a PE firm, here are a few things to ponder.

PE firms’ main motivation is a return on their investment. Making as high of a return will come through either increasing profitability of the stores they acquire and/or through a consolidation effort that will ultimately enable them to sell off to a larger group or allow them to make a public offering.   

While most dealers also operate their stores to earn a good profit and expand their footprint when possible, the difference is that dealers and publicly owned dealership groups know the importance of having a vested interest in building a strong, long-term relationship not only with employees, but also with the communities they serve.

Most PE firms want to cash out in a few years. Revenues primarily come from selling off stores, not through traditional dealership operations.

Ask any quality dealer how hard it would be to recruit or retain quality management and personnel if they knew the owner likely would cash out in five years.

Couple that with the primary mission of the ownership group to have as lean and as profitable a dealership as possible.

Having the benefit of being exposed to some of the country’s best run and longest standing dealer groups, we know how hard it is to find and retain good talent. 

As much as one of these PE firm streamlines, automates and digitizes the sales and service process at dealerships, this is still very much a people business. It will remain this way for many years to come. Well, at least for more than five years. 

As mentioned, for a PE firm to get approved by the manufacturer, it needs a dealer-operator point person. 

This likely is someone with more than 10 years industry and dealership general-management experience. This individual also will need a good deal of financial and corporate acumen in order to communicate with PE firm project leaders. 

While there is a significant amount of knowledge that can be gained and applied by working with a PE group, there is a potential for damage to a dealer operator.

I’ve seen firsthand the effects of that as a point person’s reputation suffers when PE firms start to squeeze and test the limits of both the dealership personnel and the relationships with the manufacturers. 

These dealer-operators in the end become marionettes for someone pulling the strings behind the curtain. Any goodwill these dealer-operators have with employees or manufacturers likely will be spent by the puppet master’s attempt to maximize and leverage the profitably of the dealerships.

This is the central premise why our group has chosen caution in working with PE firms. We feel the long-term costs may exceed the short-terms gains.  

To us, working directly with committed long-term dealers is the best formula for success.

This approach applies to anyone focusing a career on the dealership space.

Selling to private-equity firms can be high yielding. Working for them can be costly.

Phil Villegas is a principal at Axiom Advisors, a boutique automotive dealership consulting firm specializing in mergers and acquisitions, enterprise management, and litigation support. He can be reached at [email protected] or 786-472-2800.