Fixed Ops Are Key in Buy-Sell Market

New- and used-vehicle profit margins are coming down from what many believe are once-in-a-lifetime highs, and that means dealers shopping for dealerships are putting a renewed emphasis on less flashy but more sustainable profits – that is, Fixed Operations.

“We like to say, ‘Variable comes down, but Fixed sticks around,’“ George Karolis, president of the Presidio Group, tells WardsAuto. That saying is newly relevant because dealers in the market for acquisitions want repeatable earnings, he says.

That also implies dealerships might need to cut costs on such items because personnel expenses have not come down as fast as new and used-car margins, Karolis says.

The Presidio Group, with offices in Denver and Atlanta, is an independent merchant banking firm focused on the auto retail sector, especially dealership mergers and acquisitions. In the current environment, buyers’ priorities are shifting, Karolis says.

“You look at the quality of earnings. I think dealers are much more focused on trying to ascertain what those earnings are going to be,” he says. “Fixed Ops, Service & Parts, is going to be looked at as more sustainable. That’s where most of the contribution is going to be coming from.”

In a recent report using NCM Associates' dealership earnings data, Presidio says net pretax profit for the average franchised dealership fell 33.4% in the first half of 2024 vs. the first half of 2023.

That’s also down roughly 50% from the peak in 2021. However, the average dealership’s net pretax profit was still 1.7 times what it was in 2018, according to a Presidio-NCM analysis. (The report doesn’t publicly share the dollar amounts for the average dealership’s net pretax profit.)

Dealership buy-sell brokers say the U.S. is less of a seller’s market for dealerships than it was. Still, dealerships with the most profitable franchises, such as Toyota, and in the markets with high-volume car sales and service, including Texas and Florida, are still in high demand.

Overall, Presidio says U.S. buy-sell volume declined in the first half of 2024 to an estimated 265 dealerships, trading hands in 155 transactions, down from 294 dealerships and 200 transactions in the first half of 2023. That’s still strong historically but down from record volume in 2021.

In a separate report, Haig Partners, a buy-sell advisory firm in Fort Lauderdale, FL, says 2024 is on pace to be the fourth-biggest year ever for U.S. dealership buy-sells, with an estimated 500 dealerships changing hands. In the first half of 2024, Haig Partners estimates 248 dealerships changed hands, down from 290.

Alan Haig, president of Haig Partners, tells WardsAuto that besides looking good in contrast to declining new- and used-car profits, Fixed Operations profits are also getting a boost from drivers postponing purchases and spending more in the service lane.

High interest rates are keeping many drivers out of showrooms, along with average vehicle transaction prices that are still high despite recent declines, he says.

“People are not trading in as quickly as usual. But people still have to get to jobs, school, wherever they need to go, so they are reinvesting in their vehicle, in terms of maintenance and repairs,” Haig says.

He agrees that buyers’ attention is refocused on Fixed Operations results.

“In terms of M&A, (mergers and acquisitions) when people are buying, they are looking for repeatability, what the profits are going to be. That can be hard to predict in terms of new-and-used-car sales. What are the interest rates going to be? What about incentives?” Haig says. “More predictable is the Fixed Ops department; the size of the Units in Operation, the history, the returning customers.”