DEALER CONSOLIDATION IS BECOMING MORE POPULAR IN CANADA, AND WE EXPLORE WHY THAT IS
Most great athletes want to go out on a high and be remembered for their legacy. However, some are reluctant to give up the game they love and end up hanging on far too long.
When athletes can’t let go, their value in the market suffers, as does their reputation, since their glory days of yesteryear have been forgotten.
I believe this analogy translates well into the dealership world and that we are seeing some of the effects in the market today.
Acquisition and divestiture pace has been steady so far in 2015, keeping pace with the robust activity in 2014. Most of Canada’s dealer groups are active in markets right across Canada.
Acquirers decide to acquire a lot more easily than sellers decide to sell. This creates a perception in the market that there are many more acquirers than sellers, and as a result, we are in a sellers market.
The reality is that there are a number of dealers wondering if they should sell, take on a partner, or join a dealer group.
The most common reason to sell is related to succession and eventual retirement.
The next most common reason is business reinvestment demands. Certain dealers are reluctant to get involved with an expansion or relocation, and choose to sell.
The third reason most common is reactionary. Some dealers, not openly thinking of selling, are brought to market indirectly by brokers, and directly by dealer group direct advances.
This is in direct response to the sellers’ market situation I referred to above.
In other cases, sellers surface because of brand performance pressures, medical or personal reasons. There are a host of other reasons as well.
The fact that valuations are positive cannot be overlooked. When a sizeable dollar figure is waved in front of a dealer, that dealer often quickly converts to becoming a selling dealer.
Dealers are business people, and are largely optimists and cash-focused. Dealers have a knack of getting to the source to maximize personal financial gain. Current valuations are attractive to some dealers, and serve as a motivator to enter into a transaction.
Acquiring dealer groups appear to have access to capital and possess an appetite to grow.
We are now seeing the beginnings of a new trend: dealer groups seeking to acquire other dealer groups. We started to see this happen in 2013 and 2014.
I believe 2015 and 2016 will become a period in history in which dealer group sales will dominate the dealer consolidation market.
Groups that for the last 10 or 15 years have been on the acquisition hunt will switch gears, change sides of the table, so-to-speak, and become sellers. They will come to market to realize the value of the dealership investments they have nurtured and matured.
Historically, many dealer groups seek only highly profitable single point stores in attractive markets. With almost 15 years of dealer consolidation, the number of high quality single points stores are becoming fewer and fewer.
This has led larger dealer groups, still with an appetite for acquisition, to look at dealer groups as acquisition targets. The retail gems can now be found in a dealer group’s cluster of stores.
Buying a dealer group has many additional benefits. One such benefit is structure. Some dealer groups have adopted solid management practices. Acquiring a strong, disciplined management team is a valuable commodity that adds value to the acquirer.
Another benefit is market dominance. Many groups have a strong share of driveway in the markets they represent. Both of these factors add immediate realizable benefits to any acquirer.
Also new to the game are outsiders wanting to enter the auto retail ownership arena. These are well-healed, successful entrepreneurs with a sizeable capital backing looking to be redeployed.
Although not as high profile as Warren Buffett, Bill Gates or George Soros from the U.S., Canada has a sizeable number of investors looking at the auto retail arena as an avenue to earn attractive cash returns.
I am also not ruling out international opportunities. Canada presents a different dynamic, than say the U.S., but nonetheless, some dealer group portfolios might become attractive for international investors.
Succession is still a prime motivator, but it is finally hitting dealer groups.
For years some dealers have been acquiring stores, some a few and some many. We are now seeing that the exit strategy of some of those groups is to sell their entire group, while for others, it’s breaking up the empire and selling off individual stores.
There is still a robust market for single store transactions right across Canada. This activity will not stop.
Pricing, I believe, will normalize as sellers realize that acquirers will not pay for what the store should be producing, but rather, what it is producing.
At the end of the day, it’s up to the selling dealer to identify the hidden value in their organizations to support the multiples they are requesting. In some instances, investments have been made, and value based on future earnings might be warranted.
Staying involved is also a real possibility. Some dealers know they do not have the deep pockets to compete effectively in their local market. These same dealers still have lots of personal energy and enthusiasm and could thrive as part of a group.
For some dealers, owning a smaller piece of a successful, properly capitalized dealership might be better than owning 100 per cent of an under-performing operation.
Dealer consolidation will continue to dominate the dealership landscape in Canada for the foreseeable future. Dealer groups are showing much discipline with their acquisition initiatives, making it more challenging for sellers to consummate a “lottery like” deal.
Dealer groups now have a ton of acquisition experience. Values today are based on sound fundamentals.
Whether you are a single point dealer, a small group, a medium-sized group or a large one, there is likely someone out there that might be interested in your dealership or group. But in the end it’s up to you, the current owner, to bring the value of what you are offering to the forefront.
If you want an acquirer to show you the money, then you have to show them the value!
