Why the trend for acquisition is being driven by market conditions
Back in 1997 we first surveyed the Canadian dealership community on the topic of succession. At that time, when we examined overall Canadian demographics, we saw this baby boomer bubble and wondered how the independent Canadian dealers measured up against the rest of the country. At that time we found that the average age of Canadian dealers was much higher than a similar average for the Canadian population and we issued an alert that there was a looming dealer succession crisis in Canada.
Back in the year 2000, dealers owning more than four stores numbered 27. When we connected the dots, looked around and saw dotcom’s dropping like flies, we intuitively knew that there was an enormous opportunity for dealer consolidation. The only slowdown we could see related to access to capital. As long as capital was available for acquisition funding, we felt there was unlimited potential for dealership consolidators.
In the U.S. by that time, the public dealer groups had emerged. The U.S. dealer body was in a real state of flux and confusion. The uncertainty was being experienced north of the border as well. Certain OEMs even tried to enter the retail game, ultimately, as we now know, without success.
GROWTH IN GROUPS
Today, the number of dealers owning four of more stores significantly exceeds 100 in number, over four times the number of sizeable dealer groups that existed just 12 short years ago. Even interprovincial investments are increasing as dealer groups continue to look for new opportunities and some maneuver around OEM ownership concentration policies in order to meet their group’s growth mandate.
What has caused the rapid growth in dealer groups? The obvious answer is lack of dealer succession. There are, however, other factors to consider that, in part, play a significant and influential role. Factors such as successor quality, facilities investment, increased competition, decreasing net margins and increases in valuation all play a role in a dealer’s decision-making process. Access to financing, the ability to attract human talent and the realization of added cash flows produced by operational synergies, drive the process from the other side. When these two competing forces combine at the same time, the environment is ripe for deals to be made. Historically a dealer’s succession plan, whether formalized or not, was to transfer the dealership within the family. Once thought to be the industry’s solution to ownership transition, family succession, while popular, is no longer the dominant transition medium.
Dealers themselves began to question many things. I have assembled the following quotes
over the years:
• “This business is not what is used to be, too much competition and too much factory interference, and I question whether I want my kids to be dealers.”
• “Real estate values have increased substantially. How do I realize on that financial gain without putting a stranglehold on my kids?”
• “My brand has all of a sudden become very popular. Goodwill has increased. How do I monetize that increased value? Is it right and fair to expect my kids to manage this business in such a way as to maintain that value? Am I setting them up for ultimate failure?
• “Demand for good dealerships outstrips supply. I have a good dealership and as such I can get a great value for it. Once I sell, I can help my kids start something of their own.”
• “I don’t see my kids running this dealership in the long-term. They seem happy enough while I am around but after I am gone, well that could be another story altogether.”
• “My brand wants me to relocate and rebuild. Heck I’m 67 years old and that’s the last thing I want to do.”
• “My wife is at me to slow down. She says we have enough money. I’ve had a few health problems and I have to admit that I likely don’t have many good years left. Perhaps its time to start really enjoying the fruits I have produced.”
• “I had a general manager in here that was doing a great job and I saw him as the fellow that could manage things on behalf of the family. I sold him some equity at a deep discount and all of a sudden his behaviour changed and unfortunately so did my succession plan.”
• “I don’t want my kids to be in this business. It’s no fun anymore.”
• “I do want my kids to own this place someday and have the type of life that I have had, but deep down, I’m not sure they are cut out for it. I’m not sure I would be doing them any favours.”
I could go on and on reciting what dealers have told me over the years. Dealers do reflect on the future and have sincere concerns. This however does not translate into executable plans in many cases. Dealerships by and large are worth much more today that they were 12 years ago. Realizing on that value, or to put it another way, funding a comfortable retirement and leaving a meaningful legacy, becomes more of a concern the older you get.
TREADING CAUTIOUSLY
All dealers remember the instant loss of value that happened in 2009. To many dealers, their view of partnership with their brand is totally different today than back then. Regardless of brand, dealers from all walks of life are taking a more critical, skeptical and cautious view of their relationship with their brand. What used to be immediate and complete acceptance of new programs and ideas has turned into a more cautious and often confrontational environment.This crack in the trust bond affects everyone. Even dealers with great brand relationships have had doubt planted that constantly lingers in the back of their minds.
Dealer groups, on the other hand, are diversified by their very nature. Their dependence on one brand is by and large limited and as such they control much more of their own destiny than does a single point dealer. Many of those dealer groups that were single brand dominant in 2009 have diversified to better manage their brand risk.
Dealer groups are human capital rich. As one dealer group CEO recently told me, access to human capital is as important as access to financial capital. One cannot survive without the other. This point is driven home with standalone dealers as well. Many are struggling with trying to find good solid managers. Their lack of ability to attract the right level of talent, for whatever reason, often leads to declining store performance and ultimately in decrease in value on the eventual sale.
Dealer groups are not afraid of facilities. With access to capital and numerous financing and equity alternatives available to groups simply because of the asset base and diversification, dealer groups often can justify meeting the demands of brands when it comes to facilities. The operational synergies produce cost savings that help produce the cash flow needed to pay for those updated brand imaged facilities.
One cannot ignore the role of brands in consolidation. Openly, brands seem to prefer the single point ownership model. However, when challenges occur they are quick to turn to dealer groups for assistance. Until a dealer development type of financing is reintroduced into the Canadian dealership landscape, no other realistic alternative exists for brands and as such brands will, albeit reluctantly, continue to turn to consolidators in their time of need.
So when you boil it all down, succession may be the ultimate catalyst that drives consolidation. Today’s single point owners are under pressure from many directions. The older these single point dealers become, the greater the pressure to find the right answer for financial, emotional, physical and family security.
Don’t look for consolidation to slow down and certainly don’t look for ownership succession and all the pressures on the shoulders of today’s single point dealers to ease in any way. The environment to fuel dealer consolidation is thriving and will continue to do so for the foreseeable future.
