Most buyers still want to move forward with acquisitions, sellers need to consider their exit strategy, and dealer-owners have a succession plan.
It was originally anticipated that 2020 would be the most active year for transactions in Canada when compared to the past decade, and the market had been very active in recent months.
Several transactions were concluded between buyer and seller in the month preceding the start of the novel coronavirus pandemic. But overnight, the priorities of automotive dealers were completely turned upside down. We were no longer talking about growth and acquisition opportunities, but instead cash management, layoffs, and government assistance programs.
The current climate
At the time of writing this article, we have not yet reached the infamous peak of the crisis in Canada. However, the initial shock seems to have passed and now we are getting organized, we are adapting to the new reality, and we are planning to return to work.
As for all the transactions in progress, the deadlines are extended in order to allow everyone to adapt and understand the implications of the current crisis. Most transactions will still go ahead. Investors realize that, despite the intensity of this crisis, the long-term outlook remains very positive for our industry.
Transactions were even closed in the middle of the crisis at the end of March. And while most transaction closings originally scheduled for the end of March were pushed back to May or June, some decided to go forward with the initially proposed deadlines.
Advice to buyers
The majority of buyers remain motivated to make acquisitions. A well-informed investor realizes the consequences of the current crisis should have no impact on their investment and growth strategy in the long run. It is quite similar to investment strategies on the stock market: it is never recommended to try and predict the market in the short-term, you should instead have a long-term vision.
In addition, transactions can take, on average, nine to eleven months from start to finish. It might be realistic to think that the impact of the crisis on dealers’ operations may be blurred, and that businesses will eventually be able to function normally. It should be expected that the reality of automotive operations in a year will be different than pre-COVID-19. The fact remains, however, that car dealers will be able to adjust as they have always done in the past, because auto retail is a very resilient industry. After the major financial crisis of 2008, several car dealerships made record profits and “returns on invested equity” bounced back to even higher levels than in 2007 before the crisis. This has often been the case for the years following various economic recessions, and this is for all industries combined.
Our best advice to buyers is to stay focused. Interesting opportunities are rare and limited, mainly as buyers can be particular in terms of the brand and geographic location. It would be a shame to miss great opportunities in the current context and, at the risk of repeating myself, the long-term vision should be at the heart of any good growth strategy by acquisition.
Advice for sellers
There is no magic recipe, but rather a case by case assessment. As for sellers with a more or less long-term strategy, this is an ideal time to take a break from daily operations to reflect on an exit strategy. The vast majority of Canadian entrepreneurs do not necessarily have a formal retirement plan. In fact, according to a survey by the Canadian Federation of Independent Business, 39 per cent of small business owners plan to leave their business in the next five years and 81 per cent plan to retire. Over half of entrepreneurs, 51 per cent, do not have a succession plan and only eight per cent have a formal and written plan.
My advice to each of the 81 per cent of owners who want to retire from their business within five years would be to focus first on a defined succession plan. There is no better time to take action and start the process. Several dealers have been taking advantage of this time to update or carry out a rigorous assessment of their business in order to understand its value.
It’s also a good time to have discussions with potential successors in order to understand each other’s intentions and financial capacity. After all, if you are spending your career building your business, it would be wise to spend some time planning your retirement as well.
