2018 predicted to be a strong year for buy/sell activity
For most, generally speaking, protecting one’s investments, preserving one’s capital and protecting long-term family security becomes more important as one gets older.
This is especially true when the view of the future becomes less certain and the probability of increased business risk looms on the horizon.
We all know the last few years have been very, very good. For many, the natural instinct is to stand pat and perhaps even double down to take advantage of a possible rising tide.
As I look out to the balance of 2018, and the next few years, from my vantage point being January 2018, I can certainly make a strong argument that business risks are increasing.
The likelihood of increasing inflation, higher interest rates, possible income tax increases and corresponding reduction in customer demand are all on the horizon.
Combine that with the real possibility that key trade agreements could be altered or eliminated. The attractiveness of our country as an investment destination could take second fiddle to our larger neighbour south of the border, whose aggressive growth path could be at odds with Canada’s.
Specifically, for auto dealers, we have the added long-range planning complexity of our industry. Our industry has been relatively stable for many decades. Sure there have been ups and downs, granted some of those severe, but over the long haul, life as an auto dealer has been very good for most dealers. Many are now asking if that is about to change.
Dealers cannot help but be affected by the constant discussion at brand and industry events and in industry media of all forms, about the future of auto retailing. Brands and non-objective industry insiders are talking change within a world of continued relevance for franchised dealers.
Others from outside our industry, but with a vested interest to disrupt, use their vocal platforms to predict radical change. Not only are predictions centered around the types of vehicles that should and will be available for consumers to drive, they also surround how consumers will drive or be driven in the new world of mobility.
Always in the mix, some as an undertone and others more overt, is the threat of change to the vehicle ownership model and by extension the need or lack thereof for dealerships in the future.
Dealers cannot help but be affected by the constant discussion at brand and industry events and in industry media of all forms, about the future of auto retailing
There are also vastly differing interpretations of what future means. Some disruptive thinkers have radical change by the end of this decade, others by 2025, others by 2030 and still others beyond that.
No wonder auto dealers are confused. It’s darn hard to sort out possible reality from noise. Many of us who have been around for more than a few years and have seen a thing or two (to quote the Farmer’s Insurance slogan) take a practical view and don’t see radical change in our business model for a long time.
That’s not to say there will be not be change in auto retailing. Quite the opposite, many of us feel there will be tremendous change. But the type of change that eliminates the need for dealerships, many of us believe, is a long way off.
We are coming off another record new vehicle sales year in Canada, and from all accounts, January 2018 will continue the trend.
The U.S., on the other hand, has seen new vehicle sales plateau, only to be propped up by some horrific natural disasters that created vehicle demand and helped save 2017 new vehicle sales levels south of the border. That plateauing in new vehicle sales has seen dealer valuations also plateau and for some dealerships decline.
Current dealership valuations are strong in Canada with the number of quality buyers outnumbering realistic sellers. In my view however, the tide has dramatically shifted. Buyers are much more strategic today than a few years ago. In the early days of dealer consolidation, the name of the game was “acquire.” Growing the stable of dealerships was all important; making money at them, not as important.
Today, and I believe well into the future, buyers will continue the trend to be more strategic in their acquisitions. That means there could be valuation implications to the downside for dealerships whose brand and location are not seen as strategic.
Top that off with image investment requirements and I can make a fairly good argument that overall transaction prices for dealerships will begin to level off and even decline on average for some brands.
Many dealers that I speak with on both sides of the buy/sell equation are much more cautious but for different reasons. Driven by their age and the uncertain ownership road ahead, many dealers are curious and some are seriously thinking about taking some chips off the table.
Many dealers will want to solidify their family’s future by taking some chips off the table.
Many would move quickly, however, the lure of continued or better days ahead creates uncertainty in their minds. As we all know, dealers all want to sell at the high point. Dealers have said “2018 is looking pretty good and my dealership is poised to make lots of money. If I wait for a year or two, my store will be worth what it is today but I will be ahead by the profits in the next few years.”
No one can argue with this thinking unless of course there are increased risks that perhaps those profits might not be as high as hoped, brand store valuations a few years down the road might be lower than today and buyers might not continue to outnumber sellers. On top of that there is personal risk. None of us is getting any younger.
Buyers on the other hand are looking for opportunities to make money. That means that buyers need to visualize a strong likelihood that their involvement will increase future profits. If buyers do not see the opportunity to perform better than the selling dealer, their offer, if they even make one, will be too low in the eyes of the selling dealer.
To that end, dealers love to talk about multiples. In dealing within this arena everyday, I can tell you that there are always two multiples for every transaction I am involved with. The first multiple is the multiple of pre-tax earnings reported by the selling dealer divided into the selling price. The second is the multiple the buying dealer thinks he is paying based on the realization of post acquisition synergies.
The selling dealer multiple is always higher than the buyer’s multiple. When a dealer tells me he received a high multiple for his/her dealership, I know immediately that the buyer viewed his store as under-performing with lots of opportunity left on the table.
Buyers are looking for ultimate return on investment that are based on post-acquisition 3 to 5 times multiples. That provides buyers with annual pre-tax returns of between 25 per cent and 17 per cent — the sweet spot to attract investment.
Uncertainty about our industry’s future, long-term dealership real estate values, a short runway for ageing dealers, brand specific growth strategies coupled with significant dealership scorecard implications and continued expectation for increased dealership image investment, just to name a few, all are converging to cloud what used to be a clear view of the future.
Many dealers will want to solidify their family’s future by taking some chips off the table. Many consolidators want to solidify their dealership platform to create the scale needed to compete in the future.
Barring any catastrophic events, the cloudiness should generate fertile ground for opportunity as the stars could possibly align and render 2018 a banner year for buy/sell activity in Canada.
