As we enter 2024, it has crystalized that 2023 was in fact, a lot like 2022. It’s not an anomaly when buy-sell activity and dealership profitability rose to historic levels and stayed there.
Moving into the new year, the tide seems to be changing coming out of 2023 and into 2024. Manufacturer allocation is still impacting dealership sales, combined with negative economic headlines, more dealers are evaluating if it is finally time to retire or exit their businesses.
This article is the first of two intended to provide an update on the state of the buy-sell market as well as actionable steps to properly prepare the business for a sale to maximize its value and minimize the headache.
Our 2023 buy-sell update
In 2023, our firm experienced a blistering volume of transactions, pacing well-over 80 dealership sales, across all our verticals, and far surpassing our competitors. This can be attributed in part to some of the same elements that created the buy-sell craze over the last two years.
The national dealership groups and the public companies are still on the hunt for quality acquisitions that fit their strategic growth plans, e.g., reputable businesses in a growing market, sufficient acreage to increase volume, well-maintained facilities, minimal capital expenditures required, tenured employees, and quality franchises. Despite developing trends in the commercial truck industry, quality dealerships like these remain in high demand and continue to command a premium value.
The regional dealer groups continue to look closely at tuck-in opportunities; dealerships near their existing footprints where they can properly integrate and manage the acquisition and share the expenses across multiple rooftops. Such synergistic acquisitions are always contemplated, even if only to protect their flank from a competitor entering the market.
However, we are also starting to see a trend in regional groups moving outside their bordering AOR to take advantage of opportunities that are both a strategic fit and offer a new point of presence in a market that has growth potential.
The new types of buyers that presented themselves in recent years, like private equity groups, family offices and dealers from other industries, are still circling the industry and primarily motivated by a rate of return.
In 2023, we saw three notable shifts in the marketplace:
- Increased Buyer Pool: Even with allocation and inventory not yet returning to their pre-pandemic levels, profits are still strong and buyers are flush with cash, looking for attractive investments. The commercial truck industry represents a solid hedge in a buyer’s investment portfolio, especially if they are from outside the industry. This includes family offices, private equity, and dealer groups from other industries like Equipment and Automotive. For strategic buyers, they too have additional capital in the bank and are looking for growth and expansion opportunities. We are seeing factors like spot rates, gas prices, labor shortages especially with mechanics, inflation, and interest rates affect the dealership balance sheets and profit and loss statements, but not enough to deter buyers from a solid opportunity.
- Decreased Opportunities: Dealers who delayed a possible sale due to COVID-era earnings, have been able to capture the additional benefits from historical cashflows, influenced by supply and demand in the marketplace. 2023 saw an ongoing buyers’ market and we anticipate this moving through 2024. With a decrease in acquisition candidates available in the market, we believe that the national and regional groups will remain highly active in the pursuit of acquisitions. The dealers with one to three locations will be pushing hard to find acquisitions that meet their growth strategy and are also cost effective at today’s market values. We anticipate some new, out of the industry buyers to enter the market with the OEM’s blessing as they align with the growth and consolidation goals of the manufacturer.
- Grow or Go: The pressure from OEM’s, accelerated profits due to the market, labor shortages, and the desire to retire now has created a ‘grow or go’ mindset for some dealers and dealer groups in the industry. There is always uncertainty surrounding the industry, especially during hard economic times and certainly in an election year. 2024 will have dealers thinking about what comes next, talking with their families and successors (if they have them) and considering ’what if I explore the idea of a sale and take some chips off the table?’ Doubling down is the other option that comes into play if and when the opportunity presents itself. Growing or going takes equal thought and contemplation, but knowing the value of the dealership and what it takes to make a successful transition work are the key components.
Navigating these uncertain waters has been a challenge for buyers and sellers alike, when attempting to establish values and factoring the profits of 2020 and more significantly, 2021 and 2022. It is further magnified when the performance in 2023 appeared to correct itself more quickly than anticipated. Nonetheless, buyers are still valuing dealerships using the same valuation concepts as before.
A buyer may use three to four years of financial data to average your EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) and apply a multiple, typically from 2x to 6x based on a host of tangible and intangible variables. However, it is critically important to consider how earnings are defined and what types of assets and value components are included in the multiple.
As a firm, we believe the value must be determined as a combination of
- Your historical adjusted earnings,
- The earnings of a buyer’s pro forma and projected earnings, and
- The buyer’s desired return on investment. Naturally, the goal is to identify the unique buyer who has a special motivation to acquire your business, who can find a path to a higher proforma, and offer you a higher price.
Considering market conditions are fluid, ever-changing and unpredictable, we are often asked, “When is the right time to sell?” To which we reply, “When it is right for you, right for your family, and accomplishes your personal and business goals.”
This is Part 1 of a two-part wrap up from Dan Argiro of Performance Brokerage Services on the status of dealership sales trends entering 2024. Come back tomorrow for Part 2, which will address smart tactics to prepare a business for a transaction in 2024.