The auto dealership buy/sell market experienced an all-time record in the first half of 2024, with 204 completed dealership transactions representing 381 franchises sold, according to the Second Quarter 2024 Blue Sky Report by Kerrigan Advisors.
The activity was largely driven by an increase in sellers coming to market seeking to capture historically strong blue sky values, which remain above pre-pandemic levels for most franchises, up on average 74 percent according to The Kerrigan Blue Sky Index. Transaction activity is on pace to nearly double pre-pandemic levels and annualizing at 760+ franchises sold, a new industry milestone.
What is leading to this activity? Kerrigan officials point to present and future technology and data management challenges, particularly after the CDK cyberattack, are leading more dealers to consider a sale in the near term. These sellers are met by very well-capitalized buyers, driving the velocity of second quarter’s buy/sell market.
Historical Prices
“The 2024 buy/sell market remains robust, hitting new records as industry consolidation continues unfazed by high interest rates, the market headwinds of low vehicle affordability and anemic EV sales,” said Erin Kerrigan, founder and managing director of Kerrigan Advisors, said in a press statement with the report. “Consolidators still flush with cash from pandemic earnings and current cash flow are getting deals done with sellers looking to lock in today’s elevated values and avoid the potential risk of further valuation degradation.”
While down on average 17 percent from their peak, Kerrigan noted dealership sellers recognize current blue sky prices are highly attractive on a historical basis. This reduction is largely a result of the sustained decline in industry earnings since 2022. On a trailing twelve month basis through June 2024, the publics’ average dealership earnings dropped 35 percent compared to 2022’s peak, resulting in average dealership earning of $4.4 million.
Adjusting for the one-time impact of the CDK outage, Kerrigan Advisors estimates dealership earnings are beginning to stabilize, approaching a more normalized post-pandemic level that is nearly double pre-pandemic averages.
Buyers Specific Wants
Despite earnings stabilization and record liquidity in the market, Kerrigan officials noted buyers are increasingly seeking the highest-quality, lowest risk-franchises and are willing to pay a meaningful premium for top franchises in high-demand markets.
“The more than 100 days’ supply chasm between the top and bottom franchises is separating the buy/sell market into the haves and have nots,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors.
Another factor is the current electric vehicle (EV) Market—buyers are focused on the potential negative impact of OEMs’ EV strategies and are hesitant to invest in manufacturers who are overcommitted to EV production.”
“As a result, Toyota and Lexus, who have projected the lowest level of EV production at 18 percent, remain the most sought-after franchises today,” said Ryan Kerrigan.
Second Quarter 2024 Buy/Sell Trends
The Nevada-based firm has identified four trends that it expects will impact the buy/sell market into 2025:
- Publics deploy more capital outside the U.S. due to attractive international pricing
- OEMs play an increasingly active role in managing their networks and buy/sells
- Acquisition financing contracts for weaker franchises
- Technology challenges lead more dealers to consider a sale in the near term
Ibn their report, Kerrigan Advisors point to OEMs taking a more active and aggressive role in the buy/sell process, dictating the explicit makeup of their dealer network deploying right of first refusals (“ROFRs”) at an increasing rate despite it the tactic is explicitly disallowed by franchise law in some states.
“The OEM’s goal is often to supplant a seller’s selected buyer with a designated, favored dealer, resulting in further concentration of dealership ownership in the hands of the most dominant industry consolidators,” said Erin Kerrigan. “Most troubling, in some cases OEMs are deciding to ignore franchise laws in a buy/sell, a highly concerning precedent which emboldens other OEMs eschew auto retailers’ hard-fought legal protections meant to preserve a dealer’s blue sky market value.”
Bank Issues
Additionally, Kerrigan Advisors raised the issue in the contraction of bank lending to U.S. corporations as a percentage of overall GDP as loan terms become more onerous, significantly impacting commercial real estate and acquisition financing.
Lending standards are becoming more challenging for certain franchises as lenders analyze the risk of higher inventory levels and slower sales rates.
Lastly, the firm expects implementation of technology in the sale process and the need for data-driven retailing operations will lead to more dealers considering a sale in the near term. For many of the largest dealer groups, technology in retailing can dramatically increase employee productivity and ultimately enhance profitability.
CDK Fallout
But private dealers lack a sufficiently large enough organization and staff to develop and deploy their own proprietary technology solutions. This, combined with the recent CDK global cyberattack and its significant operational repercussions have added further stress to the technology challenges faced by private dealers, prompting some to consider a sale.
“Some dealers choose to sell rather than reengineer their business toward a digital future as they recognize the need for a larger organization with the scale to hire an entire IT team, including a top-level executive focused on deploying data to enhance sales,” stated Ryan Kerrigan. “Lower revenue operations will inherently struggle to compete in an increasingly data-driven industry.”
