The auto dealership buy/sell market rose to another record high, with 330 dealership transactions representing 544 franchises sold completed in the first nine months of 2024, according to recent report from Kerrigan Advisors.
The recently-released Third Quarter2024 Blue Sky Report by Kerrigan Advisors detailed how the market is being pushed by more sellers entering the market, stronger franchises taking advantage of historically high blue sky values, and weaker franchises being divested.
“The buy/sell market remained robust in the third quarter, hitting new records as the largest buyers leveraged their strong balance sheets and solid banking relationships to add further scale to their enterprise,” commented Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors in a statement with the report’s release. “At the same time, more sellers entered the market positioned to sell their businesses given the wealth they accumulated since the pandemic and historically high after-tax proceeds expected from a sale.”
Top 150 Dominance Growing
The Blue Sky Report is a quarterly report, received by over 11,000 industry recipients in 35 countries, includes analysis of all dealership transaction activity for the year, and lays out the high, average and low blue sky multiples for each franchise in the luxury and non-luxury segments.
The third report of the year highlighted the increased market share for the Top 150 U.S. Dealership Groups, which reached 30 percent of total industry revenue in 2023—up five percent in just five years. The accelerating market share growth is due to the largest group’s preference for higher-volume dealerships, according to analysis
Since 2021, the average dealership revenue for the Top 150 has risen seven percent to over $83 million, 16 percent higher than the industry average, which has remained at $71 million since 2021. At this rate, the Top 150 could account for 50 percent or more of industry sales in the next 20 years, potentially a tipping point for an acceleration in consolidation in the following decades, according to Erin Kerrigan.
“Major consolidators recognize the tremendous growth potential of an increasing supply of dealerships for sale, and are optimistic about their ability to pursue accretive acquisitions, supported by their rising stock prices, long standing banking relationships and the industry’s moderating blue sky values,” she said.
More Sellers
The stabilization of pre-tax earnings to a ‘new normal’ allowing buyers and sellers greater comfort to use current earnings as a basis for valuations is seen as the key driver for the activity. Kerrigan officials believe this improved clarity enhances buy/sell activity as sellers’ and buyers’ pricing expectations are increasingly aligned.
Additionally, more sellers are coming to market as due to the wealth they accumulated during the pandemic enables and, in some cases, accelerates their retirement plans. Between 2020 and 2024, Kerrigan Advisors estimates the industry amassed three times the profits achieved in the four years before the pandemic, estimated at $278 billion.
“Burgeoning capital accounts combined with high blue sky values are prompting more dealers, particularly those without a succession plan, to sell their business,” explained said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “This is particularly the case as the next generation considers the responsibility of growing their family business or considering an exit, knowing that inertia is not an option in the rapidly evolving auto retail market.”
Reason for Selling
A secondary trend is the number of dealer groups divesting their weaker franchises—year-to-date, the publics divested 36 franchises, a increasing by 24 from a year earlier.
Franchises being divested have some of the highest days’ supply in the industry, the most significant declines in dealership profitability and the lowest Kerrigan Advisors blue sky multiples for their corresponding segment.
Accordingly, franchises with the highest buy/sell market share for their respective segments— CDJR (32 percent domestic buy/sell market share), Nissan (20 percent import market share) and Infiniti (13 percent import luxury market share)—have some of the highest days’ supply and the most declines in dealership profitability.
Third Quarter Trends
Kerrigan Advisors has identified the following three trends which it expects to meaningfully impact the buy/sell market into 2025.
- Expensive image upgrades, particularly for luxury import franchises, prompt more dealers to sell. Average dealership rents have risen 32 percent since 2019, with luxury dealers’ rents increasing at the highest rate since 2020, making the impact of expensive image upgrades particularly pronounced for those franchises.
- Larger groups’ stronger balance sheets and banking relationships increase their buy/sell market share. The largest private consolidators with strong balance sheets and banking relationships increased their buy/sell market share to 32 percent, a 66 percent increase, and their highest share since Kerrigan Advisors started tracking in 2018
- Buyers are less open to new markets, more focused on tuck-in acquisitions and local scale. With gross profits down 13 percent from their peak, expense reduction and operating efficiency have reemerged as critical components to profitability and a dealership group’s strategic plan.
“With dealers now focused on identifying ways to share costs across their organization and seeking to leverage scale to their advantage, geography, market synergies and the efficiencies available in local and regional consolidation are a primary prerogative for most acquirers,” said Ryan Kerrigan.
Lexus and JLR Multiples Increase
For the third quarter of 2024, Kerrigan Advisors increased the multiple for Lexus to 8.0x on the low-end and 9.5x on the high-end, reflecting the high buyer demand for the franchise as well as Lexus’ ability to maintain low inventory levels and high profits at its dealerships.
The Nevada-based company increased the multiple for JLR as well, to a range of 7.0x to 8.0x as demand remains high with sales up 28.1 percent year-to-date through September for Land Rover, leading the luxury market in 2024. Additionally, JLR’s gross profit per vehicle is consistently superior as demand for the Range Rover and Land Rover lineup continues to be robust.
Kerrigan Advisors reiterated its positive outlook on Porsche, Lexus, Toyota, Honda, Subaru and Kia. Dealers were found to have a high level of trust in these franchises, particularly Lexus, Toyota and Honda, all of which maintain low inventory levels and high average dealership profitability.
“Luxury brands like Lexus and JLR increasingly command higher multiples as they tend to deliver higher profits, and buyers are seeking these lower risk opportunities,” said Ryan Kerrigan. “On the other hand, buyers that are evaluating underperforming dealerships are applying lower-end multiples to their proforma to assess the blue sky value. As a result, blue sky valuations are often falling below pre-pandemic levels, even for franchises that were profitable prior to the pandemic.”
