The economics remain strong enough in 2023’s third quarter for sales of auto dealerships to rise more than 10 percent, according to a recent report from Kerrigan Advisors.

The auto dealership buy/sell market had a record 313 transactions completed through the third quarter of 2023—an 11 percent increase over the same period in 2022, according to Kerrigan’s Third Quarter 2023 Blue Sky Report released Dec. 18. For the trailing 12 months ending September 2023, the buy/sell market recorded 406 completed transactions, surpassing 2021’s prior peak.

“The buy/sell market continues to show its strength in the third quarter, impervious to the rise in borrowing costs and declines in dealership earnings which, nevertheless, remain historically high, and well above pre-pandemic averages,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors in a press statement.

Using Capital for Acquisitions

Through the third quarter of 2023, Kerrigan estimates auto retail generated $235 billion in pre-tax profit since 2020, much of which has yet to be reinvested in dealership acquisitions.

The continued uptick in buy/sell activity is attributable to more sellers coming to market, strong blue sky values and buyers’ robust pool of capital generated over the last four years from record earnings.

“As profits remain elevated, growing dealership groups are allocating that capital toward acquisitions,” continued Kerrigan. “Most are investing equity, rather than raising debt, and thus are less impacted by higher borrowing costs due to the rise in interest rates.”

Report Highlights

Among the data points of the Kerrigan report are:

• 99 multi-dealership transactions were completed through the third quarter, representing nearly one third of the buy/sell market;
• Among the franchises being acquired, domestic franchises increased their buy/sell market share five percentage points to 54percent, taking share from import non-luxury franchises;
• Domestics retained their majority share of the buy/sell market in 2023; however, more than 30 Kia and Hyundai franchises sold in third quarter alone resulting in those franchises leading import buy/sell market share and overtaking Toyota and Honda for the first time this year; and
• 94% of the franchises sold through the third quarter of 2023 were to private buyers who are leading industry consolidation.

The biggest deal announced during the quarter was the $1.2 billion acquisition of Jim Koons Automotive Companies by Asbury, which closed on Dec. 11. The Koons procurement is the third largest in auto retail history in terms of purchase price and the highest price ever paid for a regional dealership group.

Concerns of Dealers

An earlier Kerrigan dealer survey found that 27 percent of dealers expect the value of their business to decline in the next 12 months, the highest rate since the pandemic and more than double 2019 and 2020’s rate of 14percent.

Notably, according to the report, through the third quarter of 2023, multi-dealership transactions tracked to record levels, surging to 99, and representing nearly one third of the buy/sell market, further evidence of the industry’s focus on the importance of consolidation and scale.

Value Above Pre-Pandemic Levels

While the number of sellers coming to market has risen, the buy/sell market remains largely a seller’s market given the substantial amount of capital still on balance sheets of dealers who are seeking to acquire dealerships, particularly high-demand franchises in growth markets.

As a result, dealership valuations remain about two times pre-pandemic values, although slightly lower than 2022. Kerrigan noted dealership valuations do not rise and fall in lockstep with industry earnings.

“When earnings soared in 2021, buyers assumed they would come back down to earth and took that into account when buying stores,” noted Kerrigan. “As earnings start to normalize in 2023 and 2024, the impact has already been baked into valuations and thus the decline in current earnings is not having a meaningful impact on valuations, as the decline has long been assumed.”