First quarter 2023 completed transactions increase 43% compared to First quarter 2022, resulting in a record 405 transactions over a trailing 12-month period, driven by multi-dealership transactions, an increase in sellers coming to market, and private buyer interest in business-friendly states, according to the First Quarter 2023 Blue Sky Report® by Kerrigan Advisors
The auto dealership buy/sell market outperformed all previous first quarters on record in 2023, launching into the new year at a robust pace that saw 103 transactions completed — a 43% increase over the first quarter of 2022, according to the just-released Blue Sky Report® by Kerrigan Advisors. The first quarter results mean that a record 405 transactions have been completed in the trailing 12 months ending March 2023, an impressive 5.7% increase over 2021’s prior record and an 82% increase over the 2015-2019 pre-pandemic average of 223. This buyer demand was driven by a continuation of historically elevated industry earnings. Despite earnings declines for most dealers in the quarter — and a 25% drop for the publics — they remained well above pre-pandemic levels due, in part, to higher vehicle gross margins and lower operating costs.
“The economic contraction many had expected in 2023, due to rising interest rates and banking turmoil, did not materialize in the first quarter. A favorable combination of sellers coming to a market with strong buyer demand, particularly in growing population centers and business-friendly states, kept the buy/sell market very active,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “While valuations have come down slightly, they aren’t budging in top markets like Texas and Florida.”
Kerrigan Advisors notes that buyer demand for expansion in these high-growth markets may be underpinning the transaction activity. Franchises located in thriving, business-friendly states, such as Texas and Florida, are commanding steep price premiums as buyers anticipate that these states will likely outperform the industry in the event of a national recession. Longer term, buyers are recognizing the compounding impact of annual economic growth driven by net migration and lower taxes.
In addition, the buy/sell market of 2023 has been fueled by an increase in sellers who are seeking to capture today’s historically high dealership and real estate values in advance of a potential recession. “Many dealers who lack a succession plan realize today’s valuations may represent the exit opportunity of a lifetime, and next generation dealers may have also decided to sell due to concern over disruptions from EV adoption and direct-to-consumer OEM sales strategies,” said Erin Kerrigan.
Another significant characteristic of the first quarter was the record 29 multi-dealership transactions, representing 28% of the buy/sell market. Said Kerrigan: “The large number of dealership group sales in the quarter reflects private buyers’ tremendous access to capital, primarily from accumulated cash flow from operations over the last three years. The largest private groups doubled down on acquisitions in the first quarter, commanding 22% of the buy/sell market, as they deployed their capital war chests to expand their businesses geographically and increase scale.”
As private buyers dominated the buy/sell market in the first quarter – the Top 144 Private Dealership Groups collectively acquired a record 37 franchises – spending on US acquisitions by the publics declined 87%, from $606 million in the first quarter of 2022 to $78 million. This was in spite of net income of $1.2 billion in the first quarter of 2023, albeit 25% lower than the first quarter of 2022, but 290% higher than 2019’s quarterly average of $415 million. Volatility in the market, coupled with historically strong earnings, has depressed the publics’ blue sky multiples, limiting their pricing power for US dealership acquisitions. Generally, a public company will not acquire a dealership at a price that results in a dilution to its earnings per share. However, the public dealer groups spent a record $653 million, 38% of allocated capital, on international and affiliated business investments in the first quarter, more than the total amount spent for the full year of 2022, presumably because these investments’ valuations were more attractive.
For the first quarter of 2023, US light vehicle sales for the import luxury segment outperformed the domestic and non-luxury import segment by 85% and 202%, respectively, possibly due to insulation from rising interest rates. Given the limited number of top luxury franchises in the US and the deep pools of capital seeking acquisitions, Kerrigan Advisors expects some of these franchises will see their multiples increase in the coming quarters, should the trend of luxury outperformance continue.
2023 Buy/Sell Trends
For the first quarter of 2023, Kerrigan Advisors identified the following trends that may meaningfully impact the buy/sell market for the remainder of the year:
- Highest volume franchises continue to command price premiums
- Rising interest rates and banking sector turmoil increase acquisition financing costs
- Buyers increasingly expect audited financials for the industry’s largest acquisitions
Ryan Kerrigan, Managing Director of Kerrigan Advisors said: “Consolidators are actively seeking volume franchises, and are willing to pay a significant price premium. Higher volume dealerships usually achieve above-average profit margins because the fixed expenses are much lower relative to revenue, resulting in significantly higher profitability and attractive economies of scale.” Kerrigan Advisors has observed that dealerships with over $100 million in revenue generally report double the operating margins of dealerships with under $50 million in revenue, enabling higher-volume dealerships to achieve consistently elevated profit margins. Also, higher volume franchises are considered easier to operate with more margin flexibility and an ability to recruit top managerial talent.
Rising interest rates, meanwhile, are creating consequences for dealers looking to grow through acquisition — especially smaller dealers who rely on local and regional banks. Banks are passing on the rising costs from the FDIC in the form of higher fees and some are limiting their lending terms to be more conservative with their underwriting. Rising borrowing costs for acquisitions could lead to lower blue sky values later this year.
Finally, buyers are increasingly expecting audited financials. While all public auto retailers are required to maintain audited financials, many private dealers are not, because private dealers’ lenders or shareholders have not mandated it. In most industries, once a private company surpasses $200 million in revenue, an audit is either recommended or required. The lack of audited financials even for many of the Top 150 Dealership Groups is an industry anomaly.
Kia Multiple Increases, Moves Ahead of Hyundai; Honda and CDJR Multiples Decrease
For the first quarter of 2023, Kerrigan Advisors increased the blue sky multiple for Kia, now valued slightly above its sister brand, Hyundai. “This is a result of Kia’s continued success increasing sales per franchise to a level that surpasses Honda and Subaru,” said Ryan Kerrigan. “Buyer demand for Kia franchises continues to increase, thanks to rising dealership profitability, excellent dealer relations and reasonable facility requirements.” The blue sky multiple adjustment is also consistent with survey results from the Kerrigan Advisors 2022 Dealer Survey, when Kia was the franchise most expected by dealers to increase in value.
Kerrigan Advisors reduced Honda’s blue sky multiple on the high-end to 6.0 from 6.25 due to declining buyer demand as a result of market share losses for the franchise. Kerrigan Advisors also reduced Stellantis’ (CDJR) high-end blue sky multiple to 4.0 from 4.25 — a direct result of the OEM’s mismanagement of its supply chain since the second quarter of 2022, resulting in an oversupply of vehicles, particularly expensive trucks. “With this reduction, we are moving the multiple outlook to steady, as it appears CDJR is focused on rectifying the oversupply of vehicles with an increase in targeted incentive spending,” continued Ryan Kerrigan.
Highlights from the Q1 2023 Blue Sky Report® by Kerrigan Advisors include:
- 103 dealership buy/sell transactions were completed in the first quarter, a 43% increase relative to the first quarter of 2022.
- A record 29 multi-dealership transactions were completed in the first quarter of 2023, representing 28% of the buy/sell market.
- The Top 144 Private Dealership Groups per Automotive News acquired a record 22% of franchises sold in the first quarter of 2023.
- Kerrigan Advisors estimates that the Top 150 Dealership Groups collectively earned $48.6 billion pre-tax over the last three years.
- The public dealer groups’ net income in the first quarter of 2023 of $1.2 billion declined 25% as compared to the first quarter of 2022, but was 290% higher than pre-pandemic, when the average quarterly net income in 2019 was $415 million.
- Through the first quarter of 2023, the public dealer groups’ spending on US dealership acquisitions declined 87% from 2022 to $78 million, representing just 1% of US franchises acquired during the quarter.
- Volatility, combined with a continuation of historically strong earnings, has depressed the public dealer groups’ blue sky multiple, limiting their pricing power for US dealership acquisitions.
- The public dealer groups spent a total of $653 million on international and affiliated business investments in the first quarter of 2023, more than the total amount spent for the full year of 2022 and a record 38% of capital allocated by the publics during the quarter.
- Domestic franchises saw their share of the buy/sell market rise, with Ford, Chevrolet. Buick GMC and Stellantis (CJDR) leading the buy/sell market. Domestic dealers sought an exit due to proposed changes to their retail model with the transition to EVs.
- Some smaller dealer groups may be selling due to concern about EV adoption and direct-to-consumer OEM retail strategies. They see this as offering lower future profitability.
- For US light vehicle sales, the import luxury segment outperformed the domestic and non-luxury import segments by 85% and 202%, respectively, in the first quarter.
- The Kerrigan Index™ decreased 34% to a 27-month low in October 2022 reflecting volatility coupled with a continuation of historically strong earnings.
The Blue Sky Report®, published by Kerrigan Advisors, is the auto retail industry’s most comprehensive and authoritative quarterly report on dealership M&A activity, as well as franchise values. The 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. For more details and to preview the report, click here. To sign up to receive the quarterly report, click here.
Kerrigan Advisors also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail. To access The Kerrigan Index™, click here.
About Kerrigan Advisors
Kerrigan Advisors is the premier sell-side advisor and thought partner to auto dealers in the US. The firm advises auto dealers nationwide, enhancing value through the lifecycle of growing, operating, and monetizing their businesses. Since the firm’s founding, Kerrigan Advisors has had the honor of representing the industry’s largest transactions, including more Top 150 Dealership Groups than any other firm in the industry. Led by a team of veteran industry experts, the firm does not take listings, rather Kerrigan Advisors develops a customized approach for each client to achieve their personal and financial goals. In addition to Kerrigan Advisors’ sell-side advisory and capital raising services, the firm also provides a suite of consulting services including growth strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.
Kerrigan Advisors publishes The Blue Sky Report®, which is the auto industry’s most comprehensive and authoritative quarterly report of dealership buy/sell activity and franchise values, received by over 11,000 industry participants in 35 countries. To register to receive The Blue Sky Report®, click here. Kerrigan Advisors also publishes The Kerrigan Index™, the only monthly report tracking the seven publicly traded auto retail companies. To access The Kerrigan Index™, click here.