Dealership buy/sells increased 11% YoY, with trailing twelve-month transactions surpassing 2021’s prior peak, according to the Third Quarter 2023 Blue Sky Report^® by Kerrigan Advisors; consolidation sparked by the pandemic has yet to abate, blue sky values remain high and acquisition growth, fueled by tremendous access to capital from operations, remains impervious to interest rates

The auto dealership buy/sell market hit another impressive record through the third quarter of 2023 with 313 transactions completed — an 11% increase over the same period in 2022, according to the just-released Third Quarter 2023 Blue Sky Report^® by Kerrigan Advisors, and is on track for another record year. 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.

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

“The continuing 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.”

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 near peak levels in 2023, on average about two times pre-pandemic values, although slightly lower than 2022.

“It is important to keep in mind that 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.”

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. “The strength of this trend is reflective of the auto retail’s adaptation to the evolving marketplace where size will be an imperative to future success both on a market and group level,” said Kerrigan.

According to the 5^th annual Kerrigan Dealer Survey, the percentage of dealers seeking to sell dealerships rose more than 200% in 2023 compared to 2022, while the percentage seeking to acquire declined 18%. Kerrigan Advisors believes the rise in dealerships available for sale is a byproduct of expected changes to auto retail in the coming years, which will likely require larger balance sheets and significant investments in digital retailing technology and infrastructure to support electric vehicle sales. The survey also found that 27% of dealers expect the value of their business to decline in the next 12 months. This is the highest rate since the pandemic and nearly double 2019 and 2020’s rate of 14%.

“In an evolving auto retail environment, dealers are facing a crossroads to either grow their enterprise or exit,” continued Kerrigan. “With franchise valuations still above pre-pandemic levels, and dealers concerned that blue sky could decline if profit margins normalize, more are capitalizing on today’s blue sky rather than assuming the risks associated with growth, particularly in an industry facing tremendous change due to government mandated EVs.”

US public auto retailers’ acquisition spending on US dealerships through the third quarter of 2023 declined 26% to $1.1 billion, from the same period in 2022, but their spending on international and other business acquisitions increased 165%, resulting in an overall rise in capital allocated to investments for the year. This is the first time since Kerrigan Advisors started tracking these companies that their collective capital allocation to US dealership acquisitions was in line with both their allocation to capital expenditures and international & other investments.

“This is a clear sign that the publics are assessing their growth strategy, not only through US dealership acquisitions but also in relation to the evolving global auto retail marketplace,” said Kerrigan. “Their allocation to alternative investments, such as foreign dealership groups, financial services companies and technology solutions is a reminder of the multiple options available to the largest groups in the industry. The publics can, and will, invest in the most economically attractive opportunities for their shareholders and are making these investments with the changing auto retail marketplace in mind.”

Third Quarter 2023 Buy/Sell Trends

Kerrigan Advisors has identified the following three important trends that we believe will meaningfully impact the buy/sell market over the next 12 months:

• 2019 financial performance increasingly irrelevant to valuation
• Leasing dealership real estate (versus buying) becomes more economic
• OEMs’ EV strategies impact future franchise profitability and blue sky value

“Pre-pandemic performance is increasingly irrelevant when assessing franchise value - 2019’s dealership financial performance is not only almost four years old, but also a reflection of a very different retailing environment,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “Buyers who seek to superimpose 2019 earnings as a replacement for projecting normalized earnings are overlooking the substantial and evolving differences between the pre- and post-pandemic auto retail business model.”

The pandemic motivated dealers to heavily scrutinize operating expenses, particularly employee productivity, which ultimately resulted in significant improvements in operational efficiencies. In addition to fewer employees producing more revenue, the industry continues to evolve significantly as auto retail has become increasingly reliant on big data and technology to optimize sales. Perhaps the best most recent example of this changing dynamic is Hyundai’s November announcement of its Amazon partnership for the sale of new vehicles. With the AI revolution, auto retailing will undoubtedly continue to change, making 2019, and the historical way of retailing, a vestige of the past.

EVs continue to impact the buy/sell market as dealership buyers are increasingly limiting the number of EVs they are willing to purchase, concerned about exposure to low-demand devaluing inventory. Today, many dealerships are sitting on over 100 EV days’ supply as consumers are unattracted to the high price tags and logistical challenges associated with EV ownership, driving a low demand environment for EVs, with a resulting increase in EV discounting at the dealer level, led by Tesla, which has reduced prices 22% year-over-year per KBB.

“In the next two years, Kerrigan Advisors sees the auto retail industry approaching a challenging tipping point in EV sales,” continued Ryan Kerrigan. “The government mandated transition to EVs will likely have major implications for franchise values, depending not only on the success of an OEM’s sales strategy, but also on location. With CARB states currently mandating that 35% of OEM sales be zero emissions by 2026, OEMs will have a financial incentive to send the majority of their EV vehicles to those states (currently 15 states), resulting in greater disparities in EV and ICE availability from state to state. This disparity could lead to monumental differences in dealership profitability based on location and, ultimately, greater gaps in franchise value, adding a new variable to blue sky valuation.”

Toyota, Honda, Subaru, Porsche and Lexus Multiples Increased; Ford Sees Reduced Multiple; Ford, Nissan, CDJR and Lincoln Multiple Outlooks Downgraded

For the third quarter of 2023, Kerrigan Advisors increased the multiple outlooks for five franchises namely Toyota, Honda, Subaru, Porsche, and Lexus. These franchises join Kia as those most likely to see improvements in valuation in the coming year. Toyota continues to outperform on every level.

“Toyota is the most trusted franchise by dealers, with an incredible 72% of dealers surveyed having a high level of trust in the franchise,” said Erin Kerrigan. “This monumental lead in the trust equation has resulted in the franchise having the highest expected increase in profits as a result of the OEM's retailing changes and the highest buyer demand in Kerrigan Advisors’ buyer database.”

Ford’s multiple was reduced by 0.25 on the high-end, resulting in a revised blue sky multiple range of 3.25 to 4.0, in line with CJDR. Ford remains the franchise most expected to see a decline in value because of the OEM’s changes to its retail model. Consistent with this negative sentiment, Ford is the non-luxury franchise least expected to see a rise in valuation in the next 12 months. These results reflect dealers’ lack of trust in the OEM with Ford ranking as the least trusted franchise. With this lack of trust, Kerrigan Advisors has seen a notable rise in Ford dealers seeking a sale.

Kerrigan Advisors also downgraded the outlook for four franchises, including Ford, Nissan, CDJR and Lincoln. The negative outlook for these franchises is driven by their poor results in the 2023 Kerrigan Dealer Survey, particularly on the question of trust. Most notably in the survey, CDJR saw a significant increase in dealers expecting the franchise to decline in value, from 24% in 2022 to 53% in 2023 – a 29-percentage point increase. Kerrigan Advisors expects this negative dealer sentiment reflects CDJR’s rising inventory levels and lack of incentive spending. Also, 39% of dealers have no trust in CDJR, placing the OEM as the 4^th least trusted franchise.

Highlights from the Q3 2023 Blue Sky Report^® by Kerrigan Advisors include:

• 313 dealership buy/sell transactions were completed through the third quarter of 2023, an 11% increase, resulting in 406 transactions for the 12 months ending September 2023.
• 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 54%, 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.
• 94% of the franchises sold through the third quarter of 2023 were to private buyers who are leading industry consolidation. The largest private groups represented 20% of the buy/sell market, while smaller private groups remained the largest buyers pool at 74%. The US public dealer groups acquired 6% of franchises sold through the third quarter of 2023.
• US public auto retailers’ acquisition spending on US dealerships through the third quarter of 2023 was $1.1 billion, a decline of 26% from the same period in 2022. On a trailing twelve-month basis, the publics spent $2.7 billion on investments, the second highest level since 2021, with nearly half of their investments going to non-US dealerships.
• During the quarter, Asbury announced the $1.2 billion acquisition of Jim Koons Automotive Companies, a Kerrigan Advisors’ client, which closed on December 11, 2023. The Koons acquisition is the third largest in auto retail history in terms of purchase price and the highest price ever paid for a regional dealership group. AutoNation, Lithia and Penske also completed US acquisitions during the third quarter.
• Through the third quarter of 2023, the US public dealer groups’ new vehicle gross profit margins were 145% higher than pre-pandemic averages.
• Kerrigan Advisors’ 2023 Dealer Survey found that 27% 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 14%.

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 nearly 10,000 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, as well as offering restructuring and turnaround consulting services. 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 strategies, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate analysis.

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 nearly 10,000 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.

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