The auto dealership buy/sell market soared to a new high with 313 transactions in Q3 2023, marking an 11% increase from 2022, according to Kerrigan Advisors' Third Quarter 2023 Blue Sky Report.
Erin Kerrigan, founder and managing director of Kerrigan Advisors, highlighted the market's resilience amidst rising borrowing costs and declining dealership earnings. Despite these challenges, earnings remain historically high, well above pre-pandemic averages. This trend is significant considering the cumulative $235 billion in pre-tax profit generated by auto retail since 2020, much of which remains uninvested in dealership acquisitions.
The ongoing increase in buy/sell activity is credited to more sellers entering the market, strong blue sky values, and buyers’ substantial capital reserves accrued from record earnings over the past four years.
"Most are investing equity, rather than raising debt, and thus are less impacted by higher borrowing costs due to the rise in interest rates," Kerrigan said.
The report also revealed dealership valuations in 2023 remain near peak levels, averaging about twice the pre-pandemic values, though slightly lower than in 2022. Dealership valuations have not fluctuated significantly with industry earnings. Even as earnings normalize in 2023 and 2024, the impact has already been considered in valuations.
Another key finding in the report is the surge in multi-dealership transactions, which reached 99, representing nearly one-third of the buy/sell market. This indicates a strong industry focus on consolidation and scale. Kerrigan Advisors’ fifth annual survey showed a 200% increase in dealers intending to sell in 2023 compared to 2022, while those looking to acquire declined by 18%.
This shift in the market is partly due to anticipated changes in auto retail, requiring larger balance sheets and significant investments in digital retailing technology and infrastructure, especially for electric vehicle sales. Moreover, 27% of dealers expect their business value to decline in the next 12 months, the highest rate since the pandemic.
In contrast, U.S. public auto retailers’ acquisition spending on U.S. dealerships declined by 26% to $1.1 billion in the third quarter of 2023, compared to the same period in 2022. However, their spending on international and other business acquisitions increased by 165%, indicating a broader investment approach.
Ryan Kerrigan, managing director of Kerrigan Advisors, said pre-pandemic performance is increasingly irrelevant in assessing franchise value. The industry is witnessing a shift, with a focus on operational efficiency and the adoption of big data and technology. Additionally, the evolving dynamics around EVs are influencing dealership valuations, with concerns about the profitability and value of franchises that heavily invest in EVs.
The full report is available for industry professionals and stakeholders seeking detailed insights into the current state and future trends of the auto dealership market.
