It only takes a cursory glance to find out that prices are rising in every industry, for producers and consumers alike. That goes even more so for automotive mergers and acquisitions – the value of the average car dealership on the market has skyrocketed in the past two years, and that trend looks to continue throughout 2022. Several factors are driving this phenomenon – and ensuring that it will remain a factor for some time to come.
Why Automotive Dealerships Are Selling For Record Amounts, and How Long Can It Last
Cars Are Selling for More
It’s well-known almost to the point of sounding cliche now: Automotive dealerships had their most profitable years ever in 2020-2021, even though severe supply chain issues caused by the COVID-19 pandemic caused their inventory to plummet. The demand is simply so strong that low inventory levels were no obstacle.
Consumers were, and continue to be, willing to pay premium amounts for their preferred new vehicle. New car prices are nearly 15% higher this year than they were in 2019, according to the US Bureau of Labor Statistics. And the inflation rate for automobile prices continues to outpace the overall rate.
The simple result of these factors is that dealership revenues are going up, which makes valuations for the sales of those dealerships proportionately higher.
Real Estate is More Expensive
Purchasing a car dealership also implies purchasing a set of buildings on a piece of land. Anything that would bump up the price of real estate would therefore also cause the price of acquiring a dealership to rise, as well as the dollar amount of the required mortgage capitalization loan.
According to the St. Louis Fed, the overall price of commercial real estate in the second quarter of 2021 rose by 7.04% compared to the previous year, a number which still appears to be headed steadily upward. Factoring this into dealership transactions, it’s inevitable that the cost of an auto dealership would have gone up.
There Are Tax Incentives for Electric Vehicles
It’s also common knowledge that automotive dealerships across the country are selling more and more electric cars, with various jurisdictions aiming for all new cars sold to be electric-powered between 5 and 10 years from now.
Greater availability, more charging stations being built, and a high level of media exposure is making it an attractive option for consumers to purchase new electric vehicles. But, possibly most importantly, both the federal government and state and local governments are providing favorable tax breaks for electric car buyers. This particular trend can only become more widespread, thanks to the aforementioned mandates for all-electric new cars.
Consumers Have Reasons to Service Their Cars
Pandemic-related restrictions in 2022 are much looser than they were in 2021. Most places have lifted many of their regulations regarding travel, and people are not only driving to work when they may not have been doing so last year, they are also traveling for pleasure.
Factors of this kind can mean an increase in business on the service side for auto dealerships. More car use means that tune-ups will be needed. Some drivers may also be taking in their cars for services they had neglected. With service departments being an important part of dealerships’ profit margins, this is another cause that leads to higher revenue and therefore higher valuations.
Can the Rise in Car Dealership Valuations Continue?
Of these factors, the current rate of inflation cannot last forever, but it also will not end suddenly. Real estate prices can easily fluctuate. There will continue to be reasons for customers to want a new electric vehicle, and in fact, more people will be swayed by them in the near future. A bump in demand for services as pandemic restrictions end will eventually drop off.
All in all, however, the overall picture shows nothing to directly slow the growth in car dealership market prices. The growth rate may decelerate, but it appears these prices will continue to go up for the foreseeable future.
At DCG Acquisitions, our experience and research provide the tools your dealership group needs to navigate these turbulent but exciting times in terms of dealership valuations.