How Long Will Record Dealership Valuations Last?

July 1, 2021

Among many other anomalies, the year 2020 gave us a peculiar story about dealership valuations.

The COVID-19 pandemic sent a chill through the automotive industry in spring 2020. Assembly plants shut down and dealerships closed. Millions of people were out of work. Doom and gloom dominated the news. Whether you were locked down or had to go to work, almost every day was characterized by the phrase “these uncertain times.”

Then the unexpected happened. Just as quickly as auto sales had come to a halt, they began to recover. People still wanted or needed to buy vehicles. This renewed demand put pressure on dealers for new contactless sales processes. 

Most dealers rose to the occasion, moving quickly into online sales, even delivering vehicles directly to customers’ homes and businesses. The automotive retailing industry had begun adapting to the “new normal.” 

Part of this “new normal” for dealers was a decrease in fixed operations, as car owners who were in quarantine didn’t need their vehicles serviced. Fortunately, this decrease was offset by higher retail margins created by strong demand (aided by stimulus payments) and low supply of new inventory.

This trajectory continued through 2020. According to NADA, 2020 new-car sales reached 14.46 million units, only a 9% decline from 2019. 2021 began with the launch of COVID vaccinations in the US, bringing feelings of relief and freedom to the American population. 

People are now beginning to feel comfortable venturing out to many places they haven’t been to for over a year – including new car dealerships and their service departments. We’re entering the post pandemic era?

What does this have to do with dealership valuations?

While the automotive retail was going through the roller coaster of the pandemic, buy-sell activity in the automotive M&A arena was heating up. The year 2020 broke all records with 289 completed dealership M&A transactions, including 103 in the fourth quarter alone. 

Dealers’ pre-tax profits shot up by nearly 50%, even though total revenue declined slightly. The valuations of the publicly-traded dealer groups reached all-time highs toward the end of 2020. The 2021 stats so far confirm the continuation of these trends, with a total of 135 buy-sell transactions from January 1 through June 8, according to Automotive News.

So, let’s break down some of the factors that are influencing dealership valuations at the present moment and take a look at where these factors are leading.

Factors enhancing valuations 

Many factors are having a positive effect on the current buy-sell environment. They include:

  • Continued strong consumer demand for vehicles
  • Increased per-vehicle gross profit margins
  • Lower operating expenses & improved operating efficiency
  • Record-breaking blue sky multiples
  • Easy access to low-cost capital and low-interest financing
  • Lower usage of public transit and ride-sharing options
  • Strong profits across the board, from large groups to small, from luxury imports to domestic franchises
  • Expectations that increases in dealership values will continue through 2021

Consolidation continues to be a trend in this extremely fragmented market. The large public and private dealer groups continue to grow larger through sizable acquisitions, while individual mom-and-pop dealerships are being rolled up into smaller groups in pursuit of a regional footprint. This trend will likely continue as many dealer principals reach retirement age and look to sell their business.

Factors detracting from valuations

As good as the current buy-sell environment appears to be, we would be remiss if we didn’t call attention to some factors that could pull valuations in the opposite direction. They include:

  • The ongoing computer chip shortage; subsequent inventory shortage and decrease in total vehicle sales
  • Steadily increasing prices making new cars unaffordable for many buyers
  • Reduced used car inventories as drivers unable to find a new car keep their current vehicles longer
  • The transition to electric vehicles (EVs), which will require large investments
  • Uncertainty of how quickly the general public will embrace EVs
  • Future reduction in service and parts income, as EVs require much less maintenance than traditional vehicles
  • Franchise laws may change to permit direct sales by manufacturers
  • The cost of mandated OEM facility upgrades, which is an ongoing burden

These are some of the wild cards that could change the course of the good times we find ourselves in. Unfortunately, navigating issues like chip shortages, a shortage of vehicles to sell, and consumer acceptance of electric vehicles won’t be solved by dealers on the showroom floor. The good news is that the vehicle manufacturers are also facing these existential problems and are working overtime to resolve them.

The outlook: sunny with a slight chance of showers

The majority of evidence points to a forecast of continued strong dealership valuations in the buy-sell space. As long as buyers want to buy, sellers want to sell, and capital is available at attractive rates, momentum should continue in an upward direction. 

This positive momentum also depends on the prompt resolution of the current chip shortage and the return to full production schedules by the vehicle manufacturers, which is anticipated to end by the fall. Dealers need full lots to make increased new car sales and maintain lucrative used car inventories.

The next pothole in the road will be the challenge of selling EVs to a population that is only beginning to gain knowledge and experience with them. Manufacturers are spending billions of dollars to develop and advertise them, so the next question is — how will EVs be received when they’re more widely available on the showroom floor? How will the dealers’ service and parts income be affected by the simplicity and reliability of electric vehicles? 

The best we can do now is to make educated predictions and prepare our businesses accordingly.

As with most types of businesses, automotive retailers who are aware of and prepared for these challenges (and whatever others come their way) will be the dealers who survive and prosper as the 21st Century unfolds. If there’s one thing that the COVID-19 pandemic has taught us, it’s that people continue to value the automobile as their main mode of transportation. People will continue to buy cars.

If there’s another thing the pandemic taught us, it’s that as automotive professionals, we’re more than capable of taking on unforeseen situations.

DCG Acquisitions is here for your dealership buy or sell transaction

DCG is one of the country’s leading, and fastest-growing, automotive M&A firms. We pride ourselves on our network of connections — with automotive manufacturers, financial lenders, dealership buyers and sellers, and more — that help us create a qualified, competitive environment on both sides of the sale. 

Contact DCG Acquisitions to speak directly with an Automotive M&A specialist and learn how our expertise can help you get the most out of your next dealership purchase or sale.