What to Keep in Mind When Acquiring a Dealership

In the current strong market for auto dealership M&A, dealer principals and dealership groups looking to expand their portfolios often face a wealth of choices. So many different dealers selling so many different brands in so many different markets can make for a bewildering array of options.

The best way to avoid decision paralysis – or losing out on a desired acquisition – is by taking a realistic look at the dealerships on your shortlist and then weighing the most important factors against one another. These factors can vary, based on the acquirer’s size, market coverage, and its short-term and long-term business goals. 

DCG Acquisitions has advised many clients during the buying process and has the experience and know-how to help you when you’re preparing to purchase a new location. Some of the items to consider include:

What automotive brands would be best suited for your company to add: The automotive landscape is made up of a wide variety of diverse brands, from the low-volume makers of exotic sports cars to the largest mass-market brands with millions of customers nationwide. The franchises that you decide to acquire will reflect your business’ strategic objectives, which can include:

• More dealerships that sell specific brands
• Underperforming dealerships that could have greater profit potential
• Up-and-coming franchises whose value will increase over time
• Mass-market brands that generate large volumes
• Luxury brands that provide large per-unit profits
• Brands that have a good portfolio of EVs available or coming soon
• Total coverage of the market from entry-level to top-of-the-heap

Increasing local dominance in your strongest business areas versus eliminating a weakness or unexplored area: In a market with sufficient supply, like automotive M&A currently, shopping is like a game of balancing choices. Acquisitions give you the opportunity to either double down or change things up! If you do proper due diligence and follow through correctly, there are no wrong answers.

Let’s say that you are already the largest luxury car dealership in a given county. Do you add an additional franchise of a luxury car brand you currently sell – or do you add a new brand that makes premium off-road or recreational vehicles, a market segment in which you have not yet done any business? Would you prefer to be the sole company people in your area come to in order to purchase your original luxury brand, or are you better off being a purveyor of the upscale special-purpose vehicles that will also likely appeal to your existing luxury-car customers? Once you analyze the local market and run the numbers, you will be able to see which option has more upside potential.

Retaining staff members at the newly acquired dealership in order to maintain continuity and smooth operations: As a buyer making an acquisition, you know that this purchase is about much more than just some real estate and a vehicle inventory. The ultimate performance of the point being purchased is largely down to the staff who are in charge of its day-to-day operations. Retaining these employees can make the difference between a smooth transition and a disaster.

Let’s face it: The automotive retailing industry does not have the best record when it comes to retaining people. Dealerships have typically been plagued by high employee turnover rates, especially in the sales department and the service bays. This can be a big red flag. Dealerships that struggle with these issues will be priced at lower multiples, reflecting the major investment that the new owner will have to make to turn the staffing situation around.  

The good news is that the best dealerships have found a way around these issues, providing a workplace with positive attributes that include:

• Work-life balance
• Highly competitive compensation and benefits 
• Staff training in every aspect of customer service 
• A well-thought-out onboarding process for new employees
• Ongoing training in problem-solving, communication, and cooperation
• Opportunities for promotion for those who wish to move up
• Recognition of employees’ accomplishments in the workplace

Dealerships that can offer this kind of working environment are ideally set up for a seamless transition when a new owner steps in – as long as it continues to operate in the same fashion. If it does, it is a win-win for both the new owner and the loyal, productive staff members who are part of the deal. Rooftops that run like finely-tuned machines will always command high prices, which buyers are usually perfectly willing to pay!

Considering when it may be worthwhile to go over the budget you have set versus when it is a hard limit: Buying a dealership is a somewhat cold and rational business decision. This is even more true today, as the dominance of very large privately-owned and publicly-financed dealer groups influences the buy-sell market. 

These entities are looking for more than just increased sales. They see dealerships as pieces on a chess board, each contributing to the outcome of the larger long-term game that they are playing on a regional or national basis. Buyers of all sizes, large or small, can benefit from understanding the approach of the “big guys.”

Sure, you may have done your due diligence and established a maximum price that you are willing to pay to acquire a given dealership. But what if some previously unknown information comes to light that suddenly makes it worth more to you? This can include:

• The dealership has just added a franchise that will significantly increase sales
• The dealership’s current franchise is releasing a new game-changing vehicle that will sell in high numbers
• The dealership has recently won awards for sales and/or customer satisfaction
• You want to keep a larger competitor from entering your market or market segment

In cases like these, as well as others, you may be justified in paying more for a dealership you believe is now actually worth more in the long run. 

Other factors to consider: A dealership is a highly complex business made up of many different profit centers. Some additional things to focus on when making an acquisition are:

• Strong profits from used cars and F&I
• Room for sales growth in the market area
• A strong online presence that generates solid leads that turn into sales
• High CSI scores
• An efficient service department that generates consistently good profits

DCG Acquisitions is your expert advisor and partner in working through all aspects of your next acquisition. When it comes to funding, DCG Capital will be an important ally in securing the funds and capitalization needed for an ambitious, profitable expansion. Our experienced team of experts are at your service.

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.