First half 2023 buy/sell activity increased 26% compared to first half of 2022, resulting in a record 418 completed transactions over a trailing twelve-month period; market on track for a record year driven by resilience of auto retail profits and the strength of the dealership balance sheets, according to the Second Quarter 2023 Blue Sky Report^® by Kerrigan Advisors

The auto dealership buy/sell market continues to gain momentum toward a record-breaking year, with 211 transactions completed in the first half of 2023, representing 357 franchises. As reported in the just-released Blue Sky Report® by Kerrigan Advisors, the mid-year 2023 results mean that buy/sell activity has increased 26% since 2022, a rate that exceeds the typical full-year results pre-Covid. There have been a record 418 transactions completed on a trailing 12-month basis, 9% higher than the prior full-year record (2021).

“This rate of activity in the first half of the year is evidence that the consolidation of auto retail continues unfazed by rising interest rates and economic headwinds,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “More sellers are considering going to market and are requesting valuations to lock in today’s historically high blue sky.”

Kerrigan Advisors’ first annual OEM survey, released in August, found that auto retail’s robust position was in part due to improved inventory efficiency and higher earnings. Executives surveyed expected recent inventory turn rates to continue as a “new normal” of 30 to 60 days of vehicle inventory on dealership lots, far below the prior norm of 60 to 90 days or more. Furthermore, the survey found that 90% of OEM executives do not expect the industry to return to pre-Covid gross profit margins on new vehicles.

According to the Blue Sky Report, dealership earnings remain 3-times higher than the pre-pandemic period, despite declining ~20% since their peak in 2022. Over the last three quarters, the US public dealer groups’ net income has risen 9.5%, due to a 74% increase in profit margins since 2019 and a 33% increase in dealership count. This, along with strong blue sky values, has led to well-capitalized buyers — especially in fast-growing, business-friendly states such as Texas, Florida, South Carolina, North Carolina, Georgia and Arizona. These buyers are thinking big: year-to-date there were 69 multi-dealership transactions in the first half of 2023, representing 33% of the buy/sell market.

“We are seeing a tremendous amount of interest in top dealership groups in growing markets, like our recent sale of MCE Automotive Group in Greenville, South Carolina – one of the fastest growing markets in the Southeast,” said Kerrigan. “We expect more sizable transactions in growth markets this year, as buyers seek to increase their exposure to expanding population centers and consolidate their regional presence, which is what AutoNation did in purchasing our client the Bob Baker Auto Group in Carlsbad, California.”

The first half of 2023 also saw a significant shift to domestic franchises, making up 58% of the buy/sell market — a 19% increase compared to the full year of 2022. Kerrigan Advisors attributes this move to anticipated changes to the dealership business model, particularly with the aggressive rollout of electric vehicles (EV). According to Kerrigan Advisors’ 2022 Dealer Survey, over 40% of dealers surveyed felt that the majority of domestic franchises would see reduced profitability because of their EV strategies. Despite this, domestics remain underrepresented in the buy/sell market relative to their 66% share of total franchises in the US.

“Many dealers are sensitive to the changing auto retail landscape, and that’s spurring them to seek assistance from our firm to understand what their blue sky value is in today’s fluctuating auto retail market,” said Kerrigan. “Some dealers lack a reliable succession plan and are nearing retirement; most see changes to auto retail as potentially detrimental to their business model, which is prompting more kitchen table discussions around a possible sale.”

Kerrigan Advisors’ OEM survey supports some of these concerns. Executives surveyed indicated they did not expect EVs to be sold through the negotiated pricing model; 20% expected EVs to be non-negotiable in price and 48% thought some portion of EV sales would include a set pricing model. In addition, 22% of executives surveyed believe the agency sales model will come to the US, with 43% unsure. While Kerrigan concludes that none of these changes are necessarily negative for future profitability, they are significant and will require dealerships to continuously adjust their business model to maintain and grow profits. For some dealers and their offspring, the unknown associated with the future auto retail model is enough for them to decide the time is right to consider a sale.

2023 Buy/Sell Trends

For the second quarter of 2023, Kerrigan Advisors identified the following trends that are expected to impact the buy/sell market for the remainder of the year:

• Higher interest rates have minimal impact on blue sky values
• An increasing number of dealers assess business value in consideration of a sale
• High-levels of key employee compensation increasingly challenges buyers’ proformas

Since March 2022, the Federal Reserve raised interest rates 10 times, resulting in a correlated rise in borrowing costs for dealers and consumers. As such, growing dealership groups are facing higher financing costs and more conservative lending terms on acquisition loans and mortgages, particularly since the failure of Silicon Valley Bank. Interestingly, despite the disruption in the lending community and higher interest rates, the expected concomitant decline in blue sky values and multiples has yet to occur: publics’ blue sky multiples have increased 20% since the first quarter of 2022.

“Rising interest rates usually have a direct negative impact on equity values, including franchise blue sky,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “We think the valuation aberration experienced today is due is the unexpected strength of the industry’s financial performance, especially auto retail’s higher profit margins. This shows the strength and resilience of the dealership business model.”

In addition to the auto retail industry’s strong record of profitability, additional factors such as pent-up consumer demand and newfound OEM inventory discipline are outweighing affordability issues related to rising interest rates. These rising financing costs are not impacting blue sky values because of the strength of the industry’s balance sheet. Auto retail has amassed an estimated $200 billion in pre-tax profits since 2019, because of years of record earnings. Many buyers can, and will, pay for acquisitions with their own capital and not tap into the debt markets for financings, reducing the impact of rising borrowing costs on blue sky values.

Kia and Cadillac Low-End Multiple Upgraded; Cadillac and Honda Outlook Moves to Steady

Kerrigan Advisors raised Kia’s low-end multiple by 0.25, resulting in a revised multiple range of 4.25 to 5.25, and increased Cadillac’s low-end multiple by 0.50, for a new multiple range of 3.00 to 3.50. Said Ryan Kerrigan, Managing Director of Kerrigan Advisors: “Buyer demand for the Kia franchise continues to rise. Kia franchises often trade above our published multiples due to the franchise’s impressive market share in the fastest-growing markets. A key to Kia’s sustained success is that dealer/OEM relations are highly positive, consistently ranking among the top 10 in NADA’s Dealer Attitude Survey.” Kia’s multiple outlook remains positive.

Kerrigan Advisors sees rising buyer interest in Cadillac, as sales per franchise improves, particularly for exclusive dealerships. Cadillac has augmented inventory management 49%, per its inventory efficiency rating by Cloud Theory as of June 2023 — the most of any franchise. Cadillac now ranks 7^th among all franchises for inventory turn rates. As a result, Kerrigan Advisors is increasing Cadillac’s blue sky multiple and moving its multiple outlook to steady as the firm continues to monitor the brand’s EV rollout. In addition to changes to Cadillac and Kia, Kerrigan Advisors moved Honda’s multiple outlook to steady from negative after a 23% increase in sales through the first half of 2023. “Honda’s improvement in new vehicle sales, should it continue, could result in a positive outlook for Honda’s blue sky multiple in future quarters,” said Ryan Kerrigan.

Highlights from the Second Quarter 2023 Blue Sky Report® by Kerrigan Advisors include:

• 211 buy/sell transactions were completed through the first half of the year representing 357 franchises, a 26% increase for transactions and 24% increase for franchises sold from the first half of 2022.
• 69 multi-dealership transactions were completed in the first half of 2023, representing 33% of the buy/sell market.
• 58% of 2023’s buy/sell market was domestic franchises, a 19% increase from the full year of 2022.
• Through the first half of 2023, the US public dealer groups’ new vehicle gross profit margins are 149% higher than pre-Covid levels.
• Ford has the highest buy/sell market share at 14.8%, largely due to dealers’ concerns over the OEM’s rollout of electric vehicles and potential resulting changes to the business model.
• 92% of the franchises sold in the first half 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 72%. The US public dealer groups acquired 8% of franchises sold in the first half of 2023.
• The US public dealer groups’ estimated blended average blue sky multiple has increased 59% in the last four quarters to 4.6x. This is largely due to a 48% uptick in The Kerrigan Index™ since October 2022.
• Kerrigan Advisors estimates the average dealership group with three dealerships is worth $39 million in blue sky, double the level pre-pandemic.
• US public dealer groups’ net income has risen 9.5% over the last three quarters, remaining three times higher than 2019.
• Over 60% of OEM executives expect a new normal of 30-to-60-day inventory turn rates, according to Kerrigan Advisors’ 2023 OEM Survey; improved inventory management is expected to support higher new vehicle gross margins in the near term.
• 90% of OEM executives do not anticipate a return to pre-Covid inventory levels, according to the Kerrigan Advisors’ 2023 OEM Survey.
• 22% of executives surveyed believe the agency sales model will come to the US, with 43% unsure, according to the Kerrigan Advisors’ 2023 OEM Survey.
• Since the pandemic, average dealership payroll per employee has risen 46%, which is contributing to challenges in buy/sells as buyers balance their acquisition’s proforma and employee retention post-transaction.

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 over 11,000 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. 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 strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.

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 over 11,000 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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