Dealership buy/sell transactions increased 6% YoY according to the Annual 2023 Blue Sky Report by Kerrigan Advisors; 680 franchises sold in 2023, an increase of 5.4% compared to 2022, defying broader corporate M&A trends

The auto dealership buy/sell market experienced a record year of buy/sell activity with 397 completed dealership transactions, up 6% compared to 2022, according to the just-released 2023 Blue Sky Report^® by Kerrigan Advisors. This activity included the third largest transaction in auto retail history – the sale of Kerrigan Advisors’ client, Jim Koons Automotive Companies representing 20 dealerships and the addition of $3 billion of revenue to Asbury Automotive Group. Fueled by significant access to capital, auto retail defied the broader corporate mergers and acquisitions (M&A) market, which declined 30% in 2023. In 2023, 680 franchises were sold, an increase of 5.4% compared to 2022.

“Despite negative headwinds of higher interest rates and declining profit margins, dealers continued to seek acquisitions, powered by their belief that scale is not only critical to future success, but essential to sustaining their businesses in the face of an evolving industry,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “We expect the consolidation trend, ignited by the pandemic-induced surge in industry earnings, to continue in 2024 as the industry has amassed nearly a quarter of a trillion dollars of pre-tax earnings since the pandemic.”

To underscore this, Kerrigan noted that nearly half of the dealers surveyed by Kerrigan Advisors in November 2023 said they planned to acquire one or more dealerships in the next twelve months, while only 6% expected to sell dealerships in the same period. The Kerrigan Dealer Survey has the highest level of respondents of any survey in the industry at over 650.

The auto dealership buy/sell market’s outperformance relative to the broader corporate M&A market is, according to the report, a result of its distinctly private structure. The majority of dealerships are owned by private dealers, who on average own three dealerships, which minimizes the impact of the public capital markets on transaction fundamentals. “The private, fragmented composition of auto retail translates into a very insular buy/sell market, driven primarily by its own internal dynamics often unrelated to the broader public financial markets,” continued Erin Kerrigan.

Dealership Valuations Decline Slightly, Publics’ Mark Second Highest Acquisition Spend

With an active buy/sell market driven by strong buyer demand, dealership valuations sustained historically high blue sky values in 2023, albeit lower, on average, than their peak in 2022. Kerrigan Advisors estimates that blue sky values declined on average 8% in 2023, far less than the estimated 26% reduction in industry earnings. The modest decline in blue sky is driven by buyers’ expected future earnings, not past performance.

“When earnings soared in 2021, buyers correctly projected that pandemic earnings were unsustainable and normalized earnings for valuation purposes. When earnings declined in 2023, these normalized expectations were already accounted for in most valuations and thus had less of an impact on blue sky,” said Kerrigan.

The public dealership groups acquired 61 franchises for $2.7 billion in 2023, the second highest US acquisition spending level on record. Of note, Kerrigan Advisors was the only firm to represent sellers of dealerships acquired by the publics in 2023, selling 30 dealerships to the publics for total proceeds of $1.94 billion, representing 71% of the total public acquisition spending for the year.

The South Rises, Domestics Dominate Buy/Sell

Notably, there continues to be a clear regional bias towards business-friendly, high growth markets in the South. This region, which has led the buy/sell market for multiple years, saw its share rise to 42% in 2023, more than double that of the West and Northeast regions. Kerrigan Advisors finds buyer demand for dealerships in the Southern states to be very high, particularly those markets with the highest population growth, strong franchise laws and business-friendly climates. This trend is consistent with the record valuations Kerrigan Advisors continues to observe in many of these markets.

Additionally, Detroit Three franchises represented the majority of the buy/sell market in 2023, taking significant share during the year. Kerrigan Advisors attributes the rise in domestics market share to an increase in the number of domestic sellers coming to market, as well as buyers’ attraction to their lower multiples. Many domestic sellers are concerned by their OEM’s electrification plans and are choosing to sell rather than manage through the EV transition.

Honda and Mazda Multiples Increased; Mazda and BMW Multiple Outlooks Upgraded to Positive

For the fourth quarter of 2023, Kerrigan Advisors increased the multiples for Honda and Mazda to reflect continued improvement in sales performance and stronger buyer demand for these franchises. Honda is regaining market share lost in 2022, resulting in its sales per franchise increasing at the fastest rate of any OEM, to second place behind Toyota.

“Honda is the fourth most trusted brand in the industry and third most amongst non-luxury brands,” said Ryan Kerrigan, Managing Director at Kerrigan Advisors. “In our 2023 Dealer Survey, 83% of dealers expect the Honda franchise to increase in value or stay the same in 2024, above the non-luxury industry average of 78%.”

Mazda increased sales by 23% in 2023, nearly double the market rate and continues to benefit from its captive partnership with Toyota Financial Services, which was extended for another five years, resulting in an upgrade of Mazda’s blue sky multiple and outlook.

Kerrigan Advisors also upgraded BMW’s multiple outlook to positive to reflect the franchise’s outperformance in 2023, particularly with its successful EV product introductions. Kerrigan Advisors expects a future increase in the BMW blue sky multiple if buyer demand continues to rise.

Mercedes, Nissan and Lincoln Multiples Reduced

Kerrigan Advisors reduced the multiples for Mercedes, Nissan and Lincoln. Mercedes faltered in its EV rollout, resulting in a rise in inventories and a steep reduction in gross profit margins. A softening in buyer demand for Mercedes franchises is reflected in the results of Kerrigan Advisors 2023 Annual Dealer Survey in which 14% of dealers surveyed had zero trust in the brand. Buyer demand also continues to wane for Nissan and Lincoln franchises as dealers report a lack of trust in the future of the franchise and concern about the OEM’s EV plans and ballooning inventories (140 days for Lincoln and 106 days for Nissan as of December 2023).

Kerrigan Advisors is also maintaining a negative outlook on the current blue sky multiples of Nissan, Ford, CJDR, Volvo, Lincoln and Infiniti. These franchises have the highest risk of future declines to their blue sky multiples, particularly as the auto retail market becomes more competitive and the success or failure of EV sales determines franchise profitability.

2024 Buy/Sell Trends

In the 2023 Annual Blue Sky Report, Kerrigan Advisors identified the following three important trends that are expected to meaningfully impact the market in 2024.

• Buyers increasingly focus on last twelve months’ financial performance to determine blue sky value
• Top import and luxury franchises in growth markets continue to achieve record valuations
• State electric vehicle (EV) mandates, if left unchecked, will have negative implications for blue sky values

2023 was the start of a shift in valuation methodology for blue sky as buyers are becoming increasingly focused on the last twelve months’ financial performance to determine blue sky value, according to the report. “Going forward, active buyers are increasingly of the belief that current earnings reflect the ‘new normal’ for our industry, so most buyers are starting to apply adjusted blue sky multiples to the most recent earnings when determining blue sky pricing, largely ignoring pandemic-period profits,” said Ryan Kerrigan. “In this regard, the second half of 2023 will serve as a significant driver of dealership valuation in 2024. The trend of emphasizing the most recent profitability will likely continue as we move through 2024.”

While valuations are trending down for most franchises, top import and luxury franchises in high growth markets continue to hit record valuations in part because many are retaining pandemic-level earnings due to growth dynamics in their markets. In addition to strong earnings performance, they have much more attractive investment characteristics. In 2023, import and luxury franchises outperformed the broader market in new vehicle sales growth, achieving 14% and 20% growth rates respectively, as compared to 11% for non-luxury and 7.6% for domestics.

Given a more challenging EV marketplace, dealers operating in CARB states will increasingly find their OEMs tested to meet the CARB EV sales thresholds required by state regulators. As currently planned, EV demand will determine total vehicle sales in CARB states starting in 2026 when 35% of vehicles sold must be electric. “This target is aggressive given EV sales in 2023 are not near the threshold required in less than two years. A government-imposed limit on ICE sales by 2026 will impact the revenue and profits of dealerships located in CARB states, reducing a buyer’s projected earnings for those franchises,” said Ryan Kerrigan. “We believe that this decline in projected future earnings will negatively impact the blue sky values of these franchises, perhaps as early as this year.”

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

• 397 dealership transactions were completed for the full year 2023, a 3.7% increase over 2021’s prior record and a 6.1% increase over last year. The increase in buy/sell activity was primarily driven by the first half of the year, when a record 211 transactions were completed.
• The number of franchises sold rose to 680 in 2023, the second highest level on record.
• The number of multi-dealership transactions increased in 2023, matching 2021’s record. 32% of transactions completed during the year were multi-dealership transactions, resulting in 126 multiple dealership transactions.
• The industry saw a significant increase in the percentage of dealers with 11 or more dealerships in 2023 and those with 5 or fewer dealerships continued to decline, reflecting an industry in the early innings of regional consolidation as a precursor to eventual national consolidation of the major metro centers.
• The domestics represented 54% of the buy/sell market in 2023 taking 4% share from the import luxury market and 1% share from the import non-luxury market.
• In 2023, public dealer groups acquired 61 franchises for $2.7 billion, the second highest US acquisition spending level on record (albeit 70% below 2021’s record of $9 billiion). The only mega transaction completed in 2023 was the acquisition of Koons Automotive by Asbury for $1.5 billiion.
• US public dealer groups ended the year at a blue sky multiple below the 7.3x average of the top franchises, and mostly in line with the 3.75x average of domestic franchises, often leaving them priced out of the buy/sell market for top assets.
• 87% of the acquisitions made by the publics in 2023 were in the South, with just 11% in the West and 1% in the Northeast, consistent with the broader market bias towards business-friendly, higher growth markets.

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 10,000 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 leading sell-side advisor and thought partner to auto dealers nationwide. Since its founding in 2014, the firm has led the industry with the sale of over 260 dealerships generating more than $8 billion in client proceeds, including two of the largest transactions in auto retail history – the sale of Jim Koons Automotive Companies to Asbury Automotive Group and Leith Automotive to Holman. The firm advises the industry’s leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, Kerrigan Advisors does not take listings, rather they develop a customized sales approach for each client to achieve their personal and financial goals. In addition to the firm’s sell-side advisory services, Kerrigan Advisors also provides a suite of consulting and investor services including acquisition and expansion strategies, valuation assessments and benchmarking, open point proposals and real estate advisory.

Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report®, which includes Kerrigan Advisors’ signature blue sky charts, multiples, and analysis for each franchise in the luxury and non-luxury segments. To download a preview of the report, click here. The firm 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. To read the 2023 Kerrigan Dealer Survey, click here. To read the 2023 Kerrigan OEM Survey, click here. Kerrigan Advisors also is the co-author of NADA’s Guide to Buying and Selling a Dealership.

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