The automotive retail buy-sell market is ripe for the picking and selling of dealerships.
In normal times, “hot, hot, hot” would refer to trips to the sun-bleached islands, walking barefoot along the sandy surf and sipping your favourite cocktail. The pandemic squashed that vision for most of us — at least for this winter. “Hot, hot, hot,” in the winter of 2021, applies to the buy-sell market for automobile dealerships.
The question I get asked the most is, why is the market so hot? What is creating the apparent frenzy? Why is the interest so high? It’s hard to land on one specific reason. The truth is that there are several reasons all combining to create an atmosphere of uncertainty for some, and opportunity for others.
If you recall, going into March 2020, there was a lot of optimism in the year ahead — and yes there were a number of buy-sells at various stages of the transaction cycle. This all came to an abrupt stop in mid-March 2020 with the arrival of the uncertainty created by the pandemic.
Everyone is expecting the next federal and provincial budgets to introduce tax increases. Get the deal done now!
Economically, the Canadian Emergency Wage Subsidy allowed many dealers to experience a softer landing than was anticipated a year ago. Most jurisdictions in Canada allowed for partial dealership operations, designated as essential business. This helped prop-up dealerships allowing them to continue to operate with heightened industry-wide benchmark health and safety practices.
While our dealerships at least had some of their doors open, collectively we all re-examined our expenses and the myriad of processes that had expanded over the years and made significant adjustments. As the year progressed, bottom lines improved, partially from the impact of CEWS, but as importantly, a new profitable way of doing business emerged.
Governments at all levels opened their wallets and handed out much needed support to Canadians. In the short-term this provided much needed cash injection into the economy. As this continued, many of us wondered just how this was going to be repaid, if indeed it ever needed to be repaid and when. The undertone of higher corporate, personal, and value-added taxes circulated in the minds of many business-people.
For someone thinking of selling before the pandemic or as result of the pandemic, the urgency to finalize a transaction was brought to the forefront. Everyone is expecting the next federal and provincial budgets to introduce tax increases. Get the deal done now!
The move to electric has many dealers concerned. Not about the vehicles themselves, but more about the additional investments required in facilities and equipment without a solid business case to show payback.
Non internal combustion engine sales have been increasing in Canada, but still are below five per cent of annual vehicle unit sales. Although there are government targets for climate change, many dealers do not see the onslaught of customers looking to buy such vehicles. There is uneven consumer demand with all areas of Canada behaving differently.
If government regulation and incentives are required to get consumers to try these vehicles, where is the money going to come from? How long will it take to build a stream of demand to make the investments required to start delivering a return on investment?
Some dealers are concerned about the cost of digitalization and the disruption of traditional business generation that could be introduced. Brand direct-to-consumer interest, potentially reducing dealership margins and changing the financial fundamentals of dealership operations, has kept some dealers up at night. Here, all brands are not equal. Some brands are open about their plans, and others are not.
Dealers do not want to wake up one morning to find out that their traditional position has been marginalized by their brand. Without a clear vision of how the dealer network will participate in the future, some dealers come to the conclusion that it’s time to get out while there is still opportunity.
Dealerships still produce a lot of cash and will continue to do so for decades to come. Sure, there will be ups and downs, but the overall has been very positive and many believe it will continue to be so.
New entrants into the consumer and commercial vehicle space are taking dead aim at the dealership experience. They advocate a new way of buying a vehicle that is far superior to using a traditional dealership. Those of us in the industry know that great experiences happen at dealerships right across the country day in and day out. Yet the media and new entrants continue to challenge, and it gets quite tiring when the challenges are not based on reality.
Interest rates have been low for a while and have dipped lower since the inception of the pandemic, making financing cheap to access. This spurs on the buyer-demand side of the equation. Vehicle buyers are able to acquire more for the same price they had been paying. Many home buyers have entered or invested in new homes. This has spurred on both the vehicle and housing markets. Some wonder if this is sustainable and what the advent of higher interest rates could have on affordability and spending power.
Low interest rates also are behind the buyer demand for dealerships. The difference between cost and potential profit opportunities has widened, making buyers seriously consider acquiring strong cash flows for minimal costs.
Some dealers are just plain tired. Perhaps succession plans have fallen through. Perhaps there is no one to take over. Perhaps they are old enough and it’s time to consider retirement. Perhaps general managers looking to invest cannot raise enough capital to make such an arrangement, and its related risks may be appealing to the incumbent dealer.
Many dealers are not interested in financing their own departure. Real estate is always a stumbling block, as dealerships normally have tremendous value. Do I sell? Or do I remain the property owner and enter into a long-term lease? Will my estate beneficiaries want to be landlords?
On the buyer side, many current dealers are looking for local opportunities, others for strategic acquisitions, and some are looking to take advantage of today’s dealership pricing. Dealerships still produce a lot of cash and will continue to do so for decades to come. Sure, there will be ups and downs, but the overall has been very positive and many believe it will continue to be so.
So why is the market “hot, hot, hot?”
I’ve tried to cover some of the obvious reasons, and there are many more. Over my career I have learned that regardless of the facts of the day, someone always sees risk and someone else always sees opportunity.
That’s the beauty of free enterprise and entrepreneurship. It might not be the “hot, hot, hot” you are accustomed to, but then again, nothing has been as it was before mid-March 2020. You might still be wearing your bathing suit and flip flops, but there is no beach. Just a computer screen, a desk, and headphones broadcasting live from your home. How the world has changed.
