IRVINE, Calif. — The auto dealership buy/sell market continued its high level of activity, fueled by a healthy economy and an increased pool of sellers reacting to auto retail’s future, according to Q1 edition of The Blue Sky Report released by Kerrigan Advisors.

Fresh investment and capital from new players, including international buyers, kept the pace at a high level — though down from last year’s peak, analysts said.

The continued steady pace of 17 million annual new-vehicle sales, compounded by pressure on dealership profits and emerging changes to the dealership business model, have essentially defined the market into two camps: buyers who have outside capital or resources to embrace and drive change, and sellers who are increasingly reliant on OEM incentives for profitability, and are concerned about how coming changes will impact generational succession plans.

Among the most noteworthy transactions underscoring this trend is AutoCanada’s acquisition of Chicago’s Grossinger Automotive Group, an Automotive News Top 150 dealer group and Kerrigan Advisors client. The Grossinger transaction was the largest transaction ever made in auto retail by a non-U.S. company.

“As with 2017, we’re continuing to see the economic benefits of consolidation, and how that’s attracting new buyers to auto retail,” said Erin Kerrigan, managing director of Kerrigan Advisors. “There is also a rising interest by many dealers in selling. In particular, smaller dealership groups, who are struggling to maximize profit through economies of scale, are concerned about the viability of their family business for future generations. These dealers would rather sell now when values are high then risk the unknown.”

This cautious approach to unknown factors has also changed the way buyers are approaching the market. While the past saw them base valuations on future potential earnings, today’s focus is on current performance.

“In the last decade, buyers mostly priced acquisitions based on expected pro forma earnings post-transaction,” said Ryan Kerrigan, managing director of Kerrigan Advisors. “With industry sales slowing, however, many are now unwilling to base their purchase price on what a dealership could do. They are focused on what the dealership is currently doing in terms of profit. That is what drives value today.”

Highlights of the June quarterly report include:

• Actual transactions declined quarter over quarter, but the number of franchises represented in each transaction increased by 45%. As a result, the total number of franchises sold in the quarter remained on pace with 2017.

• Multidealership transaction activity increased 27% in the first quarter of 2018, compared to 2017. Kerrigan Advisors expects the pace of multidealership transactions to remain high in 2018.

• Among franchises being acquired, domestic franchises (44%) maintained their leading position with the highest buy/sell market share, followed by import non-luxury franchises (40%) and import luxury franchises (16%).

• Import franchises had the highest turnover rate — a reflection of high buyer demand and low franchise supply. The supply/demand imbalance of many import franchises also results in higher blue sky values and multiples.

• U.S. public auto retailers’ U.S. acquisition spending increased 62% in the first quarter of 2018, compared to the Q1 2017. At this spending level, public retailers are tracking towards over $1.5 billion of U.S. acquisition spending in 2018, a level that would exceed 2014’s peak level.

• Private buyers, however, continue to dominate buy/sell markets with almost 80% of franchises. Private buyers are accessing debt and equity capital to finance their growth and compete with the publics for sizable acquisitions.

The Blue Sky Report is a comprehensive quarterly report on dealership M&A activity, as well as franchise values. It includes analysis of all transaction activity in for the quarter and lays out the high, average, and low blue-sky multiples for each franchise in the luxury and nonluxury segments. To preview and download the most recent report, click here.