INCLINE VILLAGE, Nev. – The auto dealership buy/sell market has hit yet another historic high, with 320 transactions completed in the 12-month period since the economy re-opened in June 2020, according to the Second Quarter 2021 Blue Sky Report® by Kerrigan Advisors, the industry authority on dealership valuation and buy/sell trends. Mostly driven by today’s unprecedented dealership profits, values for auto dealerships were at record levels, reaching an average of $9 million of blue sky per dealership for Q2, with 2021 on track to be the most active buy/sell year in history.
There were 144 dealership buy/sell transactions in the first half of 2021, a 27% increase over the first half of 2020 and a record number for the period[1]. Kerrigan Advisors expects transaction activity to rise dramatically in the second half of the year as more sellers seek to complete their transaction before year-end to potentially lock in a lower tax rate and avoid a tax increase in 2022.
“Today’s activity level is a byproduct of the industry’s explosive profitability,” said Erin Kerrigan, Founder & Managing Director of Kerrigan Advisors, noting that in the first half of 2021, the average dealership earned a jaw-dropping $1.96 million, 164% more than the industry’s average between 2015 and 2019, with the average dealership achieving a record trailing-twelve month profit of $3.51 million.
“Even with the removal of PPP funds received in 2021, most dealerships are achieving profitability levels several times higher than historical averages. Dealerships currently provide an incredibly high ROE of over 57% on average, and dealers have more capital than they have ever had. This is fueling buyer demand that is well outstripping supply and creating a seller’s market, further heating up the market and increasing blue sky values,” said Kerrigan.
The report also discusses the impact of the semiconductor chip shortage that continues to limit the supply of new vehicles. With the resurgence of COVID cases further disrupting the entire auto industry’s supply chain and impacting inventory availability and pricing, new and used vehicle prices are up 10.6% and 29.6% respectively since January 2020, the largest rise in an 18-month period.
Intersecting with these factors, according to the report, is robust consumer demand for new and used vehicles, spurred by access to quarantine savings and government stimulus, low borrowing costs and a growing appreciation for the safety and importance of personal mobility. This, combined with dealerships’ increasingly productive and efficient business operations, is leading to record gross profits per vehicle: more than double for new compared to pre- pandemic levels, with used vehicle gross profit per vehicle rising 79%.
“Given the industry’s incredible profit performance over the last 12 months, and positive outlook for 2022 and beyond, we find most dealers are buyers, not sellers, and few are willing to accept the status quo,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “Today’s dealers, both private and public, want to grow and have tremendous access to capital to do so. Few alternative investments provide the risk adjusted returns available from dealership acquisitions.”
OEM Approval Process Increasingly Sluggish
A significant trend potentially impacting blue sky multiples, according to the Blue Sky Report, is the slow-paced OEM approval process as OEMs are inundated with transactions. Increasingly, OEMs are requiring more terms from buyers, including more stringent framework agreements and facility upgrades.
“We expect the challenges of OEM staffing on buy/sell approvals to become a crisis issue in the fourth quarter, given the economic fallout of missing a 2021 close,” said Erin Kerrigan “The old adage ‘time kills deals’ is still alive and well. OEMs that take too much time to approve their buy/sells and subject the process to unnecessary red tape and restrictions will likely find a larger number of their buy/sells fall apart, ultimately leading to less buyer demand and potentially lower blue sky multiples for their franchises.”
Kerrigan Advisors did not adjust blue sky multiples in Q2, but did make changes to the outlook for certain franchises due to fluctuations in buyer demand. Chrysler Dodge Jeep Ram (CDJR)’s multiple outlook was upgraded from Steady to Positive. “Buyer demand for CDJR is on the rise as Stellantis defies the odds with higher vehicle inventory levels, resulting in impressive sales gains (32.4%) in the first half of 2021 and high sales per franchise (787 sales per franchise) in the last twelve months,” said Ryan Kerrigan.
Nissan’s multiple outlook was also upgraded, from Steady to Positive. “We expect to see an increase in Nissan’s multiples by the end of 2021,” continued Kerrigan. “Nissan franchises improved in sales and profitability this year with buyers once again interested in acquiring Nissan franchises, particularly in strong, high growth markets such as Florida, Texas, and Nevada. We saw this firsthand when Kerrigan Advisors represented on the sale of Fuccillo Nissan of Clearwater, Florida to Morgan Auto Group in August 2021.”
Kerrigan Advisors had one multiple outlook downgrade for the quarter, moving Ford from Steady to Negative. “Buyer demand for Ford dealerships is on the decline, relative to its domestic competitors. Ford sales rose significantly less than its top competitor and dealers are skeptical of the ramifications for future dealer profitability of its imminent shift to a build-to-order model,” concluded Kerrigan.
2021 Buy/Sell Trends
Kerrigan Advisors identified the following three trends it expects to meaningfully shape the buy/sell market for the remainder of 2021 and into 2022.
Buyer pool of existing dealers expands as cash accounts rise and access to debt grows
Sellers become less flexible on valuation as their profits soar
OEMs are increasingly overwhelmed by 2021’s buy/sell volume and less flexible on framework terms
Highlights from the Q2 2021 Blue Sky Report® by Kerrigan Advisors include:
144 transactions were completed in the first half of 2021, a 27.4% increase over the first half of 2020 and a record number for the period.
320 transactions were completed over the last 12 months (June 2020 to June 2021), more than any 12-month period in recent history.
Including real estate, the average dealership’s enterprise value is approaching $21M, a 19% percent increase over 2019.
There were 51 multi-dealership transactions in the first half of 2021, a 96% increase as compared to 2020, representing 35.4% of the buy/sell market -- the highest percentage ever recorded during the first half of the year.
Average dealership blue sky values rose to another peak in the second quarter to $9M, up 42% from 2019.
More efficient business operations and higher gross profits contributed to increased dealership profits in the first half of 2021— an average of $1.96 million, more than any pre-pandemic 12-month period, leading to a trailing-twelve month profit of $3.51 million, 147% more than the pre-COVID average (2014-2019).
The Kerrigan Index™ continues to outperform S&P 500—up 1038% since 2009, outperforming the S&P 500 by 179%.
Import franchises represent a disproportionate share of the buy/sell market at a combined 58% (41% non-luxury and 17% luxury), relative to their franchise 31% market share of just 34%.
The public auto retailers continued to allocate capital to acquisitions, spending a record $4.45 billion over the last four quarters.
In the first half of 2021, Toyota represented over 10% of the franchise buy/sells, in line with Ford’s, CDJR’s and Chevrolet’s buy/sell market share - impressive when considering that Toyota has only 1,238 franchises in the US, as compared to Ford’s 3,006, CDJR’s 2,461, and Chevrolet’s 2,924.
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 nearly 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.
