Positive Outlook for the 2022 Trading Market-Dealer Operations

Erin Kerrigan of Kerrigan Advisors is looking at a positive and record buying and selling market for 2022, and perhaps 2023.

Image: Getty Images

According to the Blue Sky Report of Kerrigan Advisors, the car dealership market broke the record in 2021 and closed 383 transactions representing the 830 franchise. This is 32.5% higher than the previous record for 2020.

Erin Kerrigan, founder and managing director of Kerrigan Advisors, said the buying and selling market was squeezed by record high vehicle prices, supply chain shortages, tight inventories, inflation and geopolitical pressures. It reports that it is ready to do it again.

According to an Automotive News report, the number of dealer acquisitions in the first quarter was higher than expected in 2022, and it is estimated that there were 52 transactions involving about 78 dealers in the first quarter.

Kerrigan said the outlook for December was not very positive. In fact, she expected the buying and selling market to be flat and even declining in some cases, but today she predicts it will be optimal for the 2021 level.

cause? The major market conditions that enriched the market for M & A (M & A) activities in 2021 have continued, at least for now, in 2022. This includes unprecedented dealer profits and higher blue sky valuations.

“Industry revenues were the highest quarters ever, so we have the same dynamics as in 2021,” she says. “The industry has more capital than it was at the end of 2021. Buyers are eager to leverage their capital by buying dealers, and in 2022 there will be more sellers due to future financial risks. This is a recipe for many buying and selling activities. “

She adds that even if supply constraints are eased, vehicle demand will remain higher than supply for some time and “more activity will be possible.”

Automotive News’ 2022 Dealership Outlook Survey confirms her findings. According to their survey, one in five of the 196 dealers and dealer managers who responded said they plan to buy a dealer in 2022. Almost 5% of respondents reported that they plan to buy and sell both stores in 2022.

Rating: Moving goals

Still, uncertain markets with volatile situations that can affect valuations affect valuations and make them moving goals.

“The most difficult part of today’s trading market is the evaluation equation,” says Kerrigan. How would you rate your dealer when your profits tripled or quadrupled? You still need to figure out a fair price. “

Sellers with record revenues often enter the market with unrealistic expectations. We expect to get the highest amount based on the highest profit ever. This is historically due to a market-based dealer evaluation of previous earnings. Today, buyers need to do their homework, understand what the normalized revenue of an acquisition is, and evaluate their business based on it. She explains that the ratings are more positive than the historical ones.

“Interest rates are rising, and higher interest rates are always inversely proportional to valuation,” she says. “We expect them to influence the valuation as buyers’ cost of capital increases. As the size of transactions continues to grow, the average car dealership transaction is more financial market than ever. Sensitive to. “

Due to these factors, Kerrigan is not bullish on the rating. “Revenues can continue to grow, but we don’t expect a significant increase in valuations in 2022,” she says.

However, she argues that it is unlikely that the rating will go down. She uses the housing market as an analogy. Interest rates are rising, but housing prices have not fallen, as demand remains higher than housing supply. “In fact, we’re seeing a rise in reputation as more products are on the market and sold,” she says. “This is the same as what you see in the buying and selling markets of the automotive retail industry. Demand is high, but supply is scarce. Therefore, as soon as a truly attractive asset hits the market, it will be picked up.”

However, as part of her pivot to electrification and digital retailing, she has eased her enthusiasm with concerns about OEM changes to dealers’ business models. Some OEMs are, for example, considering moving to a flat rate for vehicles that removes the negotiation process.

“Uncertainty can make a big difference in a company’s reputation, and the more uncertain buyers are about the franchise’s future revenue, the lower the multiple of the blue sky they expect to pay,” she says. “With this in mind, we have downgraded the outlook for the Chevrolet, Ford and Buick GMC franchises from” stable “to” negative. ” People in the country are obsessed with new business models in their vast dealer network, and unknown factors associated with these changes add a certain level of risk to Performa’s bottom line, which is a multiple in the future. May be reduced. ”

This is already reflected in the trading market. Domestic dealers’ trading market share fell to 46% as the import franchise’s trading market share soared to 54%. The biggest winner here was Toyota, which set a new high of 7.75%. Kerrigan Advisors attributed this to the Toyota OEM partnership business model with dealers in connection with the occasional tense relationship between domestic OEMs and their dealers.

“There is growing skepticism of buyers about Ford and GM’s plans to sell directly to consumers, which could reduce buyers’ demand for these franchises in the future,” she said. say. “In contrast, the demand for Toyota’s franchise is the highest we’ve ever seen. Buyers are facing the challenge of investing in Toyota’s franchise because Toyota is affiliated with the dealer network. I believe I will endure. ”

The road to digital

“Car retailers experienced the“ black swan ”moment in 2020, and the results continued to transform the industry throughout 2021,” said Kerrigan. “The pandemic has become a catalyst because lower new car inventories and higher consumer demand have led to the most extreme supply-demand imbalance in the history of car retail. Dealers are leveraging new pricing capabilities while at the same time. We have reduced costs and increased employee productivity, which has resulted in record profits and operational efficiencies for retailers, all of which will lead to faster retailer trading activities in 2021. I did. ”

“The pandemic has enabled online vehicle sales that were once impossible,” and digitalization has begun to transform the automotive retail industry and accelerate integration. Second, car retailers are accelerating the transition from local to national markets, and the results “will last long, especially for private family-owned dealers,” she says.

For this reason, Kerrigan Advisors hopes that digital retail and OEM direct sales attempts will facilitate industry integration throughout 2022.

“Digital retailers make the concept of primary market areas or PMAs a bit meaningless. They remove the geographical boundaries of dealer franchises and allow them to sell to much larger market areas,” she says. .. “This change requires dealers to rethink how their vehicles are sold. They will compete with others across local regions. They have regional and even national competitors. There will be. ”

What the dealer can do

The pandemic revealed that the scale and national platform separates wheat from rice husks. According to Kerrigan, the first step for dealers considering buying and selling in 2022 is to develop a strategic plan for their business.

“Whether it’s a growth plan or a final exit plan, it’s very important to develop a strategy as the industry evolves,” she says. “The historic inertial strategy of keeping the course and not focusing on redesigning the business for the digital and electrical future is more risky.”

Dealers also need to plan for growth. “I think scale will be an important determinant of success over the next decade,” she says. “They need to ponder their plans. What acquisitions add to their business? How do they want to grow? Do they want to grow into new markets or franchises? Do you want to grow in numbers? Do they have a growing staff? It’s important to consider these things. “

If the dealer considers these things and decides that he is not interested in growth or investment, Kerrigan emphasizes that “the best plan may be the final withdrawal.”

Focus on the future

When asked to take out the crystal ball and predict the trading environment in 2023, Kerrigan states that her ball is “very cloudy.”

“In 2023, we expect the supply-demand imbalance with new cars to remain strong and profits to remain strong. With a warning that unforeseen geopolitical events could change this, I say. But if profits continue to be strong, I think 2023 will be another busy year for buying and selling, but probably not as strong as 2021 and 2022. ”

Originally posted Agent entrepreneur

https://ift.tt/CmSG8QY Positive Outlook for the 2022 Trading Market-Dealer Operations

The post Positive Outlook for the 2022 Trading Market-Dealer Operations appeared first on Autobala.

Auto Updates