In recent years, we have seen drastic fluctuations in profitability and buy-sell activity levels, which may have you asking whether now is the right time to sell your dealership.
The answer lies in the follow-up question: What is your motivation for a sale?
Predicting the market’s peak is senseless, as the market is dynamic. Dealership profitability, interest rates, economic and political uncertainty, buyer demand for growth opportunities and the availability of acquisitions on the market are several variables that drive valuations and transaction volume.
This article is intended to provide insight into current market conditions and offer tips on navigating the new RV buy-sell landscape. Performance Brokerage Services specializes in buy-sell activity for automotive and RV dealerships.
In our experience, several key factors influence buy-sell activity in the current environment.
Dealer Profitability
The industry is working through aged inventory and margin compression; higher expenses for floorplan interest, advertising and payroll; and a challenging retail environment.
Reduced profitability naturally impacts an acquisition’s valuation. Granted, past earnings do not solely determine a business’ value. However, even larger buyers are not immune to these challenges and are more cautious and conservative when preparing their projections.
Interest Rates
Interest rates have heavily affected dealer profitability. Higher rates increased floorplan expense, lowered F&I services penetration and raised consumer financing costs for retail purchases.
However, if the purchaser plans to finance an acquisition, the elevated cost of capital will further suppress expected profitability. The dynamic results in some buyers structuring their deals more creatively. At times, buyers are even looking for sellers to offer financing at more attractive rates than they could secure from the banks.
Economic and Political Uncertainty
The overall uncertainty surrounding the economy, geopolitical tensions and an election year cannot be ignored. With a potentially volatile election looming, some buyers have entered a “wait-and-see period,” where they are holding off on acquisitions as they await clarity.
The situation is further magnified in the tight-knit RV industry, as dealers often discuss their growth objectives, or lack thereof, with each other, potentially citing uncertainty as a reason for delaying investments and acquisitions.
Buyer Behavior
Basic supply and demand principles must be considered when evaluating the buy-sell market. Larger dealer groups are constantly presented with sale opportunities and have the luxury of being selective with the stores and markets they pursue.
These buyers are disciplined investors who do not waiver much in their buying parameters and desired rate of return. With more dealers exploring a sale, acquisition opportunities are increasingly reaching the open market, exacerbating a buyer’s selectivity. Additionally, the buyer pool contracted as some withdrew from acquisitions altogether. These buyers choose to resolve internal operational challenges, enhance their facilities or wait for the market to normalize. Their absence reduces the marketplace buyer pressure, further skewing valuations.
Transactions Continue
Notwithstanding the above variables, buyers continue to acquire dealerships. While being selective, national and regional dealer groups are demonstrating motivation for buying high-quality businesses that fit their long-term growth objectives.
Although buyers are legitimately concerned about the retail environment, scale and consolidation still benefit these growing organizations. Some advantages include a better negotiating posture with vendors and manufacturers, shared expenses across multiple rooftops, access to top personnel through promotion/relocation opportunities and employee benefits, and a more significant edge over their competitors. Given the few high-quality acquisition targets, buyers understand that these businesses rarely make it to the open market and do not want to miss out.
Additionally, greenfield expansions do not provide the same ability to reach a desired profitability level as in the past. Some challenges include rising capital costs for construction loans, difficulty securing top-rated talent, lack of brand availability and a down retail environment. For some buyers, this validates their preference to acquire an existing dealership.
Standing Out
The buy-sell market is crowded. For years, we witnessed national and regional dealer groups declare why they felt they were the acquirers of choice. Well, the market has, in fact, shifted.
Now, you must stand out in a crowded marketplace. Demonstrate to buyers how engaging in a transaction with you will benefit them more than the other sellers they are pursuing. Preparation is paramount in distinguishing and differentiating your business. Get your business in order by enhancing your operation, cleaning up the assets, preparing your financial documents and engaging industry experts to manage the process.
Operational Enhancement
Every dealership is as unique as the dealers who own them. Every buyer has their own parameters of what they seek in an acquisition candidate. However, we often see similar elements rise to the top: performance, personnel, culture, location and facility.
Many resources are available to help you enhance your performance, such as the RVDA or 20 Groups. Adequately staff your business so it does not heavily rely on your involvement. Instill a customer- centric philosophy and exemplify the values a buyer wants to carry post-sale. Maintain your facility and demonstrate a sense of ownership pride. We would not suggest relocating your business or building a new facility to attract a buyer, but we do encourage you to control what you can.
Cleaning Up the Assets
While aged vehicle inventory continues to be worrying, acquiring another location can potentially assume undesired new and unfavorable used inventory. At times, we have even seen the discount a buyer is offering on this inventory kill the deal altogether.
Continue a concerted effort to eliminate aged inventory, maximizing your cash position and earnings before a sale. When transferring the vehicle inventory during a buy-sell, remember there is no opportunity for F&I, doc fees, or manufacturer incentives and rebates.
A buyer will consider parts and accessories obsolescence, which can limit your desired financial outcome. To combat this, regularly perform inventory counts and write-downs. You can also run sales on your older inventory or sell it on third-party sites.
Too often, we see the furniture, fixtures, equipment and company vehicles become a contentious point as we near the closing. Businesses commonly have personal vehicles registered to the company that will be excluded from the sale. However, those vehicles should be identified in advance. The business’ other assets should remain on site and available to the purchaser. A negotiated value, book value or appraised value can determine the assets’ purchase price. All are acceptable. Therefore, having an updated Depreciation Schedule or Fixed Asset List ensures you receive fair market value for your assets and eliminates the risk of causing friction at closing.
The buyer may agree to assume some vendor contracts and liabilities. However, the liabilities that are not assumed might create financial exposure. Review your early termination rights or penalties. Also, be cautious about signing or renewing any long-term contracts.
With the property and improvements carrying a significant portion of your equity, an appraisal is important in determining a sale’s viability. You cannot establish your negotiating posture without correctly understanding your real estate’s value.
Preparing Your Documents
Each buyer requires different documents for analysis, including financial statements, inventory reports, asset lists, employee information, real property information, vendor contracts, dealer agreements and more. Lately, many have discussed having a CPA review, compile or audit the internal financial statements.
This offers the buyer greater confidence in the legitimacy of the figures. However, reviewing those documents is not required and depends on the quality of the operation and the transaction size. Equipping the buyer with sufficient information ensures you receive an informed offer.
Your Advisory Team
Build a team of industry specialists who will manage the transaction on your behalf and safeguard your best interests. We view you as the quarterback and your advisory team as your offensive line, protecting you at all costs.
Your team should include an attorney, CPA, financial planner and a dealership broker. Each team member should have experience in the dealership sector, as these transactions are highly complex and loaded with industry-specific nuances. By assembling a team, you demonstrate you are serious about a sale, and engaging in a transaction with you will more likely reach a successful outcome.
When they engage in a transaction, buyers incur significant payroll, accounting and legal expenses. Buyers are allocating company resources to the project. Implementing the steps listed in this story will offer buyers a frictionless transaction and confidence that it will reach the finish line. Buyers value a successful deal’s certainty.
Dealers considering an exit might find it more challenging than in recent years. Still, transactions are being completed, and we continue to deliver exceptional client results. If we successfully position your business to stand out, you will enhance the marketability of the acquisition, increase the sale’s likelihood and maximize your business’ value. It is never too early to begin a dialogue or prepare your business for a future sale.
Jesse Stopnitzky is a partner and the director of the RV Division for Performance Brokerage Services, North America’s highest volume dealership brokerage firm advising on buy-sell activity for automotive and RV dealerships.
