Over the past three years, our Performance Brokerage Services firm experienced a record-breaking volume of dealership sales (72 in 2021, 92 in 2022, and pacing for 90-100 in 2023). Our 10 offices across North America are seeing similar trends form throughout these industries.
When we evaluate the buy-sell environment, we consider two specific areas: marketability and value. Marketability assesses the buy-sell activity volume, the balance between acquisition supply/demand and the sale’s overall likelihood. Value refers to the dealership’s pricing. Naturally, the two influence each other, and both have changed drastically over the past 12 months.
This article is intended to provide insight into the current market conditions for an RV dealership’s sale by exploring the supply of acquisitions vs. buyer demand, interest rate hikes’ consequences, shifts in post-pandemic earnings and how they collectively affect dealership valuations.
Acquisition Candidates
During the pandemic, we saw an influx of dealers successfully selling their businesses while profits, values and buyer demand were each at an all-time high. Although those dynamics have altered, even more dealers are exploring an exit, unenthused about bunkering down through another business cycle.
In a more worrying event, some dealers are showing losses and are forced to reinvest their Covid earnings back into their businesses. The turn is happening as variables well outside the industry’s control created the perfect storm.
The rise in interest rates increased floorplan expense, reduced F&I profits and impacted consumers’ purchasing power. According to Equifax, consumer auto loans and credit card debt reached the highest delinquency level in the past 10 years. The vehicle inventory levels vs. consumer demand imbalances are causing margin erosion, higher advertising costs and crippling curtailments on 2022 RVs. Unfortunately for some dealers, a sale represents the only avenue to avoid additional capital investments or even bankruptcy, further increasing the number of dealerships available on the market.
Buyer Demand
Although several transactions still are being consummated, given the increase in available acquisition candidates, buyers are more selective with the stores and markets they pursue and are looking for value in the buy.
Some buyers have less appetite for external growth because of the continued uncertain economic and retail environment. Instead, they are investing in their businesses and facilities, resolving operation challenges and waiting for the market to normalize.
Additionally, the RV industry’s unfavorable headlines caused some out-of-market buyers to pause their entry into the unfamiliar space.
Interest Rates
When buyers prepare a proforma and acquisition projection, one line item is Other Interest, separate from Floorplan Interest. As business loans’ cost of capital is considerably higher, this Other Interest expense further suppresses expected profits.
In an attempt to neutralize the Other Interest effect, more buyers—including some larger dealership groups—look for sellers to provide financing at rates more favorable than traditional financing.
Multiple of Earnings
Valuing dealerships is more of an art than a science, especially given the industry’s profitability over the past three years and its uncertainty going forward.
Unlike in real estate, we do not have comparables when conducting a deal. Every dealership is highly unique. So, the dealership industries we service gravitated toward the “multiple of earnings” concept, where a dealership is valued by its ability to produce future earnings.
The multiple of earnings concept takes into consideration various tangible and intangible variables that influence the “multiple” applied to the dealership’s earnings. Among the variables considered may be brands carried, market size, location, facility, acreage, number of service bays, management team and reputation. However, buyers must recognize that to a large extent, the dealership’s earnings already reflect those variables.
Ultimately, buyers will use the dealership’s financial data to prepare projections and reverse-engineer an offer to buy based on the buyer’s desired return on investment.
Pandemic Earnings (Pre and Post)
For the past few years, we all have discussed what the “new normal” would be. However, the industry has not yet settled into any normal retail environment.
So, as the earnings during the pandemic were not sustainable became clear, the post-pandemic earnings also reflect a normal environment. Historically, buyers could rely on only three years of financial statements and may have even applied a straight average to value the goodwill. The historical calculation is no longer an acceptable method.
As a firm, we now go back as far as 2018 and use numerous weighted averages and KPIs in our formulas to account for the fluctuations to arrive at a value. Buyers who are less confident in relying on track records or predicting the retail market remain conservative when preparing forecasts and valuations.
Valuation Paradox
The aforementioned elements all influence values: A decline in earnings, short-term uncertainty, an increase in interest rates, more acquisition candidates on the market, a smaller buyer pool and greater selectivity by buyers all are factors.
Notwithstanding, we are still consummating transactions at record-breaking values for quality dealerships and dealership groups. The scarcity of high-quality dealerships available for sale and the growing difficulty in greenfield expansions have created this paradox. Among the greenfield expansion difficulties is a lack of brand availability, high construction costs, rising loan interest rates and a longer ramp-up period during a down market.
With the high-quality dealerships we represent for sale, buyers recognize the business may not come back on the market for decades, or even generations. Such acquisitions gain multiple buyers’ attention, which introduces a fear of loss and a sense of urgency. The buyer’s decision to proceed is validated, knowing others also are seriously considering the opportunity.
However, to command a premium, a unique buyer must be identified. The deal must be a strategic acquisition that fits the buyer’s long-term growth objectives. These deals may include national dealership groups as well as regional groups, who are often strong candidates for local or tuck-in opportunities. Regional groups easily can integrate these acquisitions into their dealership network, spread the overheard across their portfolios, and relocate managers to operate the dealership and protect their investments.
The Ever-Changing Market
In October 2022, we published a similar article highlighting the dealership buy-sell market, and our findings were different, as the market is ever-changing and unpredictable.
Therefore, recognizing this is only a moment is critical.
According to ITR Economics and RVIA, 2024 wholesale shipments are projected between 363,000 and 375,000, a 22% to 24% increase over 2023’s forecast. The forecast offers some retail environment hope, which should trickle down to the buy-sell market.
Our advice to our clients has not changed in 30 years. There is no sense trying to predict the market’s peak, and market conditions cannot be the only driving force when deciding to sell a multimillion-dollar family business.
Sellers should determine their timing by whether a sale accomplishes their personal and business goals. So, when the time is right for you and your family, find partners who will assist you in evaluating the market conditions, determining your business’ marketability and maximizing the value of your life’s work.
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.
