2021 Predictions for Auto Dealers
Heading into 2021, we’re going to make some SAAR predictions. Although they may or may not prove true in 2021, we believe this exercise is beneficial for auto dealers who should be looking forward to what the year might bring and prepare themselves should these trends materialize.
The valuation of an auto dealership can be a challenging and complicated process. The structure of most auto dealerships consists of an entity holding the actual dealership operations and a separate entity owning the real estate and building. Often the latter is a related party entity that charges the dealership rent for use of the land and building. Occasionally, the real estate and the dealership operations are contained in the same entity.
We are all used to the local dealership in our town: Bill Jones Honda, Steve Smith Chevrolet. But what about the larger auto groups that have multiple franchises organized in the same entity? How are they valued and what special valuation considerations apply to them?
At the start of a new year, many people, including myself, try to establish resolutions to get the year started off on the right foot. This is especially prevalent this year with most people welcoming 2021 with open arms after the disaster of a year that was 2020. When considering the auto industry in 2020 and predictions for 2021, making some “resolutions” for your dealership to prepare for the year ahead could prove to be helpful. With that being said, here are a few common “New Year’s Resolutions” that can be applied to your auto dealership.
Q3 Climate for Blue Sky Multiples, Transaction Activity, and Other Trends
In the last few weeks, Haig Partners and Kerrigan Advisors have released their Third Quarter Blue Sky Reports and J.D. Power just released its U.S. Sales Satisfaction Index. We find these reports to be timely and informative of not only where the auto dealer industry is today, but where it is headed. Through observing all of these different sources, we can achieve a well-rounded understanding of the climate surrounding the auto dealership industry. In this post, we look at a few of the trends and key takeaways discussed in these reports.
SAAR Declined to 15.6 million, Primarily Driven by a Decline in the Number of Selling Days for the Month
After steady increases, SAAR (a measure of Light-Weight Vehicle Sales: Auto and Light Trucks) experienced its first notable decline since April, dropping to 15.6 million from 16.3 million in October. November 2020 is off of the same period in 2019 by 8.4%, and through 11 months of the year, new light-vehicle sales are down 16.7% compared to the same period last year. The calendar differences are important to note for this month with November 2020 only having 23 selling days relative to 26 days in November 2019.
In a strange year of oddities, 2020 has all of us constantly evaluating life’s basic truths. Market conditions vary drastically across all industries and even geographically within the same industry due to local government restrictions. It’s critical for auto dealers to continually analyze all aspects of their business and be ready to capitalize on industry trends. We previously discussed the use of the NADA dealership profiles as a useful tool to examine timely monthly data based on averages or dealership type. Three specific metrics in the data have reached their highest level since the data was originally published in 2012: new vehicle retail gross profit per unit, used vehicle retail gross profit per unit, and used-to-new vehicle unit ratio.
How to Understand the Reasonableness of Individual Assumptions and Conclusions
There are several life events (large and small) that require an owner of an auto dealership to seek a business valuation. Often the owner of the dealership and their advisors may only view a handful of business valuations during their careers. It is not unusual for the valuation conclusions of appraisers to differ significantly, with one significantly lower or higher than the other.
What is an owner or their advisor to think when significantly different valuation conclusions are present? The answer to the reasonableness of the conclusion lies in the reasonableness of the appraiser’s assumptions. However, valuation is more than “proving” that each and every assumption is reasonable. Valuation also involves proving the overall reasonableness of an appraiser’s conclusion.
October lightweight vehicle sales had their second month in a row above 16 million, coming in at an annualized rate of 16.2 million for the month. Though this is down 0.6% from September SAAR of 16.3 units, it is still a positive sign for the industry that sales have shown notable improvement since the start of the pandemic.
Low Supply and SG&A Reductions Lead to Record Earnings
As we do every quarter, we take a look at some of the earnings commentary from major players in the industry. These trends give insight into the market that may exist for a private dealership.
A new trend has emerged as auto manufacturers are seeking out start-ups for their technology in a mutually beneficial relationship, perhaps best exemplified by GM and Nikola’s plan for a partnership. In this post, we look at the original deal, ensuing issues, and current plans. We will also look at what this trend could mean for dealerships going forward, and the importance of the valuation date.