Auto Dealer Valuation Insights Powersports: Alternative Growth Opportunity for Auto Dealers
As we’ve written in previous posts, auto dealers have experienced heightened profitability over the last two years. For those without succession in place, the industry continues to experience a high level of M&A and transaction activity. For others interested in growing or scaling operations, bolt-on acquisitions of other franchises in similar or adjacent markets can present an attractive return.
While those opportunities don’t always arise, dealers with excess cash from continued profits or remaining PPP funds have alternative investment choices. One such opportunity is entering the powersports industry through an acquisition of a powersports dealership or opening a point themselves. As one auto dealer client recently recounted to us, “if you have the skills and experience in selling high volumes of automobiles to consumers, then you have the necessary skills to also succeed in the powersports industry.”
In this post, we discuss what comprises the powersports industry. We also offer some statistics about the size of the market in the United States and highlight similarities and differences to the traditional auto dealer industry.
What Is the Powersports Industry?
Although not as clearly defined and reported on as often as the automotive or auto dealer market, the powersports industry is a subset of motorsports which generally includes vehicles such as motorcycles, all-terrain vehicles (ATVs), snowmobiles, personal watercrafts, scooters and other alternative vehicles. According to IBIS World, the size of the powersports and related motorcycle dealership industry is expected to reach $34.4B in annual sales in the United States for 2022. The industry is expected to reach $131B globally by 2028, according to Insight Partners, which forecasts annual growth of just under 5% for the next six and half years.
Similarities to Auto Dealers
- Dealer Agreements – Like traditional auto dealers, powersports dealers have formal agreements with the manufacturer of the vehicles. In powersports, they are referred to as dealer agreements rather than franchise agreements but consist of many of the same elements including territory/area of responsibility, exclusivity of competition, sales volume requirements, etc. One key difference in these arrangements is that most powersports dealers will have dealer agreements with multiple OEMs whereas a higher percentage of auto dealers have only one franchise agreement (single point stores). While all the headlines seem to be about larger public or private auto dealership groups with multiple rooftops in one legal entity, 93% of owners had 1-5 auto dealerships in 2021. By contrast, a powersports dealer may have dealer agreements with Kawasaki, Yamaha, Polaris, Suzuki, Sea Doo, etc.
- Departments/Profit Centers – Most powersports dealers have four departments or profit centers: new vehicle, used vehicle, service/parts, and finance/insurance. While most powersports dealers do not have rigid/formal financial statements that have to be submitted monthly to the manufactures like their automotive counterparts, there is useful information in their financials to analyze the size and overall profitability and performance of each department. Generally, there is less unit/volume information provided in the financial statements than auto dealers whose manufacturers use this data in order to determine which models are selling better than others.
- Industry Terminology – The value of a powersports dealership is typically reflected in a single dollar value and as a reflection of Blue Sky or the intangible value of the various brands/dealers they represent. As with auto dealers, the Blue Sky value can be expressed as a multiple of normalized pre-tax earnings. One distinct difference in powersports is the lack of published blue sky multiples. The lack of published multiples makes the valuations, and specifically the market approach, more difficult for powersports dealers. Dealers in this industry subsection also pre-purchase inventory from the manufacturer and refer to the related liabilities as floor-plan debt like their auto dealer counterparts.
- Recent Industry Conditions – Inventories have also been constrained like traditional automobiles due to ongoing supply chain issues of raw materials and microchips, and also intermittent plant shutdowns of the manufacturers. With tight inventories coupling with high demand, profitability for powersports dealers has also increased in the last two years, but to a lesser degree than the profitability of auto dealers.
- Pre-order/Direct to Consumer Sales Model – Powersports dealers have shifted more towards pre-orders and several manufacturers have introduced more direct sales models to consumers. Our understanding of this trend in powersports is more directly related to the constraint on new vehicle supply than the struggle over profit allocation between the manufacturer and the dealer occurring in automobiles. Nevertheless, the manufacturer and the dealer are both vying for the ownership of the customer and their related purchasing experience. In our view, direct sales may make more sense for powersports dealers who more frequently see customers wanting customized features on their rides.
- Zero Emission/Electric Vehicles – The powersports industry is not immune to the increase in investment and the proliferation of electric vehicles that are also occurring with traditional automobiles. Powersports manufacturers emphasize combining electric power trains and battery systems in their vehicles. For example, Polaris introduced a new electric Utility Terrain Vehicle (UTV) Ranger EV equipped with a single 48-volt induction motor with 30 horsepower.
- 20 Group or Peer Groups – Several of our powersport dealer clients belong to peer groups. While not as formal and frequent as their auto counterparts, peer groups can benefit powersports dealers. These groups provide forums for best practices and opportunities to improve the overall management process of the dealership. Further, peer groups can provide comparable sales and profitability data with other dealers in your region that can provide evaluation and benchmarking activities. Powersports dealerships used to be primarily run by enthusiasts who got into the business because they simply enjoyed their vehicles. Over time, management has become more professional particularly as more auto dealers have entered the space, which partly explains why powersports operations have come to more closely resemble auto dealers over time.
Differences From Auto Dealers
- More Dependent on Macroeconomic Factors – Since most of the purchases in the powersports industry represent secondary/alternative or recreational vehicles, this industry is more dependent on macroeconomic factors than the auto industry. As auto dealers have seen in the past year, demand for primary personal vehicles may be more inelastic than previously thought. Specific factors such as the level of disposable income and customer sentiment are important in the powersports industry. Households with median incomes over $100,000 tend to purchase more vehicles in the powersports segment. Consumer sentiment measures the level of optimism consumers feel about their finances and the state of the economy. Consumer sentiment indexes also predict how likely consumers are to buy things based on changes in economic activity. The pandemic had conflicting impacts on the powersports industry. On one hand, business shutdowns and unemployment had a negative impact on the industry. Conversely, the shift to more outdoor recreational activities had a positive impact on the industry. It will be interesting to see how the current economic conditions will impact the industry for the remainder of 2022.
- More Dependent on Demographics/Geographic Location – While these factors are important for auto dealers, they are perhaps more important for powersports dealers. We have previously written about geographic markets favoring certain brands or types of vehicles, such as trucks in Texas, or SUVs and crossovers in Colorado or Alaska. According to IBIS World, nearly 44% of consumers buying motorcycles and powersports vehicles are between the ages of 25 and 49. Further, since most of these vehicles are used for recreational or secondary purposes, the location of a powersports dealer and the balance of its proximity to rural and urban areas can be critical to performance and success.
- Less Competition – The number of auto dealerships in the United States has ranged between 16,000 and 17,000 for the last several years, despite the consolidation and transaction volume. While not as clearly defined, First Research reports approximately 7,000 motorcycle dealers. First Research, like IBIS World, are industry research publications that define the industry as including motorcycles, sport vehicles, ATVs, scooters, etc. Whatever the exact comparable number of powersports dealers in the United States, there is much less competition than traditional auto dealerships. Auto dealers compete with countless local/regional dealers in the various franchise segments (domestic, import, mass market, luxury, etc.). Powersports dealers typically compete with 1 to 4 similar dealerships depending on their geographic location. With fewer powersports OEMs and the greater likelihood that a dealer carries these brands themselves, competition on the local level can be a lot easier for dealers that also compete in the auto industry.
- Repairs & Maintenance as a Percentage of Original Cost – The amount of customization on recreational vehicles is typically a higher percentage of the original cost than for automobiles. Further, powersports vehicles also require more frequent repairs and maintenance than automobiles. Recreational vehicles are subjected to extreme terrain and conditions, such as mud, water, and off-road terrain, causing components to require more repairs or seasonal maintenance. Like auto dealers, these types of services tend to be higher margin and more frequent, which are advantageous from a valuation perspective.
Conclusions
The powersports industry is growing in terms of size and popularity. Numerous similarities to auto dealers could lead to common ownership or potential growth opportunities. Contact a professional within the Auto Team at Mercer Capital if you have a powersports dealership or are evaluating an investment in a powersports dealership.
At Mercer Capital, we follow the auto industry and adjacent industries closely to stay current with trends in the marketplace. These give insight into the market that may exist for a private dealership which informs our valuation and litigation support engagements.
