Auto Dealer Valuation Insights

A weekly update on issues important to the Auto Dealer industry

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Electric Vehicles Valuation Issues

EV Start-Up Rivian IPOs at Valuation of $86 Billion

What It Means for Ford, Other OEMs, and Auto Dealers

Rivian Automotive has been in the news a lot recently given its eye-popping IPO. Ford has invested in Rivian and until recently was planning to jointly develop an EV. In this week’s post, we feature a recently published piece from our Family Business Director blog about Ford’s decision to invest in Rivian from Ford’s perspective.

Differing Perspectives on the Used Vehicle Market

Feast or Famine?

Headlines persist describing inventory shortages, record transaction prices, record profitability, and predictions for when conditions will return to normal. How do we make sense of all of it? What factors are contributing to the current conditions? Like the larger automotive industry as a whole, conditions can be described as the best of times and the worst of times, or feast or famine. Interpretation of the conditions can differ depending on the perspective of the consumer or the auto dealer.

In this weeks’ blog, we offer commentary on the status of the used vehicle market and re-examine used vehicle metrics through third quarter data. We also discuss how we got here and where we are headed.

Valuation Issues

NADA Is Busy Working on Capitol Hill on Behalf of Auto Dealers

In last week’s blog, we wrote about attending some of the Tennessee Automotive Association meetings and explored the buy/sell considerations discussed there.

This week, we discuss another highlighted topic: the federal legislation that NADA is prioritizing and how that legislation could impact your dealership’s operations.

Mergers, Acquisitions, & Divestitures

The Tricks and Treats of the Buy/Sell Process from a Selling Dealer’s Perspective

Fall District Meeting Roundup

We recently attended a series of district meetings sponsored by a state auto dealer association. The topic on everyone’s mind was transactions. Because potential transactions seem to be top of mind for so many dealers, this post focuses on that. Because Halloween is right around the corner, we offer guidance about how to think about and structure a transaction in the form of Treats (what is true) as well as Tricks (what is not). We hope you enjoy the post and Happy Halloween!

Interpreting Inflation and Interest Rates for Auto Dealers

Can Retail Vehicle Prices Continue to Soar?

Inflation and interest rates are on more people’s minds lately due to supply chain disruptions across all industries. People understand how inflation and interest rates affect their daily lives when noticing the rising cost of goods/services and the cost to borrow money to buy a house, but many don’t realize that inflation and interest rates are interconnected. Inflation and interest rates are frequently linked when discussing macroeconomics and they tend to have an inverse relationship. When interest rates go up, in theory, inflation goes down. However, there are many more factors other than inflation and interest rates impacting the economy in the real world.

In this post, we discuss how we got to our current reality, what auto dealers might expect regarding inflation and interest rates, and how it all might impact the dealership.

Mergers, Acquisitions, & Divestitures Public Auto Dealers

September Acquisitions by Sonic, Asbury, and Group 1 and What They Mean for Privately Held Auto Dealerships

Smallest Public Players Getting Larger

In three consecutive weeks, 117 auto dealerships were bought across 3 transactions, each scooping up more dealerships than the last. The three smaller pure-play public auto dealership companies (Group 1 Automotive, Sonic Automotive and Asbury Auto Group) all made sizable acquisitions in a red hot M&A market coming after Lithia purchased a large private auto group back in April.

In this week’s post we discuss how these transactions highlight a couple of key themes in the marketplace for auto dealers.

Valuation Issues

Tax/Estate Planning Cheat Sheet for Auto Dealers

Winds of Change?

Benjamin Franklin famously said that the only things certain in this life are death and taxes. While both may be certain, taxes are always subject to change.

In this post, we focus on four particular proposals from the Build Back Better Act that impact estate planning and business valuations for auto dealers: 1) Estate Tax / Lifetime Exclusion; 2) Corporate Income Tax Rates; 3) Capital Gains Rates; and 4) Valuation Discounts for Passive Assets.

Mergers, Acquisitions, & Divestitures

M&A, Reinvesting in Core Operations, or Paying Dividends

How Public and Private Dealerships Should Think About Allocating Capital Amidst Excess Liquidity

Over the past year or so, many auto dealers “outperformed” particularly as inventory shortages have raised margins on new and used vehicles in 2021. Additionally, cost cutting initiatives have dealerships running more efficiently, leading to record profitability. The question now comes for public and private auto dealerships alike: what do I do with this excess liquidity?

In this post, we consider what options are available to both public and private dealers. We look at what decisions the publics are making, and what that could mean for private dealers.

COVID-19 Coverage Public Auto Dealers

Used Vehicle Margins in 2021

How Large Used-Only Auto Retailers Are Measuring Up

As our dealer clients know, automotive retailing competition has intensified with large, well-capitalized online-only retailers getting plenty of attention. Due to imbalances between supply and demand, gross margins on both new and used vehicles have increased in 2021.

In this post, we survey gross margins for the publicly traded dealerships, in light of the current operating environment and reconsider the investment thesis put forth by the new entrants.

SAAR

July 2021 SAAR

The July 2021 SAAR was 14.8 million units, roughly flat compared to July 2020, but down 12% from July 2019.  SAAR was expected to fall for the third straight month, but this figure is lower than many experts predicted in June. In this week’s post, we dig into the numbers.

Valuation Issues

First Half 2021 Review of the Auto Dealer Industry

What Are Key Statistics Saying?

As we enter into the second half of 2021, first half statistics are being released and second quarter earnings calls are on the horizon for the public auto companies.  We’ve all read the headlines of the auto dealer industry in 2021:  heightened profitability, historic gross profits per unit and soaring retail sales prices for new and used vehicles, and inventory shortages and challenges caused by plant shutdowns and the microchip shortage. What are some of the key industry statistics saying about the current and future health of the auto dealer industry? Have they peaked, are they continuing to increase or beginning to decline, and/or how long will the current conditions hold? In this post we attempt to answer these questions.

SAAR

June 2021 SAAR

The June 2021 SAAR totaled 15.4 million units, which is up 12.4% compared to June 2020 (the lowest June figure in recent memory due to the COVID-19 pandemic) but down 9.9% from May 2021.  In this post, we discuss the June SAAR number, the ongoing microchip shortage, the hot market for used cars, and what all this means to dealers.

Luxury

The Electric Vehicle Race

Tesla vs. Everyone

When you think “electric vehicles”, there has been one brand that has established itself as a clear leader: Tesla. In this post, we take a look at Tesla and recent competitors that are challenging Tesla in the EV space.

Industry Trends From the Road

Key Takeaways from State Automotive Annual Conventions

We recently attended the annual conventions of two state automotive groups – Kentucky and the Tri-State Convention consisting of Tennessee, Alabama, and Mississippi. In this post, we summarize certain sessions that our readers should find interesting including cybersecurity issues, how to protect your dealership from fraud, future trends and their possible impact, coming regulation and what that means for your dealership, and the importance of succession planning.

SAAR

May 2021 SAAR

After three straight months of impressive gains, the SAAR fell 9.6% in May from 18.8 million units to 17.0 million units.  The summer is typically a strong season for auto sales, but several supply-side factors have limited the availability of vehicles over the last month.

Tax Planning for Auto Dealerships

Why Auto Dealers Might Not Pay “Market” Rent

In business valuation, appraisers seek to normalize historical earnings to establish the level of earnings an investor might reasonably expect from an investment in the subject company. These adjustments may increase or decrease earnings, and they can be for a variety of reasons. Normalization adjustments include surveying various expense categories and determining whether the amount historically paid is considered “market rate.”

Rent paid to a related party is frequently judged to be above or below market, which can be for a variety of reasons. Dealers’ priorities lie more with sales and operating efficiency than tracking what the market says they should pay in rent. The rent paid also may be artificially high or low for tax purposes. In this post, we examine what exactly this means, and why auto dealers may hold real estate in a separate but related entity from the one that owns the dealership operations.

Mergers, Acquisitions, & Divestitures Valuation Issues

Valuation and M&A Trends in the Auto Dealer Industry

Full Speed Ahead or Partly Cloudy?

A few weeks ago, I sat down with Kevin Nill of Haig Partners to discuss trends in the auto dealer industry and the release of their Fourth Quarter 2020 Haig Report. Specifically, I wanted to focus on the unique conditions impacting the industry, and also the changing methodology that buyers are utilizing to assess dealership values. Haig Partners is a leading investment banking firm that focuses on buy/sell transactions in the auto dealer industry, along with other transportation segments. As readers in this space are familiar, Haig Partners also publishes Blue Sky multiples for various auto manufacturers based on their observations and data from participating in transactions in this industry.

Year-End 2020 Auto Dealer Industry Newsletter Release

We are pleased to release our latest edition of VALUE FOCUS:  AUTO DEALER INDUSTRY NEWSLETTER. The newsletter features a commentary on industry data from year-end 2020.  Additionally, this edition includes two timely articles: “The Seven Factors of a Highly Effective Buy-Sell Agreement for Auto Dealerships” and “The Chip Shortage Is Making It Feel Like 2020 Again.” Download this latest issue.

Valuation Issues

Dealership Working Capital

A Cautionary Tale Against Rigid Comparisons

Most transactions involving auto dealerships are structured as asset sales, so dealer principals may take this mindset when considering a business valuation. Generally, the assets acquired by a buyer include new vehicles, used vehicles, parts, fixed assets, and the blue sky or intangible value of the franchise. However, the inventory (predominantly new and used vehicles) is typically financed 100% through short-term lines of credit referred to as floor plan. If the largest portion of current assets are offset with corresponding short-term debt and other working capital items such as cash are not involved in a dealership transaction, a dealer might wonder why does working capital matter?

Blue Sky Valuation Issues

Valuation Implications of a 28% Corporate Tax Rate on Blue Sky Multiples

Will Dealerships Become Less Valuable if Tax Rates Rise?

In the early stages of the Biden administration, much of the tax-related discussion surrounding the auto industry has been related to credits for electric vehicle manufacturing and investment in EV infrastructure. In this post, we discuss the valuation implications for auto dealers of the proposed increase in the federal corporate tax rate from 21% to 28%.

COVID-19 Coverage SAAR

March 2021 SAAR

After a tumultuous February due to weather conditions, March SAAR has bounced back with a vengeance.  March SAAR of 17.75 million units is the second-highest of all time for the month, just shy of March 2000.  There are two main factors driving this increase.  While the winter storms had a negative impact on February SAAR, it likely caused pent-up demand that helped drive sales in March. Beyond simple delays, flooding forced some to replace damaged vehicles. Secondly, the Biden administration passed a Covid-19 stimulus bill at the beginning of March, and $1,400 paychecks hit many Americans’ wallets. This influx of cash may have also spurred a massive increase in vehicle sales.

Changing Advertising Trends for Sunday’s Big Game

How the Auto Industry Is Spending Advertising Dollars

So it’s the week of the big game. What are you most looking forward to?  The game?  The food – appetizers and snacks?  The halftime show? Or maybe the commercials?  Inevitably, all of us probably have this same list of things in some particular order.  The festivities will probably look entirely different this year with smaller gatherings and pandemic protocols affecting travel and public viewing at restaurants and sports bars.  But what will this year’s commercial line up look like and will the auto industry participate? Will this year serve to be an aberration or is it a reflection of advertising changes impacting the auto industry and auto dealerships?

Auto Dealerships

Mercer Capital provides business valuation and financial advisory services to companies throughout the nation in the auto dealer industry.