The Washington Post calls it the “Silver Tsunami” of baby boomer business owners retiring. An article in Wealth Management says of the 12 million baby boomers who are business owners, 70% are about to retire.
This applies to our industry, too.
Growth in dealerships typically occurs at the margins—improving your service shop processes, maybe adding new lines, or stealing a little market share from the dealer down the road. In our industry, larger steps are gained by acquiring additional locations.
With dealers all over the country about to retire, dealers with the energy and runway remaining have a tremendous opportunity to grow and build wealth. If this is you, this is your era! This is when you have the golden ticket!
If you are ready to grow, let’s talk about the most important considerations.
Are you ready? Acquiring an additional dealership requires money. Money can solve many problems when they arise, and they will. Beware of taking on too much debt to finance the deal, as debt can hobble your growth for years to come. You need enough for a down payment, some working capital and money to renovate/retrain/reconfigure and weather a rainy day. Your acquisition target will require these funds to rise to your standards.
What are your standards? Do you have a “way” of doing business that works? Can you use your existing dealership as a training ground for your target’s staff? Do you have a few key people you can pull in to help you train the new-location staff your way? What are your plans for the new organization’s policies, processes and structure?
Plan how you will run your existing dealership and your acquisition. Though I love Robert Kiyosaki’s “Rich Dad Poor Dad,”
I have run several dealerships and businesses and “passive income’s” reality is a little different than meeting with your managers periodically and watching the money roll in. As you take on a much heavier load, ensure you have support in place, in your business and at home. Organizations grow in steps—you will become stretched thin at the end of each step before the cash flow supports adding another management rung. As you grow to multiple dealerships, you will have the means to add group leaders. In the interim, you will be responsible for the work.
Do you have strong staff in key roles? Do you have people who can run your current dealership or take the helm at the new one?
Some organizations will groom a GM at their current facility, then when he/she is ready, find a dealership fitting their business model for the GM to run.
Once you have decided to grow through acquisition, what’s next?
The first question owners ask is why they need an intermediary when they know what they want. Consider consumers who are buying and selling houses.
Why do home buyers and sellers use real-estate agents for both sides? Imagine you have a bright orange kitchen because the look reminds you of a fabulous trip to the tropics. How will you feel when your home buyer requests the price be reduced to compensate for renovating away the tropical kitchen? The deal will die.
Having that discussion between buyers and sellers face-to-face is almost impossible, so buyers tend to fade away. While you prize your “original” office because your 30-year-old son used to play there when he was a toddler, buyers may not see the same value…and an orange kitchen is always lurking somewhere.
Sometimes the hurdle is the dealership location, sometimes it is the lines carried, sometimes it is the financial results, or sometimes it is as big as the building layout on the dealership campus, causing material inefficiencies.
Dealers pour their heart and soul into their dealership. No one wants to hear—and no one wants to say—the result is a C-minus in the buyers’ eyes. Note, too, sometimes the dealership is a C-minus and sometimes it’s not, and the buyer is the one who needs to recalibrate their view.
An intermediary rephrases, filters, re-states, softens, showcases and presents each side with the result in mind, filtering out the emotion in the conversation.
After you have identified an acquisition target, how do you know what you are reviewing? What is the dealership worth? What are its strengths and weaknesses? What are the dealership’s growth opportunities?
Intermediaries review your acquisition target’s results and benchmark them. The numbers tell a story about the dealership’s strengths and weaknesses. Those strengths and weaknesses drive what you should, and should not, pay for the business.
For example, gross margin on parts 10% below industry standards is an easy fix. Raising prices to the industry average is not likely to impact customer retention.
However, personnel costs 10% above benchmark are more difficult to resolve. If you lay off people, you can drive poor customer service from the remaining staff. Broad wage cuts are impossible without affecting customer service. Solving the problem through natural attrition and trying to immediately increase revenue from the existing staff also are tough challenges.
The benchmarking we do is a valuation to determine the existing business’ price. Benchmarking affects the value/price.
Accounting firm valuations rarely reflect buy-sell terms. Accounting valuations typically include the entire organization while buy-sells are usually asset sales. They include inventory, fixed assets and goodwill.
The two values may be vastly different.
Dealers have two acquisition goals. One is to acquire well-run, fully staffed dealerships that will continue to generate cash flow with less attention needed. The other goal is to acquire dealerships with growth potential or ones that are turnaround situations.
Knowing the kind of buyer you are and the type of project you are willing to tackle is important. A turnaround may seem like a deal at purchase, and may have the chance to return bigger rewards, but may be much riskier and need much more cash to fund. Seldom is a bargain a bargain.
On the seller side, growth potential increases a business’ ability to sell. Realizing growth potential requires time, money and talent, so the person who achieves it (the buyer) gets the benefit of the increase. The selling price is not based on what the business might become, but on how the business is currently doing.
If you are a growth or turnaround buyer, take time to predict your future. Recast past results and project the next few years’ cash flow based on your expected fact pattern.
Here are some points to consider in your projections.
If you are replacing the acquisition target’s accounting department with a single additional admin at your existing dealership, adjust for those savings.
Project the cash-flow growth you believe you can achieve. If you have the market knowledge to project growth based on unit sales (number of unit sales or increases in the margin of the historic unit sales), start there and build up your cash-flow projections based on the unit transaction increases you believe will be realized. Alternatively, adjust revenue based on growth increases by percentage of revenue/cost. When you adjust, be conservative.
If you know the acquisition target has been missing a market segment, such as not selling F&I products, and you have a skilled F&I manager who can implement an F&I program right away, adjust for those cash-flow projections.
Remember, the market changes based on economic influences. Right now, dealers are facing uncertainty about the future based on post-Covid impacts. Each dealer was affected differently, so adjust for what you believe the future holds for your acquisition target.
Once you have recast the historical results and calculated some projections, how does your deal pencil? What is your return on your investment? If you intend to invest $2 million to get $300,000 annually, that is a 15% return on your money. If you plan to earn $1 million annually from your investment, you will realize a 50% return.
Once you have determined your required return, let’s negotiate.
After you have an accepted offer, the fun begins! The process is an emotional roller-coaster for buyers and sellers. Sellers are giving up their baby for adoption, and buyers are nervous about the unknowns they are inheriting.
Not long ago, I had a seller who was two weeks from closing. They already had two martinis and were out of cigarettes. The seller was ready to chew out the all-cash buyer the buyer wasn’t moving fast enough.
He insisted I give him the buyer’s phone number. I said, “Let’s put a pin in that until morning.”
You will need an objective, neutral person to serve as a buffer as you go through this process.
Intermediaries have been through the process. They know what to expect and are on hand to buffer and quarterback both sides as they move through the process—and in our industry, the process takes time.
Navigating the approval process often requires time and patience as you manage multiple manufacturers, multiple floorplan providers, accountants, attorneys and various other issues.
If you are buying or selling a dealership and need some support, look for a professional who knows the industry well. Main street brokers often do not understand the approval process, floorplan requirements and what makes a dealership great. In addition, buy-side representation can save buyers from paying too much and help spot the wins, and the potential potholes beforehand.
Carrie Stacey, owner, Stacey and Associates.
Carrie Stacey is the owner of Stacey & Associates, a company specializing in business valuations, mergers and acquisitions, consulting, coaching and benchmarking geared at dealerships. She is a licensed CPA in the U.S. and Canada. She also worked as general manager at both marine and RV dealerships. Additionally, early in her career, Stacey spent several years in professional sales.