Opinion: The More Things Change …

A picture of Jesse Stopnitzky, partner at Performance Brokerage Services

The deeper we progress into 2022, the more 2021 has crystalized into an anomaly, when buy-sell activity and dealership profitability reached historically unprecedented levels.

As the tide changed in the first nine months of 2022, the latest RV wholesale shipment data showed a 33% year-over-year decline. That reduction, coupled with negative economic headlines, has more dealers evaluating whether they should retire or exit their businesses.

This article is intended to provide an update on the buy-sell market status as well as actionable steps to properly prepare a business for sale to maximize its value and minimize the headache.

The Latest

In 2022, our firm is on pace to close a record-breaking transaction volume, far surpassing our 72 dealership sales in 2021 and on track to close over 100 in 2022. The transaction increase can be attributed in part to the same elements that have created the buy-sell craze the past two years.

National dealership groups are still seeking quality acquisitions fitting their strategic growth plans. Acquisition targets include reputable businesses in a growing market, sufficient acreage to increase volume, well-maintained facilities, minimally required capital expenditures, tenured employees and quality brands.

Despite the industry’s cyclical nature, quality dealerships such as these remain in high
demand and continue to command a premium value.

Regional dealer groups are looking closely at tuck-in opportunities.
Their acquisition targets include dealerships near existing footprints, where they can properly integrate and manage the acquisition and share expenses across multiple rooftops. Such synergistic acquisitions are always contemplated, even if only to protect a dealership group’s flank from a competitor entering the market.

New buyers to the RV sector, such as private equity groups and dealers from other industries, still are circling the industry. The new buyers primarily are motivated by a rate of return.

Three notable shifts in the marketplace occurred in the past quarter.

First, the buyer pool decreased. With vehicle sales declining and towable inventory returning to prepandemic levels, concern grew about reduced margins and potential curtailments.

In addition to persistent supply chain challenges and labor shortages, new obstacles appeared, including rising gas prices, interest rates and inflation. Independent/local dealers experiencing these headwinds have had a diminished appetite to grow until they restabilize their business and resolve operational challenges.

Further, significant interest rate hikes have made business loans for acquisitions more costly.

Second, buy-sell opportunities increased. The new, challenging retail environment may sway dealers who delayed a possible sale as earnings soared during the pandemic to re-explore an exit.

As the market’s seller pool increases, we believe national and regional groups will remain highly active in seeking acquisitions. However, buyers may be more selective with the markets
and candidates they pursue.

Third, uncertainty surrounding the industry’s future the next six months introduced a wait-and-see period, as buyers await economic and political clarity. This moment in time occurs regularly in business cycles.

Navigating these foggy waters has been challenging for buyers and sellers. Both sides faced obstacles attempting to establish values and factor in 2020 and 2021 profits. Determining value is further complicated when 2022 performance appears to be correcting itself more quickly than anticipated.

Nonetheless, buyers are still using the same valuation concepts to value dealerships. A buyer may use three or four years of financial data to average a seller’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and apply a multiple, typically from two times earnings to four times earnings, based on various tangible and intangible variables.

However, considering how earnings are defined and the types of assets and value components included in the multiple is critical. As a firm, we believe the value must be determined as a combination of the seller’s historical adjusted earnings, the buyer’s proforma financial statement earnings and projected earnings and the buyer’s desired return on investment.

Naturally, the goal is to identify the unique buyer with a special motivation to acquire your business who can find a path to a higher proforma and offer you a greater price.

According to BizBuySell, the nation’s largest online marketplace of businesses for sale, small business acquisitions dipped 3% in the second quarter of 2022 from the first quarter. However, second-quarter acquisitions in 2022 increased 14% from the second quarter of 2021, suggesting a strong buying appetite remains.

You should note, though, the median sale price dropped 9% in the second quarter from the second quarter of 2021. Lower median sales prices should lead to further buyer activity, especially in acquisitions factoring current economic uncertainty into the asking price.

Considering market conditions are fluid, continuously changing and unpredictable, we are often asked, “When is the right time to sell?” We reply, “When it is right for you, right for your family and accomplishes your personal and business goals.”

Tried and True

The Roman philosopher Seneca said, “Luck is what happens when preparation meets opportunity.” To combat ever-changing market conditions, preparation remains paramount.

By properly preparing your business for a sale, you will enhance its marketability and expand the buyer pool. Buyers are more inclined to evaluate an acquisition target that is well-presented and allows for a seamless transaction.

Overall, a well-presented seller will maximize the business’ value and increase the likelihood of a successful sale.

The more things change, the more they stay the same.

Three major steps to prepare your business for a sale include cleaning up your financial
statements, gathering your data and assembling your advisory team.

To clean up your financial statements, start with the business’ assets. A sales transaction likely will be an asset sale as opposed to a stock sale, where a corporation’s assets will be sold. With an accountant’s help, ensure your balance sheet and depreciation schedule are in order.

You want to remove sold or disposed of assets, identify personal assets not used in connection with the business, and if applicable, reclassify either expensed or accelerated depreciation assets. Completing the cleaning process will help you receive fair market value and provide the buyer clarity on the assets being acquired.

Perform routine parts and accessories inventory counts to adjust for obsolete inventory
such as aged, damaged, opened and nonreturnable parts and accessories.

Work to sell through any aged new RV inventory and unfavorable used RV inventory. These RVs may be susceptible to curtailments and/or discounts at closing.

Because long-term contracts could become a buyer’s liability, the contracts might be a deal breaker. Review long-term vendor contracts and equipment leases and understand your termination clauses. If possible, move the contracts to month-to-month. If you are considering a sale, do not sign or renew any long-term contracts.

Enhance the property’s curb appeal before a buyer visit and continue needed maintenance. Securing an appraisal would be prudent. The appraisal enables the seller to consider real estate value related to accomplishing your goals. If you are leasing the property, begin a dialogue with the proprietor to understand your rights to assign or sublease, as well as new tenant requirements.

By equipping the buyer with data required for analysis, you are sure to receive an informed offer. Buyers may request information such as financial statements, an asset list, inventory reports, real estate data, a description of vendor contracts, management and employee information and dealer/franchise agreements.

Finally, we always advise our clients to surround themselves with a trusted advisory team
to safeguard their best interests.

Typically, the team includes an attorney, accountant, financial planner and dealership broker or buy-sell advisor. Ideally, your team will have experience with buy-sells in the RV or automotive industries.

The advisory team will remove the selling process from the dealership to limit the risk of a confidentiality breach and enable you to focus on maximizing performance.

Don’t Just Maintain

Performance stability is important during buy-sell negotiations, elevating the buyer’s confidence in the purchase and preventing the deal from being re-traded.

Do not take your foot off the gas. Stay involved and engaged, mentally and physically. Remain ready to adapt, be quick to resolve issues, and continue to run the business as if the company is not for sale.

Ensure you are maintaining your facility, hiring new employees and ordering inventory. If all goes as planned, this will be the last time the dealership’s assets generate income for you and your family.

If you are considering a business sale soon, you cannot begin your preparation too early. Develop your exit strategy and confide in your trusted advisors.

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. Family-owned, the company benefits from more than 25 years of experience, 700 past dealerships sold and a 90% closing rate. Stopnitzky is an RVDA associate member.

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