Everyone has an opportunity to win

The pandemic has opened eyes and disrupted the buy/sell game.

Certainly 2020 and 2021 were very interesting times.

The pandemic created an environment for significant consumer and business pressure. Some of this materialized in many industries as numerous small businesses shuttered operations.

For many employed and self-employed workers, life was anything but normal, forcing them to rely on government subsidies while curbing life’s normal habits. Many stayed home because their jobs were temporarily put on hold, while others chose to work from home to better manage family responsibilities and respecting health and safety risks.  Everyone found themselves in search of new ways of living their day-to -day lives. 

Automobile dealers and their employees were also affected. Although we were fortunate to be designated as an essential part of the economy, that did not mean that we were not turned upside down and spun around when supply disruption was added to the mix. Business and life were anything but normal.

Yet out of those significant and uncontrollable challenges came opportunity. One of those opportunities was being able to finally gain visibility and insight into our businesses.

The first ball to drop had to do with the number of employees we engaged. We had the time to clearly understand what those human resources were doing and why. 

As we laid off a good chunk of our staff, we found that things were still getting done. We quickly determined we had too many people doing things we did not need and not enough people doing the good things we did need. 

The second ball to drop had to do with technology. We were spending a lot of money on technology we did not know how to use properly. The assessment of these two things initially gave us an opportunity to focus on how we could do many things differently and hopefully better. 

White boards and flip charts in every dealership across Canada became jammed with ideas as core teams began to identify the pieces needed to build a better future.

Expenses began to come into line with the decreasing level of business activity we were experiencing. Government subsidies provided much needed cash flow while we tinkered away at our businesses, took time to learn and then plan new ways of moving forward.

Many of us realized that our businesses started changing well before the pandemic hit. In the early period of the pandemic, we began to realize that we had let too much time slip by without recognizing and reacting to those changes. We had become too comfortable again and the pandemic gave us a much-needed swift kick in the butt.

From my vantage point, dealers fell into three broad buckets.

Some dealers panicked internally but externally showed a positive front, trying to save face. This group largely stood still.

Another group of dealers sat waiting for the return to normal. They promised to themselves they would do better when everyone and everything around them got their act back together.

A third group emerged consisting of those that believed they needed to reinvent as much of the business as they could to have a better opportunity to compete in a new world.

Each of the three groups played a key role in the dealership buy/sell activity.

The first two groups were largely sellers and the third group, either held on and stood firm, bought, or sold out depending on circumstance and opportunities.

One belief became very clear as the pandemic ravaged on — things were not returning to normal anytime soon, if ever, and consumers were ready to try new things.

In the good old days, say before 2017, we all knew who our competitors were and what we had to do to outsell them. Business was predictable. The only ups and downs on the new vehicle side had to do with OEM programs.

Good ones helped increase sales and bad ones made it impossible for dealers to compete. Bad managers walked hand in hand with bad OEMs. As new vehicle sales went, so did used, service and parts. The falling tide lowers all boats. 

Sellers wanted out, and buyers were out looking for the right opportunity. It’s a situation that brokers could only dream of, and there it was right before their eyes.

F&I was the only saving grace. Changing managers rarely provided the lasting impact needed to turn things around. That’s all changed now. The business is different and will never return to the old comfortable days of the past.

Some dealers have realized this and decided to sell their stores while the values were still high. Normalized earnings calculations were all over the board. Some dealers tried to sell on pre-pandemic performance, others included the wage subsidies or a portion thereof because poor financial performance was not normal, fixed costs were adjusted up or down depending on the situation and so on and so on.

In many ways buyers were wading through uncharted waters and were excited. Multiples overall did in fact decline for many brands but remember the starting point was very high.

The pandemic did create an environment where strong dealers could and did go shopping. Sellers wanted out, and buyers were out looking for the right opportunity. It’s a situation that brokers could only dream of, and there it was right before their eyes.

The one difference is that buyers were being more selective. Smart ones focused on strategic opportunities that would add to their dealership portfolio in a meaningful way.  For those opportunities, engaged buyers were only too happy to pay a fair price.

Potential sellers came in all shapes and sizes, small, medium, large, extra-large, and double extra-large. The environment was, and still is, ripe for the big to get bigger and for many dealers and dealer groups opportunity was present to exit stage left or right and head straight for the bank.

We have seen some enormous transactions these past six months. It’s my opinion that these and other types of transactions will continue. Some dealers will sell out completely, others partially, again others might only cash in on some of their accumulated real estate value and easily allow family or management to buy into dealerships to ensure the long-term success of the business and provide an opportunity for their legacy path to continue while taking some chips off the table in the short-term.

It does not matter whether your goal is to stand firm, or increase your business presence, or increase your family liquidity. No one can argue that growth through acquisition is not good for all of us. Regardless of your point of view, everyone has an opportunity to win. How long this environment will last is anyone’s guess.

About Chuck Seguin

Charles (Chuck) Seguin is a chartered accountant and president of Seguin Advisory Services (www.seguinadvisory.ca). He can be contacted at cs@seguinadvisory.ca.

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