Low supply and high profitability of certain brands lead to seller’s market with tough competition
Canadian dealers looking to sell their business are sitting in the driver’s seat in terms of attracting buyers, though the brand and/or the land are factoring into the purchase price.
“In the 10 years I’ve been doing this, I’ve never seen this much of a seller’s market,” said Farid Ahmad, Founder of Dealer Solutions Mergers and Acquisitions. “It’s a lack of supply, pent-up demand, and people that were looking to grow their business over the last couple of years didn’t because of COVID. The future was uncertain, now they know where the future is going. Those groups that have ambition to grow are now coming out and saying, ‘COVID is over, giddy-up.’”
Michael Lewicki, President of Lewicki Automotive Consulting Ltd., echoed Ahmad’s assertion.
“For every seller, there are seven or eight buyers, so in the case of a very profitable dealership in a larger municipality, particularly with some of the imports, if you pound a for-sale sign into the front lawn you’ve got to beat the buyers off with a stick,” he said.
“It’s no different than a residential house sale in the Greater Toronto Area or Greater Vancouver. Given the demand, selling prices are in the stratosphere, which leads to additional stuff being available on the market,” he said.
Erin Kerrigan, Founder and Managing Director of California-based Kerrigan Advisors, said auto dealerships are making so much money now it has limited the availability of acquisitions.
“There are fewer sellers than buyers because there are very few places you can replace this kind of cash flow from investment,” Kerrigan said. “Dealers aren’t looking to sell because they are making so much money. Why would they sell? To get something, (buyers) are having to pay a price premium,” she said.
Samir Akhavan, Managing Partner of Templeton Marsh Ltd., a Canadian new vehicle dealership brokerage and related advisory consulting firm, agreed it is a seller’s market, but adds, “The market is very dynamic, it’s very fluid, it can and does change very quickly, and we are not sure you can pigeonhole it into any definitive description.”
Within the past few months, there have been some interesting developments in the GTA. In December, Mercedes-Benz divested seven dealerships in Toronto that it owned corporately under the banner Toronto Retail Group. They were sold to the AWIN Group of Dealerships and Zanchin Automotive Group, which both retail MB.
Lewicki said from a corporate standpoint the deal made sense.
“It’s highly unusual now for the factory to be involved in retailing their products,” he said. “Mercedes was in the Greater Toronto Area and ultimately they decided they didn’t want to be in that anymore, so they liquidated their position. Presumably, they got a good price for it and off we go.”
In April, Brampton-based Policaro Group, which announced plans in January, 2021 to exclusively sell premium luxury brands, acquired three stores in Waterloo as part of its commitment to Jaguar, Land Rover and Volvo.
Oregon-based Lithia Motors Inc., a publicly-traded company, bought Pfaff Automotive Partners’ 11 locations in August, 2021. The purchase represented the first entry by an American dealership company into Canada.
“The issue is not that it happened, but what took so long?” said Lewicki. “Lithia looks at the Canadian market as a good market. Pfaff was clearly an attractive target for them with their collection of import stores and clearly Lithia believed they could make money here.”
Ahmad said the luxury dealership market has always been strong because there are so few of them, but it has been magnified because of the momentum that is taking place. “If you have one, they are very profitable in normal circumstances,” he said.
Akhavan said that despite all of this, some dealers won’t have such an easy time selling because of the brand they are retailing.
“There are some brands that aren’t worth any more today than they were two years ago, five years ago or eight years ago,” he said. “You basically couldn’t give them away if somebody’s life depended on it. I think there are brands that never really picked up with the pandemic.”
He said an emerging trend is dealers selling their business to land developers or entering into a partnership with real estate developers. He said within the past 18 months, five Vancouver-area dealers have factored into one of these scenarios.
“I think you will see more of that in the coming years, likely only in Toronto, Vancouver and, perhaps Montreal, because of the density and core of the city and the lack of available real estate for redevelopment,” he said.
Ahmad said Quebec is the most fertile ground in the country for buying and selling dealerships. He said for the last couple of years a “disproportionate amount” of his company’s transactions have taken place in Quebec.
“I think the Quebec dealer mentality is this is a good time to sell because so much is happening,” he said. “They are very enticed if the deal is right. The demographic and the market is just so hot it’s creating its own momentum.”
Akhavan said consolidation by dealer groups will be the “biggest piece of the puzzle” for the next three years.
“Those guys are the real prime movers of the market,” he said. “They have the wherewithal to do the bigger deals.”
Ahmad said smaller dealer groups are more inclined to purchase stores within their specific region. He referred to them as “Hometown Dealer” groups.
According to Lewicki, it basically comes down to understanding the marketplace. “If you’ve got a dealer in Oakville that has two stores he’ll gladly buy two more in Oakville because there is no learning curve to that,” he said.
Akhavan said dealer groups that are buying dealerships within their immediate vicinity are also extending their range 100 kilometres in either direction, pointing out that it is starting to happen more in the Prairies.
“If you sort of take a more in-depth, analytical look you’ll see it makes perfect sense,” said Akhavan. “That may be the trend others are missing, or they are seeing it but are not interested in developing that market.”
Another factor in all of this is family-owned dealerships. The owners face the decision of whether to retire and cash out or create a succession plan for their family members.
“Two things are changing that,” Ahmad said. “The second or third generation don’t have the same passion as the (ones before them). The other thing is the assets. Dealerships and land and buildings are so expensive today in comparison to five or 10 years ago that I think a lot of parents are thinking ‘the future of the industry could be uncertain with electrification and agency models, why would I put all that financial burden on my children when I can sell now and give them cash and they can do what they want?’”
Lewicki said the average age of the Canadian car dealer is getting older, so it becomes more of a factor for cashing out.
“If they don’t have a succession plan with a child or a friend or whatever, they are looking at it and wondering is it ever going to get any better?” he said. “If you’ve got record profits with high multiples, you’ve got a record goodwill value. If you are the vendor, you are looking to put that into your pocket. It’s staggering, quite frankly.”