Pressure from inflation and interest rates continue to impact consumers and dealers through increasing vehicle and financing costs, along with higher fixed and compensation costs, respectively.
That is according to DSMA’s Automotive Intelligence report covering the last quarter of 2023. Looking ahead at 2024, it forecasted inventory rebounds and shifting consumer sales trends imposing a downward pressure on dealer profitability. On goodwill multiples, it predicted an industry-wide decline during this period of high interest rates.
“On average, banks are lending 50% of goodwill values on most dealership buy-sell deals, requiring more cash upfront for transactions. This is limiting the current buyer pool on every opportunity, leading to lower transaction prices,” said DSMA in its report.
It also said that high borrowing costs have pushed the purchasing power of would-be dealership buyers down. This in turn has led to more challenges and uncertainty in M&A activity. “However, buyers are still willing to pay for the right opportunity,” they said.
They also noted that goodwill prices reflect the industry’s past performance, highlighting a lag of six months to 1 year. Buyers, DSMA added, are now looking at alternative financing methods, including Vendor Take-Backs (VTBs), non-bank lenders (such as private equity firms), and REITS.
For the market itself, they said there is a shift — from a seller’s market towards a buyer’s market. “Seller’s expectations have not shifted at the pace (of) the market, causing an increased ask-sell spread,” said DSMA.
“Sustained elevated interest rates are eroding buyer’s purchasing power as borrowing becomes more expensive,” they added. “As a result, banks are tightening lending as they look to mitigate their risk factors. In addition, higher rates have an additional knock-on effect for current dealers as borrowing costs increase for vehicle consumers, leading to potential lower sales figures, and thus, lower goodwill values in future periods.”
The full report is available here.
