Market Overview

Auto Dealership Buy/Sell Market Picks Up Steam: 2018 on Track for 5th Year of 200+ Acquisitions, According to The Blue Sky Report® Released by Kerrigan Advisors

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New tax law and economies of scale help publics and consolidators
buck trends to grow earnings and fuel Q2 Buy/Sell market to 92% growth
over Q1; one-eighth of all auto dealerships have changed hands since
2014 as industry consolidation continues

The new tax law and improved economies of scale and scope are among the
trends driving a robust Buy/Sell market in Q2, after a slow start to the
year, according to The Blue Sky Report's® Second Quarter Report released
by Kerrigan Advisors.

Seventy-five transactions were completed in Q2, a 92% increase over Q1.
With consolidators and publicly traded auto retailers seeing increased
earnings as a result of these factors, profitability at dealerships
holding steady, and dealerships embracing innovative, profit-driving
business models, Kerrigan Advisors predicts that 2018 will mark the
fifth consecutive year to see over 200 transactions.

"We estimate one in eight dealerships have changed hands since 2014 and
we believe increasing consolidation means this number will only
increase," said Erin Kerrigan, managing director of Kerrigan Advisors.
"Consolidators are leveraging significant opportunities to increase
earnings with accretive acquisitions by achieving economies of scale and
scope post-transaction."

"Consolidators are finding new ways to grow earnings by employing
technology and streamlining their business models, changing their
selling systems, and introducing new products across their platforms,
while the ‘to-be-consolidated' are squeezing more profit out of their
existing business models. And both are being positively impacted by
reduced taxes as a result of tax reform," added Ryan Kerrigan, managing
director of Kerrigan Advisors.

The Kerrigans, however, did note that while blue sky values remained
high in Q2, they were below 2017 levels, partly as a result of rising
interest rates and floor plan cost increases. But, despite a plateauing
SAAR, The Kerrigan Index™, which tracks publicly traded auto retail
companies, continues to rise – indicating that Wall Street believes that
scale matters and that anticipated disruptions to auto retail will
disproportionately benefit the largest dealership groups. "There is
little doubt that size will be a key driver for future success in auto
retail," added Ryan Kerrigan.

The Blue Sky Report, published by Kerrigan Advisors, is the auto
industry's most comprehensive and authoritative quarterly report on
dealership M&A activity, as well as franchise values. It includes
analysis of all transaction activity for the quarter, and lays out the
high, average and low blue sky multiples for each franchise in luxury
and non-luxury segments.

Key Highlights from the Blue Sky Report Q2 Report include:

  • 114 dealership buy/sell transactions were completed in the first half
    of 2018, compares to 101 transactions in the first half of 2017.
  • The number of franchises sold rose 22% over the first half of 2017.
  • The number of multi-dealership transactions increased to 33 during the
    first half of 2018, versus 23 in the first half of 2017.
  • Domestics maintained their leading position, followed by import
    non-luxury franchises and import luxury franchises.
  • The publics are tracking towards nearly $1 billion of U.S. acquisition
    spending in 2018, a level that would surpass all prior years, except
    2014 when Lithia Motors acquired DCH Auto Group.
  • Private dealership groups continue to represent the largest share of
    dealership acquirers. Only 22 of the estimated 192 franchises that
    changed hands in the first half of the year were acquired by public
    companies.
  • Dealership rents rose as compared to 2017, creating concern: the
    average dealer now has a rent to gross profit of 11.2%, a 3.7% rise
    over the 2017 ratio.

The Q2 Report outlines three key trends that Kerrigan Advisors
anticipates will have a significant impact on the buy/sell market for
the remainder of 2018 and into 2019
:

  • Consolidators focus on geographic concentration
  • Successful business models command higher blue sky values
  • Expense reduction becomes a major consolidation driver

In addition to expense reduction and a focus on geographic
concentration, the report emphasizes the importance of successful and
innovative business models to increased valuations, citing the recent
sale of Wilsonville Toyota and Wilsonville Subaru, both of which
effectively utilized a no-negotiation sales model, resulting in
profitability far higher than industry standards.

"Buyers of dealerships today are students of auto retail. Most spend
their days and nights thinking of ways to enhance their business'
profitability and strategically drive earnings growth," said Erin
Kerrigan. "Acquisition opportunities that provide an expanding group
with new strategies to grow earnings will command a premium in today's
buy/sell market."

Kerrigan Advisors monitors conditions in the buy/sell market and
publishes an in-depth analysis each quarter in The Blue Sky Report®,
which includes Kerrigan Advisors' signature blue sky charts, multiples,
and analysis for each franchise in the luxury and non-luxury segments.
To download the report, click
here
. The company also releases monthly The Kerrigan Index™,
composed of the seven publicly traded auto retail companies with
operations focused on the U.S. market. The Kerrigan Auto Retail Index is
designed to track dealership valuation trends, while also providing key
insights into factors influencing auto retail. To access The Kerrigan
Index™, click
here
.

Erin Kerrigan is
Founder and Managing Director of Kerrigan Advisors, and is a recognized
industry expert on dealership valuation, real estate, and buy/sells. A
sought-after commentator on automotive retailing topics ranging from
consumer auto buying trends to auto retail consolidation to private
equity in auto retail, she has keynoted numerous automotive conferences
and her analysis has appeared in publications such as Automotive
News
, CNBC.com, and the Wall Street Journal.
For a recent video of Erin's commentary on the market, click
here
.

Ryan
Kerrigan
is Managing Director of Kerrigan Advisors and an expert on
U.S. auto retail buy-sell transaction work. Prior, Ryan served as
Managing Director at Serent Capital, a $250mm private equity fund
investing in middle market companies, and served as General Manager of
the family's auto dealership. Mr. Kerrigan began his career as a
management consultant at McKinsey & Company, where he advised Fortune
500
 companies on growth strategies, organizational issues, pricing,
and business valuation.

About Kerrigan Advisors

Kerrigan Advisors is the leading dealership buy/sell advisory firm
focused on providing a high level of client service for dealership
sellers nationwide. Led by a team of veteran advisors, Kerrigan Advisors
customizes each sale process to maximize the seller's transaction
proceeds. The firm has sold 72 dealerships since 2015, including five of
the Top 100 Dealership Groups in the U.S. With the most comprehensive
buyer database in the industry, Kerrigan Advisors has the industry
context and expertise to match every seller with the right buyer. In
addition to Kerrigan Advisors' sell-side transaction work, the firm also
provides a suite of consulting services including accounting preparation
for sale, litigation support, open point applications and transactional
due diligence.

In addition to the monthly Kerrigan Auto Retail Index, each quarter,
Kerrigan Advisors publishes The Blue Sky Report®, a Kerrigan Quarterly,
which is the auto industry's most comprehensive and authoritative
quarterly report and analysis of dealership buy/sell activity and
franchise values. Kerrigan Advisors' Managing Director, Erin Kerrigan,
is a recognized industry expert on dealership valuation, real estate,
and buy/sells, and is a frequent speaker at leading auto retail events
and conferences, including NADA, JD Power Automotive Roundtable, AICPA,
NADC, and Driving Sales' President's Club. She has also been a keynote
speaker for events hosted by American Honda Motor Company, Audi of
America, US Trust, Ohio Automobile Dealer Association, and SunTrust
Bank, and has led webinars for NADA and Automotive News. Kerrigan
Advisors' Managing Director Ryan Kerrigan is also a sought-after
industry expert. He is featured in a monthly column for Dealer
Magazine
and has written Op-Eds for Automotive News, among
other outlets.

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