As an LA native and managing director at Haig Partners, I am thrilled to contribute to this edition of the Greater Los Angeles New Car Dealer Association (GLANCDA) newsletter. Haig Partners has facilitated the purchase or sale of over 580 dealerships, including 60 in California and 28 that qualify for the Automotive News Top 150 list, with an industry transaction value exceeding $11 billion.
We recently set records for the highest values ever received on an individual brand basis with the sale of Toyota of North Charlotte, South Vista BMW, South Vista Honda and Lake Norman Chrysler Jeep Dodge. Additionally, we achieved the highest value ever for any individual store with the sale of Hendrickson Toyota in Coconut Beach, Florida. The LA market has the potential to set records, too!
The Buy-Sell Market is Wide Open!
An estimated 151 dealerships traded hands in Q1 2024, marking the highest volume for a Q1 on record. Private dealer groups conducted more than 87% of these transactions. Haig Partners represented almost 20% of the industry’s transactions, and based on our pipeline, we expect this hectic pace to continue.
Dealerships deliver outsized return on investment for skilled operators, and the industry remains flush with cash from pandemic profits. This elevated capital and low leverage across our industry drive great demand for assets matched with the right market. Although profits have declined from the peak of 2022, it’s important to recognize that 2022 was more of an anomaly than the percentage declines we see today, and average dealer profits remain significantly elevated over the pre-pandemic period.
Financial and Franchise Performance
The average store owned by a public dealer group saw a 26% decline in pre-tax income year-over-year during the first quarter. Over the past 12 months, the average public dealership generated $5 million in pre-tax income, reflecting a 6.2% decrease from year-end 2023 and a 25.7% decrease from year-end 2022. We believe profits will continue to decline throughout the remainder of 2024. However, these averages can obscure trends occurring at the franchise level, where we are noticing growing variation in dealership performance.
Lexus, Toyota and Honda profits have remained high, partly thanks to tight days’ supply. Conversely, owners of Stellantis, Nissan and Infiniti dealerships have seen profits drop by more than 50% year-over-year. It’s important to note that all franchises go through phases, and an underperforming brand today could present a valuable opportunity tomorrow. The key is matching the right brand to the right market and aligning it with your strategy.
We estimate that the average blue-sky value of a publicly owned new car dealership was $19 million in Q1 2024, representing a decline of 5% from year-end 2023 and 18% from 2022. Blue sky values may continue to decrease throughout 2024 at a rate of 1-2% per month. Despite this decline, the implied blue-sky values for stores owned by public companies remain closer to peak today than in 2019 because buyers expect dealership earnings to stay elevated for the foreseeable future. Additionally, the high demand for dealerships — and consequently, their prices — remains robust due to the significant incremental cash flow dealers have generated over the past few years, leaving them with ample funds to invest. The right brand in the right market will still capture peak valuations.
Toyota holds the largest market share in Los Angeles, followed by Honda. In the luxury segment, BMW leads, followed by Mercedes and Lexus. Each of these brands has a higher market share in Los Angeles than nationwide, indicating a strong market alignment. These stores will command strong values when they come to market, and only the most competitive bids will win these deals.
With the market being this competitive, how do you bid to capture a deal? Competitive bids are usually a function of franchise multiples and the last 12 months of adjusted earnings or a net-to-sales proforma.
California and LA Market
When speaking with dealers and investors nationwide, concerns sometimes arise about investing in California due to the legislative environment, high taxes and high real estate values. While these factors impact return on investment, public and private buyers view these opportunities differently. A skilled advisor with consistent deal flow can navigate these complexities and execute transactions effectively.
The market is characterized by higher real estate values and comparatively higher taxes. Still, we can partner with our associations to help drive favorable legislative changes.
GLANCDA and CNCDA achieved an excellent win for the dealer body by passing AB 473. Several tenants to this bill protect the rights of the franchise network, including preventing manufacturers from introducing new vehicle brand names that would directly compete with their dealers, establishing cost sharing on customer-facing DC fast chargers, and placing limitations on post-sale subscriptions for features already in the vehicle. The Private Attorneys General Act (PAGA) is the next big issue. Modifying this act will increase the desirability of dealerships across the state.
The Greater LA market remains a hotspot for the AI revolution, venture capital and new business starts while being home to a dense, affluent population that drives — a lot! We recently observed a sizeable public acquisition in our neighboring Orange County, and we have significant interest and success from family office and private equity investment in LA market auto retail. These sophisticated investors recognize the value and potential of this market.
I recently interviewed Brian Maas, president of CNCDA, on our Haig Partners Podcast — Riding Shotgun. We discussed the value of operating in California and how the upside far outweighs the perceived challenges. The episode will be published soon, so stay tuned!
The Greater LA Market is competitive and nuanced; it remains an exciting time to be a dealer. With the cost of new vehicles rising and interest rates staying “higher for longer,” having a robust economy in our backyard is a distinct advantage.
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