Pub. 5 Issue 1

4 I n recent months, industry articles and editorials have sug- gested that the long bull run in the buy/sell market has come to an end. We beg to differ. In fact, these recent opinions are not backed by data. In the first quarter of 2019, trans- action activity actually rose 39% over 2018 (see Chart I). And, the number of multi-franchise transactions remained high at 14 (see Chart II). These are not signs of a slowing marketplace. Clearly, dealers today are facing a tougher operating environ- ment versus the halcyon days preceding 2016 when SAAR was growing at an average annual rate of 7.5 percent. Today, monthly SAAR is flat or declining, costs are up and interest rates have ticked up from record lows. But, that is not the whole story. Aver- age dealership revenue and profits remain near record highs and overall industry health remains solid. For many dealers, March and April were the best months of operating performance in years. Dealers have shifted their focus from new car sales to other, more resilient parts of the dealership business model. Those dealers who have grown used, F&I, parts and service have fared very well during this period of declining new car sales. Fromour vantage point, these good operators who have shifted their focus are thriving. In fact, some strong dealers have more cash in the bank than they could possibly ever spend. They are opportunistically buying stores, and in some cases, biding their time to see how the macro-economic cycle plays out. These op- erators are focused on expense control given low topline growth, and the lower margins associated with the new car department. And, as always, they are growing the countercyclical parts of the auto retail business model. While some investors and operators are worried about the sales downturn, they recall that auto retail generally bounces back very quickly. The best example of this is how dealers brought down expenses rapidly in reaction to the financial crisis of late 2008, remaining profitable, and even increasing net to sales over prior years (see Chart III). Auto retail quite simply is a resilient industry. In our experience, the transaction environment remains ac- tive and healthy, with transaction volumes up year over year (see Chart I). Valuations are high, particularly when including deal- ership real estate which is selling at peak valuations (see Chart IV). In recent months, our firm has had an all-out bidding war over a top luxury franchise in a major metro. We have put three BY RYAN & ERIN KERRIGAN, KERRIGAN ADVISORS Is the Sky Falling for the Buy/Sell Market? We Don’t Think So  IS THE SKY FALLING — continued on page 6