Report: Auto Dealership Acquisitions Remain Active, Profits Trending Down

The average publicly owned auto dealership made $5.4 million in the 12-month period that ended with the third quarter of 2023, a 17 percent drop from year-end 2022, according to a new report from Haig Partners in Fort Lauderdale.
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Car dealerships
Despite lower profits, the acquisition activity in the automotive dealership ranks remains high, according to a new report from Haig Partners in Fort Lauderdale. // Stock photo

The average publicly owned auto dealership made $5.4 million in the 12-month period that ended with the third quarter of 2023, a 17 percent drop from year-end 2022, according to a new report from Haig Partners in Fort Lauderdale.

Despite the decline, profits remain more than 2.5 times higher than pre-pandemic levels. In addition, overall demand for dealerships remains high due to earnings that remain well above historical levels, according to the report.

At least 385 dealerships have traded hands through the end of Q3 2023. At this pace, 2023 will be the third most active year for dealership buy-sells, following 2021 and 2022.

Due to lower profits, Haig Partners estimates the average blue-sky value per publicly owned dealership at the end of Q3 declined by 12 percent compared to year-end 2022, a little more than 1 percent per month.

The declines, however, are not being felt evenly across all franchises or regions. This year, Al Hendrickson Jr. sold his Toyota dealership in south Florida for the highest price ever paid for a single franchise. Demand for Toyota dealerships remains elevated.

In addition to Toyota, Haig Partners reports seeing strong demand for a number of other franchises, and for dealerships of almost all kinds located in regions that are growing quickly and have pro-business climates.

Two Mercedes-Benz dealerships recently were sold in Miami-Dade County for more than $700 million, including real estate. Other geographic locations also are seeing higher prices for dealerships, including Texas, the Southeast, Mid-Atlantic, Mountain States, and the Southwest.

Other highlights from the Q3 2023 Haig Report include:

  • Valuations are becoming more complicated due to uncertainty about where future profits will settle, but desirable franchises and attractive markets continue to command premium prices.
  • Public company acquisition spending rose in Q3 2023, reaching nearly $2B YTD, bringing spending above levels observed in the same period last year.

“The buy-sell market remains near record levels due to strong profits and significant demand from dealers who want to grow their companies,” says Alan Haig, president of Haig Partners. “Declining profits continue to reduce blue sky values from the record highs we saw in 2022, but they remain 2.3x above pre-pandemic levels. We believe blue sky values will remain elevated since buyers believe profits will also remain elevated. There is pent-up demand for new units and service drives remain full.”

Higher interest rates impact dealership buyers, just as higher interest rates affect auto buyers. Fortunately for dealership sellers, the report says, buyers have an immense amount of cash on their balance sheets thanks to three years of pandemic-boosted profits, so they can use their savings to finance a good portion of acquisitions.

Haig Partners says it’s also seeing some dealership groups divest certain brands or stores in markets where they would like to exit, taking the capital from those sales and reinvesting in acquisitions elsewhere.

“There are several other factors supporting the buy-sell market today,” Haig says. “We are past the UAW strike, which did not have a terrible effect on dealers. Inflation is declining, GDP is growing faster than expected, employment is rising steadily, and a significant recession, which was predicted by many, if not most, economists, seems less likely with each month.

“Dealership buyers respond to these conditions with strong offers when the right dealerships come up for sale. For dealership sellers with realistic expectations, we are confident they can expect strong values for the balance of 2023 and into 2024.”

Additional notes from the Haig Report includes:

  • Public company acquisition spending tumbles in Q3. Spending on domestic auto dealership acquisitions declined 92 percent quarter-over-quarter, plummeting from $956 million in Q2 to just $80 million in Q3. Overall, total acquisition spending from the publicly traded auto retail groups was down 78 percent on a quarterly basis, which we attribute to these groups investing significant time on evaluating large and/or international acquisition opportunities. Haig Partners expects a spike in domestic spending in either Q4 2023 or Q1 2024.
  • UAW strike ends, and all OEMs feel some pain with wages going up significantly for employees. This will result in higher costs per vehicle, with Ford reporting an estimate of $850-$900 per vehicle built by the Detroit Three.
  • The UAW strike also impacted international manufacturers, which have announced wage increases for their U.S. workers, with Toyota at 9.2 percent for all its non-union factory workers in the U.S., Honda at 11 percent, and Hyundai matching the UAW offer with a 25 percent pay raise by 2028.
  • Fixed operations are a profit powerhouse. Fixed operations gross profit continues to climb at an impressive rate, rising 9 percent from YTD Q3 2022 to YTD Q3 2023. Drivers have returned to the road in full force, expecting to cover nearly the same number of miles in 2023 as in 2019. The average vehicle on the road hit 12.5 years old this fall, the highest age on record, and these vehicles have higher mileage than ever before. Additionally, consumers that want to purchase new vehicles have been met with record-high new vehicle prices and high interest rates, making new vehicles unaffordable for many today.
  • Hyundai and Amazon partnership announcement. Hyundai will be expanding its digital showroom into Amazon in 2024. Customers will be able to shop for, equip, and purchase new vehicles through com, which will then be delivered through local dealers. On one side, Haig Partners sees a few potential benefits. For consumers, the convenience and ease of online shopping may translate to an improved buying experience compared to the current model, which means they may purchase vehicles more frequently. For OEMs, Amazon could help elevate the visibility and desirability of their products for dealers. For dealers, selling through Amazon provides an opportunity to reach customers who may otherwise buy from Tesla or other direct-to-consumer sellers. The risk to dealers is that the gross profits on new cars get pushed down significantly. Until more is known about this trial, it’s difficult to assess its long-term impact on the industry.
  • Toyota continues to dominate brands as one of the most desirable franchises to acquire. Earlier this year, Haig Partners represented the owner of Al Hendrickson Toyota, which brought the highest price ever paid for a single dealership. And in November, buyers made impressive offers on five other Toyota dealerships that Haig Partners is representing for sale. Strong product is a big reason why informed buyers are so bullish on the brand. Dealers admire Toyota’s approach to drivetrains and its electrification strategy and often talk about the trust that exists between themselves and the factory.