5 common deal breakers for auto dealers

February 10, 2021

Owners looking to sell their auto dealership may face a number of barriers when they’re engaged in a potential transaction.

If you’re considering selling your dealership or in the process of selling, you should be aware of the potential pitfalls. Here are five potential deal breakers:

1. Unrealistic expectations

Like how homeowners think they know the value of their house, auto dealers often believe they know how much their business is worth. Unfortunately, what you believe and what’s fact are often two different things. You must become aware of the dealership’s value, which includes real estate and operating assets. This is especially true as many in the industry are currently navigating some headwinds related to the COVID-19 pandemic. The volume reduction seen in 2020 combined with potential inventory challenges and longer-term industry trends have all created a more volatile market in terms of how auto dealerships assets are being valued.

2. Culture clashes

When one company buys another one, there’s the possibility the two cultures won’t mesh well. The buyer’s culture might be more corporate while the current culture is easygoing. Bringing together two different organizations may lead to role changes and changing expectations, which may cause the deal to collapse. This is especially important with auto retail businesses given the importance of the operational team and the wide range of cultures inherent in the industry.

3. Lack of a succession plan

Buyers aren’t looking for just a profitable business, they want a management team in place that’s experienced and can easily run the business during and after the sale. This may be an issue if the owner-manager also plans on leaving the role once the sale is complete. A strong general manager and other senior leaders can allow you to present a turnkey operation to a buyer and increase the changes of maximizing value upon sale.

4. Lack of financing

The risk that a buyer has difficulty obtaining financing has increased over the last number of years as dealership valuations continue to rise. Banks have been willing to lend to buyers, but that could change if there’s continued economic uncertainty. You must ensure the buyer has enough capital to complete the purchase and is not overly reliant on outside sources of capital.

5. OEM approval

The original equipment manufacturer (OEM) must give its stamp of approval on any deal, which is unique to the auto retail industry. While it’s often easier to sell to a buyer that’s already approved by that OEM, you want to ensure you don’t discount other solid operators who might have interest. You should ensure potential buyers have the required operational background to gain the OEM’s trust.

How we can help

Our Transaction Advisory Services and Tax teams provide business owners with guidance when selling. We provide strategic advice before, during, and after the transaction process. Think of us as a one-stop shop. Contact us to find out how we can help.

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