Market consolidation in Canada's auto industry has accelerated rapidly over the last decade, and shows no signs of slowing down in the years to come. Combined with changing demographics — the average principal is nearing or at retirement age — many dealership owners face a big question: should I sell my business?
The transaction process is a critical time for your auto retail business. A rewarding and exciting journey can quickly turn sour when unexpected roadblocks occur. To mitigate risk, dealership owners should ensure they understand the more common deal breakers, including why they occur, to maximize the chance of completing a transaction that meets all of their objectives.
What are the consequences of a deal gone bad?
When a deal falls through, it can have a significant impact on your dealership.
A transaction is highly demanding, especially for owners and management. Deal fatigue can set in for both you and the key members of the team involved if the process drags on. The process itself can be distracting and take away from time spent on running the business, which can have a negative effect on operations and thus financial performance. In cases where a deal falls apart and only one buyer was at the table, owners must start from scratch and/or work to identify an alternate offer that may be less than optimal.
A lost deal can also affect your relationship with the OEM. The manufacturer could lose confidence in your ability to find the right buyer, or exude pressure to direct the deal to a preferred party of their choosing that is not the right fit for your specific objectives.
Why does a deal break down?
Deals can fall through for many reasons, some of which are more preventable than others. Some of the biggest deal breakers in the auto retail industry include the following five issues.
1. Value expectations
The automotive market is constantly shifting, making it a challenge for many dealership owners to assess the true value of their business on their own. Further complicating matters, the auto retail industry is inundated with anecdotal information on big multiples and huge buyouts.
A misalignment on value can be an insurmountable deal breaker. Dealership owners must ensure they understand the full and fair value of the business, including operating assets and real estate. For some dealerships, particularly those in larger urban centres, the real estate value may very well surpass the value of the operating asset.
2. Fit between the seller and the buyer
During the diligence period of a transaction, tension can arise when planning to merge a tight-knit, family-owned operation with a larger dealer group, which may have operational processes that are more stringent, as well as a more corporate culture.
Existing procedures and policies may not be an exact match, foreshadowing changes in how the dealership may operate after close. More common, however, is a culture clash among staff. Integrating two separate workforces can result in role changes and a shift in expectations, which may or may not be welcome. If not managed correctly, this tension could result in the breakdown of a deal.
3. The management team
Providing continuity of management can be critical when it comes to ensuring a deal will go through. While many dealership groups have a substantial workforce, they can be stretched for management talent.
Most buyers look to acquire dealerships that already have a strong management team — one that can continue running the business and driving profitability during and after the transaction. This may be challenging in owner-managed operations where the objective of the sale is to allow the owner to move out of an operational role quickly. To mitigate this risk, owners who want to sell the dealership as part of their plan to retire or transition out must begin building an internal succession plan early on.
4. Financing issues
As dealership valuations continue to trend upwards, the risk of financing issues during a transaction can also rise.
While banks have increasingly provided cash flow lending to support dealership acquisitions over the last decade, that inclination could start to wane as the macroeconomic landscape begins to shift. As part of proper due diligence, owners must ensure that a buyer has the appropriate capital and support of their financing sources to be able to complete the transaction.
5. OEM approval of the transaction
A key element that makes auto retail transactions unique from other industries is the need for OEM approval to close the deal. Although rare, especially if the buyer is a large group with an existing brand, situations can occur where the manufacturer will either not approve a buyer, or indirectly exert pressure on the process to create issues for a non-preferred buyer.
Failing to secure approval can strain relations between the manufacturer and the dealership, and make it harder to maintain confidentiality in the market. Owners should pre-qualify potential buyers and ensure they have the finances and operational background required to gain the OEM's confidence.
How can a dealership owner avoid a breakdown?
In most cases, dealership owners can avoid deal breakers through careful preparation, and by building a strong support team of advisors, including lawyers, accountants, and transaction specialists.
An advisor like BDO can help owners identify objectives and view the business through the lens of a buyer. Working together, owners can proactively address roadblocks by:
- Understanding the dealership's real value. A full assessment combines market intelligence with a formal valuation of all assets, including real estate.
- Clarifying the specifics of a transaction. An anecdotal, high-level understanding is not enough. Dealership owners need a granular view of the process to be adequately prepared.
- Performing due diligence. Advisors can take a deep dive into the financials and present data in a digestible format, as well as help to pre-qualify potential buyers and their capabilities.
- Recognizing opportunities and challenges. Identifying the strengths and weaknesses in the business structure that could affect a valuation.
- Optimizing operations. Changes to the tax structure, operational procedures, or workforce could defer the sale, but drive increased value in the end.
- Marketing the business. An experienced advisor can help you network with and attract multiple buyers, to create competition and ensure an owner gets fill fair value for their business.
This type of holistic approach not only helps mitigate risk, it can also allow owners to dictate the terms of the transaction and achieve the best possible deal.
What does the future hold for your dealership?
BDO's Automotive Outlook 2019 report highlights key issues and actionable strategies to help owners determine the future of their auto retail business — whether that involves selling the dealership or acquiring new ones. Download your free copy to learn more.
Our team of experienced ransaction advisors can also assist you through the process of selling your auto dealership and help reduce the risk of deal breakers. Contact us to start the conversation:
Ryan Farkas
Partner, Corporate Finance
Adam Mallon
Partner, Corporate Finance
Shane Weimer
Partner, National Automotive Retail Leader
David Hertzog
Partner, GTA Automotive Retail Leader