How to avoid 5 common deal breakers when selling your auto dealership

The automotive market is constantly shifting, making it a challenge for many dealership owners to assess the true value of their business independently. There is an abundance of anecdotal information often spread around regarding big multiples and huge buyouts. Further complicating matters, many dealers have experienced elevated levels of profitability over the last several years that may not be sustainable, potentially creating significant gaps between what a buyer is willing to pay and seller expectations.
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.

As a deal is being discussed, a seller often negotiates with a buyer in the context of pre-tax value. The level of pre-transaction structuring implemented by a seller and the buyer’s proposed deal structure can significantly impact the tax paid by a seller. If a seller has not implemented the right structure, the tax leakage can lead to an outcome that does not meet their liquidity objectives, ultimately causing a deal breakdown. 

Providing continuity of management can be critical when 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.

There has been a long-term trend of banks increasingly providing cash flow lending to support dealership acquisitions, however 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. The higher interest rates and tighter lending conditions seen in the market recently have raised the risk profile of this specific consideration.

Ensuring a proper cultural fit between the buyer and seller is critical in all transactions. Contemplating how a long-time family-owned operation might fit within a larger dealer group, which may have more stringent operational processes, as well as a more corporate culture, is important. Another element unique to auto retail transactions 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.