In the face of uncertainty, it’s more important than ever to get prepared
The first quarter of 2016 has surprised many and also disappointed a few. With year-to-date new vehicle sales up in most parts of the country, Alberta, Saskatchewan and to a limited extent Manitoba, show the results of economic headwinds.
We are living in interesting and uncertain times. Discussions on retail disruption are taking place all over the globe and Canada is no exception.
Ride sharing, autonomous driving and driverless cars are capturing headlines as media and equity markets globally look for instant solutions to what is potentially a multiple decades long transformation.
Air bag, earthquake and diesel emission issues are all combining to create cross brand new and used vehicle supply shortages. Dealers representing those affected brands are patiently waiting for fixes and a return to normal inventory and sales flow.
Inflation is still low in comparison to historical levels and so are interest rates. Employment levels are fairly stable, with the exception of certain pockets within Canada. Equity markets have been somewhat nervous during the first quarter and not at all friendly to auto retail stocks in North America.
From my perspective, dealer consolidation still is active but the ratio of closed deals to reviewed deals is decreasing.
Sellers are asking high values for their stores, hoping to cash in on the “sell high” philosophy. However, buyers are showing more discipline and passing on deals at a higher rate than ever in the past five to seven years. Prices have likely peaked, and for many brands, are on the down turn.
Over the past few months I’ve had discussions with many single point, small group, and large group dealers and CEOs.
The common theme among large group CEOs is what I call “strategic shopping.”
These CEOs are looking for the right store, representing the right brand, in a strategic market that fits their portfolio of dealership investments. They are looking to match their available human capital and hurdle rate expectations.
Growth for growth’s sake has definitely moved to the sidelines. Small group dealers are almost at a tipping point.
Do they continue to grow, requiring more and more financial and human capital? Or do they stabilize their group, maximizing annual profits and begin to prepare themselves to be acquired by a strategic buyer?
As a whole, this group is confident and successful. They have tremendous lifestyles and are reluctant to give up the fruits of their career.
But these dealers are concerned about industry headwinds and brand dependence, causing them to wonder whether it’s time to take some chips off the table and secure the future for themselves
and their families.
They love the game and don’t really want to stop playing but are the first to admit that they don’t want to be the one that hangs on too long.
Single point dealers or those dealers with one or two stores are the most divided. Many start the discussion wanting to know who is for sale.
But deep conversation reveals concerns about succession, brand, value uncertainty and ultimate exit from the business discussions. It looks like this group is uncertain about the future.
For many, real estate has created the most value for them. They believe they have significant tax erosion on a sale and have no way of deferring or managing that tax liability.
In many ways, Real Estate Investment Trusts (REITS) allow the vendor to have the cake and eat it too. They are favourable in a dealership sale transaction and most certainly in a family or management team succession to unlock otherwise frozen equity.
So with all this uncertainty, what is a dealer to do?
The biggest mistake I see dealers make is that they do not properly prepare their businesses for sale before the possibility of a sale is even contemplated.
A couple of high level pointers:
• Make sure you can explain every line on your financial statements;
• Make sure every line is used in your business. If not, keep personal and intercompany items easily exposed so they can be adjusted;
• Make sure you charge fair value rents and salaries and can produce all employment contracts;
• Review PPSA every few years to make sure all past security that is no longer in force is removed. You would be surprised what searches will reveal and how many third parties lay claim to your assets;
• Keep all licences updated;
• Keep all permanent contracts in easily located files, whether long-term or month-to-month; and
• Make sure minute books and other legals are in order and up to date.
Why do the above? Because at some point all dealers, regardless of size, become sellers.
The problem is that you never know when that will be.
As a dealer, you must be comfortable with your future as a dealer. This means being comfortable with your brand and its business practices.
In recent years, many buy/sell transactions have been triggered by dealers no longer comfortable with their brand’s image and facility investment requirements, margin erosion, stair-step programs, factory dealer relationship practices.
As a franchisee your dealership value is tied to the perceived short-term and long-term value of the brand you represent. It’s not based solely on your dealership fundamentals.
You must be comfortable competing in an evolving business model. There is no question that the auto retail business is changing. This is led by the ever-demanding consumer and brand owner.
Your business has potentially more outsiders competing with you today and into the future than ever before, most of which have significantly lower costs of entry than you do.
You are being asked to constantly invest more only to have consumers accept new competitors with open arms right there in your marketplace. This keeps many dealers awake at night.
Uncertainly make some dealers thrive and try harder. For others it scares them and adds to the confusion.
Regardless of what camp you find yourself in, all is not lost. Dealers by and large are optimists.
I believe you must remember that it does not really matter what any other dealer does. The only thing that really matters is to decide what you are going to do.
