Looking to sell your dealership? Learn who your buyer is
With the arrival of fall comes the excitement of new beginnings. Kids are back at school, summer vacations are a distant memory, and dealers all over the country begin to hunker down and refocus on their dealerships. The long list of performance improvement projects begins to be whittled down as we try to make the decisions necessary to increase profits, customer satisfaction, retention and vehicle sales.
The new realities of fall are clearly evident. All dealers attend their brand’s new model intro shows to get excited about what is coming down the pipeline and enthusiastically we return to our stores to spread the optimism.
I find that 2010 is very different. Coupled with the optimism of product and brand is a frenzy to acquire more stores. Regardless of current size, Canadian vehicle dealers are looking to expand. If our practice is any indication, potential buyers outnumber sellers by about 5 to 1. This creates a sellers’ market, driving up prices and greatly reducing the time for potential buyers to make a decision – if you snooze, you lose.
The attitude of potential buyers however has not yet caught up to some. The winners in this game are those dealers who have a clear vision of their requirements. Let me explain. Potential buyers fall into a few broad camps: opportunistic, credible, strategic, and new kids on the block.
Opportunistic buyers
This buyer is one that jumps at opportunities when they are presented. They hear rumours that a particular dealer might want to sell or is in trouble and immediately go into reactive mode. Very quickly they convince themselves that this is a great opportunity without really spending much time initially evaluating the merits of the acquisition. Generally, they will try and do much of the legwork themselves and rarely engage professionals to assist.
Opportunistic buyers fade as fast as they appear. In the process they create a level of frustration and distrust on the part of sellers and make it difficult for everyone else
Credible buyers
These are current dealers that are most often approached privately by motivated sellers. Outsiders view them as credible and approachable. You as a potential buyer cannot create credibility overnight – rather, it’s developed over time based on how you operate your business and by your past success.
Many selling dealers are emotionally tied to their dealerships. They would like to select their successor to ensure the long-term success of the business and people they developed. They will only approach those dealers who possess the perceived credibility to get the job done right.
OEMs often turn to credible buyers to help them out with situations from time to time. Should a selling dealer follow the process of informing the OEM of their desire to sell, they will often be referred to a list of credible buyers.
Strategic buyers
Some dealers plan their moves. They don’t get fussed about opportunities; rather they create their own opportunities based on a well-developed long-term business plan. No one likes to overpay when acquiring a dealership, but strategic buyers have a very different view of value than most other buyers. Value is not only determined based on what is being acquired, but also by the additional value to be derived to the whole.
New kids on the block
More and more of our phones ring with individuals and firms looking to get into the vehicle-retailing business. Perhaps they have been involved in other automotive businesses, taken the academic route, or just simply see an opportunity. They normally have financial backing but lack the hands-on experience required to run a dealership.
Of course there are possible combinations of the above making the assessment of a potential buyer very difficult for most sellers.
Impact of emotion
One point that is often overlooked by many buyers is the impact that emotion has on the potential seller. Most dealers must clear a huge emotional hurdle before they can truly and honestly begin the selling process. Sellers that have not yet addressed this can be very inconsistent and thus frustrating to deal with. These folks are normally putting out feelers to determine interest and value.
Buyers must remember that for the vast majority of sellers, this is their first time. Most dealers have not sold stores before and are traveling in uncharted waters. Many do not seek professional advice until further down the process in order to keep the potential sale close to the vest and as confidential as possible. Others chose an advisor from the get-go and in effect, insert a shield between themselves and their suitors.
Confidentiality
It is the kiss of death for any dealer to allow word to get out surrounding a pending or potential sale. Market forces quickly react and the selling dealer may find a decline in business and departure of key staff. We all must remember that a sale is not a sale until the cash is in the bank. Employees and the community should not be informed before the deal is finalized. This protects both the seller and the buyer.
Valuations
The questions I get asked most often pertain to valuation. There are many misconceptions in the marketplace and as such many different approaches and opinions on valuation.
In order to get the right price, sellers must identify the value drivers in their dealerships well in advance of offering their store for sale. Sellers and their advisors must be well versed in the subtleties that make their stores attractive. Each market is different and has different potential. Sellers often try to get paid based on future potential but the reality is that sellers only have their history to sell. The future belongs to the buyer. Buyers will not pay sellers for future effort and changes that the buyer must make regardless of how much potential exists.
Buyers on the other hand must respect the sellers’ position. Buyers who try to drive down the price based on their operating practices and policies post-acquisition will be met with challenges and disappointment.
Negotiation, due diligence and closing the deal
Often getting to the table with a framework deal is the easy part; staying there is the hard part. Purchase agreement negotiation can be a big stumbling block as the lawyers begin to wordsmith the deal. Both the vendor and purchaser must agree to representations and warranties, some of which either party always finds offensive.
When a potential purchaser begins to take a deeper look inside the financial, operational, people and financing sides of the proposed transactions, tension often surface. There are always surprises, even in the best of transactions.
Closing the deal requires patience, perseverance, balance, common sense and sound relationship management. Without these, most deals simply will not get finalized.
As we navigate through the fall of 2010, many of us will be playing the acquisition game. For many sellers, it will be the first time. The reasons for selling can be many: age, health, fatigue, lost interest, worry, failed succession plans, or simply just being plain old tired. For buyers, it’s adding to current portfolios, executing on a long-term strategy or simply increasing market share. Everyone has their own reasons.
One thing is for sure, the fall of 2010 and likely all of 2011 will see a heightened frenzy of dealership transactions. Dealer consolidation is alive and well in Canada, and will continue for the foreseeable future.
