Choose to Invest in Existing Operations Before Investing in Others
Updated: Sep 3, 2020
By Phil Villegas
For most of my automotive career I’ve been around dealership buy/sells, first as an employee at a dealership, then for a dealer group that was acquiring stores, and lastly as an advisor to dealers in these transactions. Over this time, I’ve had the opportunity to witness a wide variety of what makes some deals work and others not so much.
In circumstances where transactions went very well, I’ve found that it’s a progressive evolution of the dealer, where expansion comes on the heels of maximizing current operations. These dealers have put themselves in a situation where they have generated strong financial performance and developed a deep management bench and look for new stores to provide their capital and team members a platform for continued success.
Which raises the inherit question as to why certain dealers expand when there is still plenty of growth and opportunity at their existing stores. For most public companies, I believe they are primarily buying revenues to disguise lack of organic growth in their existing operations. For Private Equity firms, they are deploying their capital to achieve their belief of “economies of scale”. But for privately held dealers the rationale to expand can vary quite a bit based on the region, franchises and selling philosophy the dealer applies, with ego being a major element of the equation.
When dealers get the desire to expand, it’s often best to start at home. Before you go and pay someone 6-10 times earnings for their store – consider whether your existing dealership achieved its top performance. Investing those funds into your existing operations and personnel may surprise you. The return on investment into an existing store may exponentially outperform that of a new acquisition.