Cloudy Sky Multiples Not Ideal for Expansion
Updated: Jan 5, 2021
As Seen in Automotive News
Reasons I would not buy a dealership until 2021
By Phil Villegas
From mid-March through May the dealership buy-sell market came essentially to a standstill. Over the past few weeks, we have seen an ever-increasing pace of transactions being entered into, whether these were picking up where things left off in March, or simply buyers exploring new transactions. While most of us are trying to restore as much pre-Covid normalcy into our lives as possible, I would exercise caution as it relates to valuations of dealerships.
There are plenty of influencing factors that are working to compel us into believing that the economic outlook of dealerships today is the same as it was in February, pre-Covid. We do not have to look further than the stock markets to see this school of thought play out. This also includes dealership brokers who are working hard to hold the line on the optimistic recovery of the economy and the perceived scarcity of available dealerships while justifying high valuations.
Individuals are pointing to stronger than expected automotive recoveries in May and June as the sign that the economic impact of the pandemic is behind us. While I would love to subscribe to this optimistic school of thought, there are simply too many other negative forces in the economy that I believe are yet to fully manifest themselves.
For dealers who are willing to listen, I am recommending that unless it is a highly strategic or opportunistic acquisition, to hold off on any acquisitions until 2021 until we see the full impact of Covid on the economic recovery. I consider the current economy to be in a state of suspended animation, where the PPP (Paychecks Protection Program) and other federal stimulus packages have essentially punted the ball a few months on any significant downwards economic consequences. While I do believe the worst of the economic shutdown is behind us, I do not believe the outlook is as bright as it is being pitched and we are going to see a slowing recovery in the months to come. Our current position is that any pre-Covid franchise valuation multiples are simply not viable in the current market given all the uncertainty. Even with what might be considered a fair multiple, the multiplier (profitability) is highly in question. Any current transaction will likely be using pre-Covid earnings as a part of its valuation and would look to ignore or justify any post-Covid performance, this is where the risk to the buyer resides.
I believe a significant part of the May, June and even July sales are a combination of pent-up demand, highly attractive manufacturer incentives and federal stimulus impacts. Car sales essentially received a vitamin B-12 shot in the arm and things are feeling relatively amazing. My concerns primarily relate to what the industry is going to look like once the benefits of this metabolism boost wear off. With unemployment currently above 11% and a sputtering reopening for many states seeing surges in Covid cases, I do not believe car sales will continue to see this same v-shaped recovery, particularly as we move into the end of the 3rd and 4th quarters.
For dealers with an eye on expansion, unless it is a highly strategic or opportunistic acquisition, this is not the time to divert personnel or financial resources on ventures where the valuation variables only stand to move in a negative position. This is a time to keep your powder dry, focus on existing operations and wait for the election, market, and virus uncertainties to be further behind us in our rearview mirror.