204 transactions, representing a record 381 franchises, were completed in the first half of 2024, according to the Second Quarter 2024 Blue Sky Report® by Kerrigan Advisors; activity was largely driven by an increase in sellers seeking to capture strong blue sky values and well-capitalized buyers

The auto dealership buy/sell market experienced an all-time record in the first half of 2024, with 204 completed dealership transactions representing 381 franchises sold, according to the just-released Second Quarter 2024 Blue Sky Report^® by Kerrigan Advisors. At this rate, transaction activity is nearly double pre-pandemic levels and annualizing at 760+ franchises sold, a new industry milestone.

This heightened activity was largely driven by an increase in sellers coming to market seeking to capture historically strong blue sky values, which remain above pre-pandemic levels for most franchises, up on average 74% according to The Kerrigan Blue Sky Index. Present and future technology and data management challenges, particularly after the CDK cyberattack, are leading more dealers to consider a sale in the near term. These sellers are met by very well-capitalized buyers, driving the velocity of second quarter’s buy/sell market.

“The 2024 buy/sell market remains robust, hitting new records as industry consolidation continues unfazed by high interest rates, the market headwinds of low vehicle affordability and anemic EV sales,” said Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors. “Consolidators still flush with cash from pandemic earnings and current cash flow are getting deals done with sellers looking to lock in today’s elevated values and avoid the potential risk of further valuation degradation.”

Kerrigan noted that for most franchises, dealership sellers recognize current blue sky prices are highly attractive on a historical basis, though down on average 17% from their peak. This reduction is largely a result of the sustained decline in industry earnings since 2022. On a trailing twelve month basis through June 2024, the publics’ average dealership earnings dropped 35% compared to 2022’s peak, resulting in average dealership earnings of $4.4 million. Adjusting for the one-time impact of the CDK outage, Kerrigan Advisors estimates dealership earnings are beginning to stabilize, approaching a more normalized post-pandemic level that is nearly double pre-pandemic averages.

Buyers Seeking High Quality, Low Risk Franchises

With earnings normalizing and continued strong cash flow generation, the top consolidators have amassed record amounts of liquidity since the pandemic. By way of example, the publics currently have access to $7.4 billion of capital, up $370 million from the first quarter of 2024. Despite earnings stabilization and record liquidity in the market, buyers are more selective on franchises and locations, and are increasingly flocking to the highest quality, lowest risk franchises, often paying a meaningful premium for top franchises in high-demand markets. By contrast, weaker franchises, especially those with declining sales and ballooning inventory, are experiencing tepid buyer demand and a shrinking share of buyer capital.

“The more than 100 days’ supply chasm between the top and bottom franchises is separating the buy/sell market into the haves and have nots,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors. “Additionally, buyers are increasingly focused on the potential negative impact of OEMs’ EV strategies and are hesitant to invest in manufacturers who are overcommitted to EV production. Toyota and Lexus, who have projected the lowest level of EV production at 18%, remain the most sought-after franchises today.”

Second Quarter 2024 Buy/Sell Trends

For the second quarter of 2024, Kerrigan Advisors identified the following four trends that the firm expects will impact the buy/sell market into 2025:

• Publics deploy more capital outside the US due to attractive international pricing
• OEMs play an increasingly active role in managing their networks and buy/sells
• Acquisition financing contracts for weaker franchises
• Technology challenges lead more dealers to consider a sale in the near term

Kerrigan Advisors has observed OEMs taking a more active and, in some cases, aggressive role in the buy/sell process and dictating the explicit makeup of their dealer network deploying right of first refusals (“ROFRs”) at an increasing rate.

“We’ve seen some OEMs brazenly attempt, unsuccessfully, to employ a ROFR in states where the tactic is explicitly disallowed by franchise law,” said Erin Kerrigan. “The OEM’s goal is often to supplant a seller’s selected buyer with a designated, favored dealer, resulting in further concentration of dealership ownership in the hands of the most dominant industry consolidators. This does not enhance the diversity of an OEM’s network. Most troubling, in some cases OEMs are deciding to ignore franchise laws in a buy/sell, a highly concerning precedent which emboldens other OEMs eschew auto retailers’ hard-fought legal protections meant to preserve a dealer’s blue sky market value.”

In many regards, this shift in OEM mentality is a byproduct of Tesla’s initial retail success with the direct-to-consumer model and their exclusive ownership of the customer relationship and data. In the Kerrigan Advisors 2024 OEM Survey, 19% of OEMs surveyed plan to exclusively own the customer relationship and data in five years, a 16% increase from 2023, while just 14% expect dealers to retain sole ownership, a dramatic shift from historical precedent, when the dealers owned the customer facing relationship.

“Though OEMs have largely abandoned the agency model concept, some are attracted to the idea of a consolidated retail network with more standardization and greater retailing control of the customer experience,” said Ryan Kerrigan, Managing Director of Kerrigan Advisors.

Kerrigan Advisors has also noted a trend in the contraction of bank lending to US corporations as a percentage of overall US GDP as loan terms become more onerous, significantly impacting commercial real estate and acquisition financing. Lending standards are becoming more challenging for certain franchises as lenders analyze the risk of higher inventory levels and slower sales rates.

Lastly, Kerrigan Advisors expects implementation of technology in the sale process and the need for data-driven retailing operations will lead to more dealers considering a sale in the near term. For many of the largest dealer groups, technology in retailing can dramatically increase employee productivity and ultimately enhance profitability. But private dealers lack a sufficiently large enough organization and staff to develop and deploy their own proprietary technology solutions. This, combined with the recent CDK global cyberattack and its significant operational repercussions, have added further stress to the technology challenges faced by private dealers, prompting some to consider a sale.

“Some dealers choose to sell rather than reengineer their business toward a digital future as they recognize the need for a larger organization with the scale to hire an entire IT team, including a top-level executive focused on deploying data to enhance sales. Lower revenue operations will inherently struggle to compete in an increasingly data-driven industry,” continued Ryan Kerrigan.

Mazda Multiple Increased, CDJR and Nissan Multiples Decreased

For the second quarter of 2024, Kerrigan Advisors made three blue sky multiple adjustments, increasing the blue sky multiple for Mazda and decreasing the multiples for CDJR and Nissan.

Kerrigan increased Mazda’s high-end blue sky multiple to 3.75 from 3.5 due to improved buyer sentiment of the brand. Mazda continues to gain market share with well-designed products and the support of its ongoing captive relationship with Toyota Financial Services. While its current days’ supply of inventory is above market, Mazda is focused on supporting its dealers to increase sales and subsequently reduce days’ supply. The brand’s sales target for 2024 was revised up to 450,000, an impressive 24% increase from its 2023 sales of 363,000. Most importantly, sales per franchise have risen steadily since 2019 and hit a record level through the trailing twelve months as of June 2024.

In the case of CDJR, Kerrigan Advisors reduced the franchises’ blue sky multiples on the high-end to 3.5 and on the low-end to 2.5. Some lenders are currently unwilling to finance CDJR acquisitions and dealers are beginning to terminate the franchise, in part due to the exploding inventory carrying cost. As further evidence of CDJR’s declining blue sky value, Asbury Automotive Group has taken impairment charges against many of its CDJR franchises in 2024.

Kerrigan Advisors also reduced Nissan’s blue sky multiple this quarter on the low-end to 2.5. Demand for the Nissan franchise continues to decline due to steeply-reduced profits and poor product offerings. According to Automotive News, Nissan dealers’ return on sales has declined to 1% from 2.3% last year and net profit has declined 70%. The franchise is also considered over-dealered with a declining sales per dealership.

Kerrigan Advisors’ Franchise Multiple Outlooks Upgraded for Honda and Ford, Reduced for Mercedes-Benz and Hyundai

For the second quarter of 2024, Kerrigan Advisors upgraded its outlook for Honda from Steady to Positive and Ford’s outlook to Steady from Negative.

Demand for Honda franchises is on the rise as sales per franchise rebounds and inventory production remains disciplined. Also, fewer buyers are concerned about Honda’s EV partnership with Sony given weak EV market demand. In the case of Ford, the OEM has acknowledged its overly optimistic projections on EV sales and rolled back the Model E dealer requirements. Ford sales are outperforming the other domestic franchises in 2024, and buyers are showing more interest in the franchise, which could result in an increased blue sky multiple, particularly if inventory days’ supply improves from its currently high levels.

Kerrigan Advisors also lowered its outlook for both Mercedes-Benz and Hyundai to Negative from Steady. Mercedes’ EV products are struggling in the marketplace, resulting in high inventory levels and low margins. Amongst the top luxury franchises, Mercedes has the highest overall days’ supply of vehicles (33% higher than BMW and 159% higher than Lexus). Mercedes’ declining luxury market share is creating a wider lead for Lexus and BMW. In addition, Mercedes-Benz’s decision to take a more aggressive approach to structuring its dealer network, including identifying select preferred buyers and exercising its ROFR, is beginning to limit the franchise’s buyer pool and could reduce its blue sky value in the future. Likewise, Hyundai’s aggressive position regarding buy/sell approvals, particularly the OEM’s desire to hand-select preferred dealers in each region, coupled with the franchise’s expensive facility requirements and Hyundai’s higher than average days’ supply, are resulting in lower buyer demand for Hyundai franchises.

Highlights from the Q2 2024 Blue Sky Report® by Kerrigan Advisors include:

• 204 buy/sell transactions were completed through the trailing twelve months as of June 2024, representing 381 franchises, an all-time record for the period.
• The recently introduced Kerrigan Blue Sky Index, a barometer of industry franchise value, is 74% higher than 2019 levels, though down 17% from 2023.
• 55 multi-dealership transactions were completed in the first half of 2024, representing 27% of the buy/sell market.
• The Kerrigan Index™ through July 2024 was up 56% from 2022’s low, and sits just 16% below its all-time high, with three of the public US dealer groups (Asbury, AutoNation and Group 1) reaching all-time record market capitalizations in July 2024.
• Import luxury buy/sell market share rose to 40% in the first half of 2024, up from 27% in 2023, and domestic buy/sell market share declined to 44% compared to 2023 full year results of 54%.
• As of the second quarter of 2024, average front-end gross margins on new vehicles have leveled off, just 3% lower than the first quarter of 2024.
• 94% of the franchises sold in the first half of 2024 were to private buyers who are leading industry consolidation. The largest private groups represented 37% of the buy/sell market, while smaller private groups represented 56%. The US public dealer groups acquired 7% of franchises sold in the first half of 2024.
• The US public dealer groups’ estimated blended average blue sky multiple has increased 62% in the last four quarters to 6.3x.

The Blue Sky Report^®, published by Kerrigan Advisors, is the auto retail industry's most comprehensive and authoritative quarterly report on dealership M&A activity, as well as franchise values. The quarterly report, received by over 11,000 industry recipients in 35 countries, includes analysis of all dealership transaction activity for the year, and lays out the high, average and low blue sky multiples for each franchise in the luxury and non-luxury segments. For more details and to preview the report, click here. To sign up to receive the quarterly report, click here.

Kerrigan Advisors also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail. To access The Kerrigan Index™, click here.

About Kerrigan Advisors

Kerrigan Advisors is the leading sell-side advisor and thought partner to auto dealers nationwide. Since its founding in 2014, the firm has led the industry with the sale of over 275 dealerships representing nearly $9 billion in client proceeds, including the third largest transaction in auto retail history – the sale of Jim Koons Automotive Companies to Asbury Automotive Group. The firm advises the industry’s leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, Kerrigan Advisors does not take listings, rather they develop a customized sales approach for each client to achieve their personal and financial goals. In addition to the firm’s sell-side advisory services, Kerrigan Advisors also provides a suite of consulting and investor services including growth strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.

Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report®, which includes Kerrigan Advisors’ signature blue sky charts, multiples, and analysis for each franchise in the luxury and non-luxury segments. To download a preview of the report, click here. The firm also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail. To access The Kerrigan Index™, click here. To read the 2023 Kerrigan Dealer Survey, click here. To read the 2024 Kerrigan OEM Survey, click here. Kerrigan Advisors also is the co-author of NADA’s Guide to Buying and Selling a Dealership.

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