August 30, 2017

MBAF's Ira Silver discusses M&A in the automotive industry in Automotive Buy Sell Report.

After 30 plus years of assisting clients with buy-sell due-diligence in the closings of automobile dealerships, I am often asked “what’s the secret to guaranteeing a positive result? Is there a commonality in all deals?”

With all the factors that go into any given deal, my initial response to that question is to say, “Each M&A transaction, is as unique as your own fingerprints.” However, on closer reflection, I realize that despite the enumerable variables, there is one word that resonates with every successful transaction, and that word is “quality”.

“Quality” factors into each of those variables that can make or break a deal, whether you are buying or selling an auto dealership, a hotel chain or medical practice. Here is a breakdown on how each of the specific “quality factors” in an auto dealership M&A will add to the uniqueness of that particular deal and, ultimately – when paid proper attention to – lead to its success.

Quality of Franchise – Certain dealerships are better to acquire than others. Understanding the “quality” of the franchise requires in-depth knowledge of the industry and current trends. Right now, Lexus, Mercedes Benz, BMW, Toyota and Ford are higher “quality” franchises than Acura, Mazda, and Mitsubishi, for example.

While franchise is vital to growth, overpaying for a franchise can be devastating to your success. Questions to consider include: High-line dealership vs other brands, import vs domestic? Will the franchise still exist in 5 years?

One case in point is that General Motors has stopped production of 5 models. Does your franchise depend on stair-step programs to generate sales, and what happens if those incentives are stopped? Currently we see large consolidation in the industry as we have approximately 18,000 dealerships, which is approximately 7,000 less than a few years ago. Will we only see large mega dealerships in the future?

Quality of Location & Facility – Location influences a potential acquisition’s “quality,” and ultimately its value. A large market Ford dealership certainly has a better chance for long-term survival, as opposed to a country dealership.

Is the facility “image compliant” with the manufacturer’s guidelines, or will it need millions of dollars of new construction? Not only does this change the cost of acquisition, but takes time and effort away from selling cars.

Does the contractor you are selecting have experience building dealerships and can use his experience to help design a facility with minimal change orders? Will you mortgage the property or perhaps consider a lease buy-back to provide additional working capital?

Quality of Management Team – Whether you are acquiring a dealership with an “in-place” management team or bringing in your own management team, are they capable? How deep is your “bench strength”? Will you dilute your management team by buying more dealerships for them to run?

Will your net to sales go from 4% to 3.5% on the group, which on a group with sales at $400M, would reduce profits by $2M annually? Does your succession plan include future family members taking over for you? Do they have the experience, and most importantly the love of the business that made you successful to provide a lasting legacy?

Quality of Due Diligence – The quality of your due diligence can ultimately be the greatest influence on success or failure of a merger. Are you taking the seller’s numbers at face value and/or the quality of the real estate? Who will perform a building inspection, equipment inspection and a Phase I? Are there lawsuits outstanding or contingencies not brought to your attention? Is your team capable to perform the necessary due diligence and review functions to verify that the purchase price is fair enough to meet the Return on Investment?

Quality of Your Professional Team – And, finally, you need to rely on the quality of your professional team. Are you dealing with dealership brokers, bankers, lawyers, insurance agents, IT specialist and CPA’s on both sides of the transaction that are experienced with everything involved with a transaction of this magnitude?

Will your “financial team,” (CPA’s, Lawyers, etc.) be able to properly assess if you are financially sound enough to meet both banks’ and manufacturers’ working capital guidelines? Everything from the type of entity you choose to be (i.e.: Partnership, S-Corp etc.), to the financing needed to complete the acquisition, to the shareholder / partnership agreements, will need to be factored into your buy-sell decision. Are you better off using your cash to pay down debt, if you assume interest rates will go up 1 – 1 ½% on say $ 200M of debt, or utilize to purchase more dealerships.

Your IT professional can ascertain if the type of computer systems used by the dealership you wish to purchase can be adapted to your current system or if you need a new DMS system. Your IT team will also have to asses if the system has been or can be hacked. All the professionals on your M&A team will have volumes of information to go over with you, are they up to the task?

While “quality” may be a commonality in every M&A transaction, you can see how varying degrees of “quality,” in and of itself, lead to every transaction having its own unique identity.

Beyond that, while we can talk of how to take charge of all the issues regarding quality, how can we predict those things we cannot control, specifically as they relate to consumer wants in 10 years? Will there be more ride sharing with self-driving cars? Will more consumers buy on-line, rather than visiting the dealership? Will dealerships still need acres of land or a delivery lane only? Will the buying experience be as short as 30 minutes? Will gas prices influence traditional combustion models vs. all electric model franchises? Might we see a time when dealerships may be nothing more but service centers and delivery sites?

It is these questions, and more, that despite certain commonalties, make each acquisition a transaction that is as unique as your own fingerprint. And speaking of fingers, always remember, my best advice in buying a dealership is to look at it as a poker hand. It is okay to throw the hand away and play another one.

Ira Silver, CPA, CGMA, is a principal in the Tax and Accounting Department at MBAF and is the principal-in-charge of the firm’s Orlando office. Ira has been in the public accounting profession since 1982. He can be reached at (407) 781-0150 or isilver@mbafcpa.com

Click here to read the article on Automotive Buy Sell Report