Buy-Sell Q&A: Where the Automotive M&A Market is heading

Q: Are there any pitfalls that dealers will have to be mindful of that could effect their profitability and valuations?

A: The small-expression menace we see is the possibility of a recession. Some economists forecast that we’re probable to have a economic downturn in 2023, which would decrease demand from customers for automobiles and possibly impair the amazingly large revenue on cars that dealers are taking pleasure in currently. As income drop, so would valuations.

In the Q4 2021 Haig Report, we highlighted some medium to prolonged-time period threats that dealers will have to have to think about:

Tesla and Other New Entrants: Tesla now has grow to be the major luxurious brand name in the U.S. and its subsequent products launch, the Cybertruck, is aimed at the heart of the domestic makes. Other new entrants, these as Rivian Automotive and Lucid Motors, also are moving into the industry, as well as new models currently being introduced by conventional OEMs, like Polestar. These new entrants will most likely encounter blended results in the marketplace, but there is a superior likelihood that competing dealers across the place will eliminate shoppers and gains as a result. Most likely a higher risk to dealers is that new entrants might thrust conventional OEMs to power the agency design on dealers (see under).

The Agency Product: Traditional OEMs have viewed that thousands and thousands of shoppers are inclined to go to a web site, order a motor vehicle and then hold out for it to be delivered. And these OEMs also see they no extended have to have to make millions of autos for dealers’ storage plenty, guessing at which autos customers will essentially want, and then heavily market and deliver incentives in order to get clients to acquire the cars. Their gains for each car or truck are considerably bigger when they produce only what consumers want to buy. And at last, they see that stores are producing significant income. This new set of facts is triggering a variety of OEMs to reconsider their relationships with their dealers and buyers. Ford’s plan to individual into two divisions, the Design e Division that will produce only EVs and the Blue Division that will create only inside-combustion motor (ICE) vehicles is an instance of a prospective Company Product in participate in. Prospects who want to order an EV will have to get from Ford’s Model e internet site.

It doesn’t show up that shoppers will be capable to order Design e motor vehicles specifically from dealers. This is a profound improve as the OEM will now established, alternatively of “suggest,” retail pricing and the OEM will be the point of call with clients. The customer can pick out which dealer will provide the vehicle, but the rate will be determined by Ford, which also will make a decision how substantially to shell out the retailer. The customer will turn into Ford’s customer, fairly than the dealer’s buyer. This agency product, where the seller gets to be an agent and is not a retailer, is prevalent in other areas of the entire world. It is our understanding that sellers in these regions make significantly significantly less revenue than sellers in the U.S. And Ford is not by itself in its wondering. OEMs have been envious of Tesla’s stock industry valuation that is partly dependent on this direct gross sales product.

Electric powered Vehicles: Some dealers are anxious that EVs will call for much a lot less elements and provider get the job done than ICE vehicles, which will hurt their company departments.

Consolidation: Whilst however a highly fragmented industry, consolidation in automobile retail accelerated in 2020 and 2021. Teams like Lithia Motors, Team 1 and Asbury Automotive Team bought dozens of shops to broaden their nationwide network of dealerships, accompanied by digital retailing resources that will permit them to promote and assistance consumers who choose on line buying. These car teams and other dealers are ever more confident that massive scale will subject more in the foreseeable future than it has in the previous. They system to provide shoppers a more substantial assortment of cars and extra methods to shop than more compact sellers can offer. If effective, they will acquire market share and you should their OEM associates and shareholders. Their gains would come at the expenditure of smaller sellers that are not able to match these abilities. Haig Partners features probable cures for sellers for every of these considerations. But because of to space constraints, we just can’t describe them in depth in this article. However, you can go through about these remedies on webpages 14 and 15 in the Q4 2021 Haig Report. These risks are true. Nonetheless, dealers are hugely resilient and we assume they’ll uncover ways to mitigate these pitfalls. We are still bullish on the franchise process.

Haig Companions presents likely cures for sellers for every single of these considerations. But thanks to place constraints, we can’t clarify them in depth listed here. On the other hand, you can read through about these solutions on web pages 14 and 15 in the Q4 2021 Haig Report.

These challenges are real. Nevertheless, sellers are remarkably resilient and we be expecting they’ll obtain methods to mitigate these hazards. We are nevertheless bullish on the franchise program.