In any industry, an annual retrospective reveals trends that signal a shift away from the past and toward the future of the industry. A look back at 2017 in the retail auto sector calls attention to some trends that were expected and others that appear to be prognostications finally coming true.
Let’s take a moment to review some of the most important developments in the auto retail sector in 2017.
The Value Disconnect
The ongoing battle between buyers and sellers with respect to the value disconnect continued in 2017. We have seen some movement perhaps, to sellers looking at 2017 performance and realizing that while an auto dealership is still a good business, the sales increases were not the same as in recent years past. This may have had the effect of driving more sellers to market thereby creating volume in 2017.
Succession Planning or Lack Thereof
For years pundits and anyone watching the industry have been forecasting mergers and acquisitions (M&A) activity would rise to some degree because of family succession. It took some time, but in 2017 this appears to have started. This type of transaction has taken many forms. Some family sellers have determined the next generation will not (or cannot) operate the business, so they put the family business up for sale. In other instances, no “next” generation is available to take over, so the owner looks to transfer the business to trusted management or a third party. Unfortunately, I have also started to see forced sales because the owner either
Cash is king. Money talks. Take the cash. These expressions are ingrained in our minds and influence our business decisions. After all, when it comes to selling a business, the seller is often well advised that when presented with two similar offers, they should opt for the cash offer over one from a buyer who needs to secure financing. However, when presented with such an option, the choice is not always that easy for several reasons:
- Good buyers are hard to find, and when you are selling a highly valued business, the buyer pool shrinks considerably (almost exponentially, it seems).
- A good deal is rarely just about the money. As I point out in a previous post, “Top 5 Do’s When Negotiating the Sale of an Auto Dealership,” getting top dollar for your business is certainly a key consideration, but you may also want to consider your legacy in the industry and in the community, the future wellbeing of your employees, and whether the new owners will continue to run the business according to a certain set of principles or core values.
- You cannot always judge a buyer by the amount of cash that buyer has on hand. A great prospect may need or want to finance all or a portion of the deal for any number of reasons, including the possibility that the person’s cash is tied up in other very successful ventures.
- The fear, distrust, and uncertainty that surround non-cash offers can cloud a buyer’s judgment and derail the offer that holds the greatest potential upside for all parties involved.
The key to evaluating offers is to ask the right questions. Instead of asking whether a prospective buyer has the cash on hand to purchase the business, consider all the terms of all offers and ask how likely it is that the buyer you want to sell to can secure the necessary financing.
“Patience is a virtue” is easier said than done, especially when parties are embroiled in the tense negotiations that often accompany business deals, and especially when self-imposed deadlines are nipping at their heels. But deals rarely benefit when a deadline takes precedence over the deal itself. In fact, far more often than not, pausing to reflect enables good things to happen and prevents unforeseen negative consequences from occurring.
Certainly, the need for speed and sustained forward progress makes sense in any business deal, but I have yet to encounter a deal that has suffered from taking the time to re-evaluate based on new information or insight.
Often, the original thesis (the reason the deal makes sense for both parties) is verified and the deal moves forward, perhaps with some adjustment to a post-closing operational matter or an allocation of risk. In some cases, the new information changes the
As 2017 gets rolling, I am just getting started on a few new buy/sell transactions, giving me the opportunity to reflect on some issues that commonly arise as buyers and sellers negotiate terms of their agreements. These issues probably will not surprise you, but if you are buying or selling a business — especially an auto dealership — the insight I provide here will prepare you for some of the human factors and resulting hurdles you may likely encounter.
I was talking with a prospective new employee last week, and I asked her if she had any experience with real estate matters in her transactional experience. She gave me a quizzical look and her response stated that she did corporate work and that real estate was not part of what she typically did. I wish this was the only time I encountered this response when discussing mergers and acquisitions or “corporate” representation, but it reflects a common misconception. The fact is that real estate is an asset that is a part of every deal.
Anticipating Increased Complexity
When I look at a transaction or a company, I often find that the issues involving real estate are the most intense and often the most difficult to resolve. The issues also tend to vary considerably because companies and individuals treat real estate in a wide spectrum of ways in a deal. In its simplest form, real estate could be an owned asset being purchased. However, even in these “simple” situations, if the party holds and financing the real estate separately, it can add significant complexity to a transaction, especially if it is one of the higher dollar assets related to the business.
At its most complex, the real estate may be a leased asset unrelated to the business, and the change in ownership or operation may signal an opportunity to renegotiate the lease or refinance the property. Adding to the complexity of dealing with leased properties are the practical reality of having to coordinate with a third party that is not part of the transaction to obtain a lease amendment or consent. The phrase,