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Motor industry insights: Starting the sale journey

Motor industry insights: Starting the sale journey

Given the events of 2020 and with the future remaining uncertain, it is clear that the next 5 years will involve more pressure, requirements and opportunities, forcing many dealers to abruptly leave the industry. The question dealers need to ask – “is this the same case for me?”

The decision to sell your dealership should be well considered and deliberate. If you are not on the path to sell, you should be concerned if you are not planning to implement the vast changes needed to be made to your dealership in the future. To stay stagnant is to voluntarily put the dealership at risk of suffering severe value destruction with it unable to keep up with the offerings of its competitors.

Should you stay, or should you go?

Coming to the conclusion on whether or not you should seek to sell your dealership or if you should keep it and embrace changes are dependent on a few factors.

Amongst busy schedules and increasing demands, dealers often forget the reason why they initially joined the industry. Upon reflection most people say it was because of “the money”, but when you boil it down, that’s a by-product of a number of different reasons why people take the leap. These could include:

  1. It was a family business, so my future was already decided for me
  2. I wanted to be my own boss and in charge of my own future
  3. I wanted to be financially independent
  4. I love the industry
  5. I love the lifestyle my business affords me

By uncovering the reason why you were drawn into the industry in the first place, you will either be able to rekindle your motivation or reconcile with yourself why it is time to pass the business onto a new owner.

Reasons why selling could be an option

If you need further clarity on what your decision should be, then you should draw upon the reasons why you think you should sell, these could include:

  1. Loss of control – “I’m sick of being dictated by the factories”
  2. Shift in priorities – “I’m now financially independent, so I’m not prepared to compromise anymore to make money”
  3. Depletion of generational passing down of the dealership – “I do not want my kids to have to run this in the future like I was expected to”
  4. Loss of passion – “I just don’t feel the same about the dealership anymore”
  5. Lack of desire to change – “It’s too difficult, why should I bother?”

If you can identify with the above, then it is most likely the right time for you to act.

When it becomes difficult

Not all dealers have a clear vision for their future, making their decision-making process more difficult, especially for those who:

  1. Still love the business
  2. Are not ready to retire
  3. Whose identity is heavily linked to their job
  4. Are unsure if their kids will want to take over the business

In the past, it was acceptable to procrastinate with the decision-making process, with the dealer being in control of the timing of their decision. This is no longer the case with dealers having to face making a life altering decision rapidly as their other options lose viability.

What has caused the rush?

A series of events over the last 5 years have contributed to the constraints put onto dealers, forcing them to urgently and proactively seek a sale and limiting dealers wanting to maintain their businesses ability to turn down an offer to sell.

The buyer pool is drying up

The number of buyers in the market has depleted, with only very large, well-capitalised and innovative buyers making the transition to the Electric Vehicle (EV) agency model.

International manufacturing

The manufacturers (unfortunately not Australians) are being legislated into manufacturing EVs only, making our future electric as we are 100% an import-based market.

Technological advancements

A car with no internal combustion engine has fewer parts and does not require frequent servicing (with them often never being serviced by their first owners). All “engines” of the future will perform the same, so a test drive will become a configuration assessment as the “drive” part will become more about the features and benefits of the vehicle.

Dealerships will become more like an Apple genius bar rather than a transaction hub. The agency model will thrive, as Primary Market Area (PMA) is irrelevant, and the connection between customers and dealerships through the maintenance of a vehicle is lost.

Profit streams will dwindle as new technology continues to attack all traditional profit streams of a dealership. Therefore, assuming goodwill is six times a profit, based on the old profit streams, is extremely ambitious.

Ownership is evolving to usership

Cars have traditionally been fractional purchases, where the “owner” starts with little ownership at purchase and pays a monthly usership fee (representing interest and depreciation). This may result in some form of positive ownership fraction (equity) at contract term, but unlikely.

The technology changes coupled with comprehensive credit reporting will unhinge the ownership concept towards a fully maintained usership. This can all be handled online, so the need for transactional people that currently operate in showrooms will become obsolete.

Future buyers

If you are not planning to be a large agent in the EV business, you should consider selling within the next 2 – 5 years.

If you are wondering who would be in the market to purchase your dealership, the chances are that they will be one of the below:

  1. Large groups who are looking to grow larger
  2. Mid-sized groups who will grow in size and maintain relevance
  3. Large non-industry players who will look to enter the “new model” from the ground floor

These groups of buyers are extremely well informed and have a clear 20-year plan that embraces the transition of the new business model.

Their plans for expansion are targeted as they narrow in on dealers opting to sell. They seek to secure geographic locations where local markets are share driven and focus on the brands that hold the best product technology partners.

They will keep a stand-in on both sides during the transition, so currently configured dealerships maintain some value however, as time passes their value will decline.

Unfortunately, the ability to pick your own exit date is not an option.

Currently six brands in Australia are publicly moving to the agency model or exiting the market to leave the heavy lifting to a distributor. It is assumed that the other brands have the same plan, it has just not been made public knowledge.

Despite it seeming contrary to getting the best value for your existing business, we do not believe an agency agreement is as valuable as a dealer agreement to a third party.

The dealer groups that remain will need to be large enough to make the agency model profitable through scale. Therefore, they need to expand through acquisitions to attain the scale required.

Ultimately standing still is not an option, it will put your dealership at risk of suffering severe value destruction. You should be formulating plans for growth or exit as part of preparing your business for sale.

These two options might seem overwhelming but given our extensive experience working with many dealers who have been at this cross-road before, we can help you formulate plans that are right for you and your business.

Article originally appeared in GoAuto, 2 March 2021
This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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