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Old 09-16-2011, 01:36 AM   #1
Moshe @ Performance Brokerage Services
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Default buy-sell activity has picked up dramatically

The buy-sell activity in the past 6 months has picked up dramatically.

Many of the broken stores have been absorbed. The low hanging fruit has been picked off as well. Unfortunately, a rather large amount of empty buildings are still looking for franchises to bring in. But overall, we are finally seeing some stability returning to the buy-sell environment and with that, the goodwill prices are finally escalating again.

With vehicle sales continuing to rise nationally, and the change in ownership of some of the brands, it has brought a fresh new outlook, products, marketing strategies, stronger manufacturers’ balance sheets and a more excited dealer body who has been waiting anxiously for some much needed changes.

The Asian import brands are on fire and continue to gain market share month over month. The domestic franchises are still consolidating and are also noticing a substantial increase in retail sales. Their service and parts operations are also experiencing a major influx of new customers commuting from nearby communities due to dealerships' closures in towns nearby.

California for example, has experienced nearly a 30% decrease in its new car dealer body over the last five years! This will preserve and shore-up the remaining dealers in all facets of their operations: from new vehicle sales, used vehicle sales, service and parts.

Which makes and models are going to fill the vacuum? Franchises that used to have legs have fallen by the wayside over the last three years. Saturn was just one example of the much needed shift in the paradigm that our industry experienced. There is a real opportunity for market share to be gained by other franchises that are hot on the scene.

If we were asked four years ago to predict the level of success that Hyundai, Kia, Mazda and Subaru would have by 2011, we would have never guessed anything remotely close to today’s reality. These brands continue to grow in market share, and from a buy-sell perspective, they are currently some of the most sought-after brands.

The reset button was hit. Dealerships can still be purchased at affordable prices. A win-win environment currently exists: acquisitions measured by a reasonable return on investment for buyers, at price levels that still make financial sense for sellers to sell.
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Old 09-16-2011, 11:23 AM   #2
XDCX
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Thanks for the market update - I'm sure many of our members will be happy to hear that Blue Sky values are increasing and the market is starting to heat-up again.

I'd be curious to hear your assessment of the market as it relates to getting dealership buy/sells financed. Are the banks loosening up and issuing real estate loans for dealerships again? Can a dealer get a capital loan to make an acquisition? For the dealer who wants to sell, does it make more sense to hold out for a cash payment or does a buy-in/buy-out ever make sense?
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Old 09-17-2011, 02:17 PM   #3
Moshe @ Performance Brokerage Services
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You asked multiple questions. I will address them in order in general terms.

Financing has loosened up just a bit, but overall it is still REAL tight. For acquisition purposes in general, practically speaking, financing is nonexistent. No financing whatsoever is available for the goodwill portion and rarely any financing is available for working capital.

As for flooring - some banks and the manufacturers are coming back in. However, the dealers/applicants are scrutinized much more than ever before and the rates are still rather high. First time buyers find it almost impossible to get flooring lines turned on. Dealers, who are not performing well, have been experiencing pressure and curtailment from their flooring sources, and in some cases, dealers have been receiving notices of flooring termination. Recently, we have experienced a couple of rejections for flooring, from multiple sources, for dealers that have been in the business for over 30 years!

As for the real estate portion - the average small dealer (1-3 stores) can find those funds available if he/she is profitable. However, as the values tumbled and the banks are more cautious, loans can be found at best around 60%-70% loan-to-value. On the flip side, in a couple of our current transactions, TFS is financing 88% of the real estate and Honda is financing 100% of the real estate!

In general, we see more activity with Wells Fargo Bank, Chase and of course Ally Bank.

As for your last question, should sellers hold out and wait - after what we experienced in Q4 of 2008, how could sellers risk waiting for anything? We did not see it coming even two months before the economic meltdown occurred. Volatility and uncertainty still reign.

So, not any different than before, sellers should sell when their time is due. Whenever they are ready, or are forced to. If only to mention a few possible conditions: a desire to retire, an old age, no succession, not having fun anymore, a divorce, a partnership dissolution, manufacturers’ demands for facility upgrade that they would rather not go through, relocation, redeployment of capital to improve one’s portfolio, unfortunate losses that can’t be sustained or hopefully an offer that they cannot refuse, etc.

As for your last comment - a buy-in/buy-out program is one of my favorite ways of selling a store. If done correctly, it becomes a win-win all the way around. To the buyer it is a life changing event - the ability to become a dealer with a small amount of cash. Without that chance he/she could not afford buying a store at all. To the seller - a planned exit, a planned phase out and ultimately selling the store for the highest possible price, when you add back the continued participation in the profit sharing until the buy-out is completed. A word of caution to the readers: it has to be structured correctly. We have done dozens of those over the years and they can get ugly.
Clearly I can’t spell out the all the details here, but if only to mention a few: select your candidate carefully - it is a partnership in a way for several years. It needs to be structured correctly with a threshold of performance, governed by employment agreements, stock purchase agreement and a shareholder agreement. Additionally, seller should remain 100% owner of the real estate until the buy-out is completed. Some risks should be mentioned as well: if the threshold performance is not met, it is very difficult to unwind the deal. The culture of the dealership could have changed if you had to take it back. The dealership might not produce enough profit for the buyer to purchase additional stock, causing the process to stall in a way. The flooring lines remain open under the seller’s name and the exposure continues, etc.

We have some success stories to tell of course. One story comes to mind of a gentleman who came to us with $180K. We got him involved in a store, and within 5 years he owned 100% of the stock, netting $1.3M and managed to purchase the real estate for $3.3M as well. A success story indeed!

Last edited by Moshe @ Performance Brokerage Services; 09-20-2011 at 08:10 PM.
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Old 09-19-2011, 04:36 PM   #4
XDCX
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Thanks for the information - I think that's the most informative overview of the current market I've read anywhere.

Quote:
Originally Posted by Performance Brokerage Services View Post
As for flooring - some banks and the manufacturers are coming back in. However, the dealers/applicants are scrutinized much more than ever before and the rates are still rather high. First time buyers find it almost impossible to get flooring lines turned on. Dealers, who are not performing well, have been experiencing pressure and curtailment from their flooring sources, and in some cases, dealers have been receiving notices of flooring termination. Recently, we have experienced a couple of rejections for flooring, from multiple sources, for dealers that have been in the business for over 30 years!
We had a few of our members get caught-up in the Chrysler Financial to GMAC quagmire and it proved to be a sobering experience. Even for the dealers who were able to meet GMAC's terms is was daunting to see that they were essentially at GMAC's mercy since there were no other banks issuing floorplan loans at the time.

We had another member research the SBA's program that the NADA likes to tout and he couldn't find a single banker who was willing to touch it.

Quote:
Originally Posted by Performance Brokerage Services View Post
As for the real estate portion - the average small dealer (1-3 stores) can find those funds available if he/she is profitable. However, as the values tumbled and the banks are more cautious, loans can be found at best around 60%-70% loan-to-value. On the flip side, in a couple of our current transactions, TFS is financing 88% of the real estate and Honda is financing 100% of the real estate!

In general, we see more activity with Wells Fargo Bank, Chase and of course Ally Bank.
Again, great information. It's interesting to see that Toyota Financial Services and Honda are supporting their dealers by financing a larger percentage of the real estate value than the traditional banks.

Quote:
Originally Posted by Performance Brokerage Services View Post
As for your last comment - a buy-in/buy-out program is one of my favorite ways of selling a store. If done correctly, it becomes a win-win all the way around. To the buyer it is a life changing event - the ability to become a dealer with a small amount of cash. Without that chance he/she could not afford buying a store at all. To the seller - a planned exit, a planned phase out and ultimately selling the store for the highest possible price, when you add back the continued participation in the profit sharing until the buy-out is completed. A word of caution to the readers: it has to be structured correctly. We have done dozens of those over the years and they can get ugly.
Clearly I can’t spell out the all the details here, but if only to mention a few: select your candidate carefully - it is a partnership in a way for several years. It needs to be structured correctly with a threshold of performance, governed by employment agreements, stock purchase agreement and a shareholder agreement. Additionally, seller should remain 100% owner of the real estate until the buy-out is completed. Some risks should be mentioned as well: if the threshold performance is not met, it is very difficult to unwind the deal. The culture of the dealership could have changed if you had to take it back. The dealership might not produce enough profit for the buyer to purchase additional stock, causing the process to stall in a way. The flooring lines remain open under the seller’s name and the exposure continues, etc.
This is why I like an interactive forum - I always assumed brokers tried to steer sellers away from buy-in/buy-outs and encouraged 100% cash deals.

Quote:
Originally Posted by Performance Brokerage Services View Post
We have some success stories to tell of course. One story comes to mind of a gentleman who came to us with $180K. We got him involved in a store, and within 5 years he owned 100% of the stock, netting $1.3M and managed to purchase the real estate for $3.3M as well. A success story indeed!
That is awesome - that's the American dream and it's good to see it's still alive.
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