How the car dealership buy-sell market could change over the next year

There may never be the perfect time to sell your dealership. Principal Dealers considering a sale are motivated by many reasons; some are tied to market conditions and others to personal goals. Thus, it is rare in our industry to find a dealer who is 100% certain that (a) selling is the best option and (b) now is the best time to sell.

I won’t advise on personal reasons to sell, but the market conditions that currently exist have opened a window of opportunity that may not come again for some time. If there was ever a time when the stars aligned for sellers, that time is now.

Consider how the following factors affect buy-sell activity and dealer valuations, and how these factors may change over the next year.

Cost and access to capital: Buyers are concerned about two things: the cost of borrowing capital and access to capital. When access is high and cost is low, more buyers are looking. These conditions create a seller’s market. This is what we have now, and have been for some time.

In a seller’s market, dealer groups are not the only potential buyers. In recent years, other entities have entered the space, such as private equity groups and independent used car dealerships looking to expand into franchises. All of this competition has been great for sellers.

But now the cost of capital is rising. The Federal Reserve has announced several more rate hikes over the coming year. As the cost of borrowing increases, there will still be buyers, but the environment will not be as competitive.

Access to capital may also be affected. Goldman Sachs said that in the United States there is a 38% chance of a recession over the next 24 months. If that happens, banks will tighten their lending policies. Additionally, many buyers have used Small Business Administration loans to fund transactions. As risk increases, the government may decide to reduce its SBA loan portfolio, further restricting access to capital.

Even if dealer groups can get financing, will they? In an uncertain environment, the attitude tends to be that unless they find the perfect match, they won’t take the risk.

Consumer demand: What goes up must eventually come down. As rising rents, gas prices and food prices continue to affect consumers, they will be less able and less willing to buy new vehicles. If a recession is in the cards, consumer demand for new vehicles will inevitably plummet. This could negatively impact dealer valuations from 2023 and beyond.

Compression of profit margins: Dealerships have enjoyed historically high margins on new and used vehicles, but we are seeing these margins begin to decline.

Cox Automotive expects inventories to remain tight and prices to remain high through the end of the year.

However, some manufacturers pressure dealers not to sell above the list price. And once supply chain issues are resolved, profit margins will likely return to pre-pandemic levels.