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

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Q: Are there any pitfalls that sellers should be knowledgeable of that could effect their profitability and valuations?

A: The small-expression risk we see is the possibility of a economic downturn. Some economists forecast that we’re likely to have a recession in 2023, which would cut down demand from customers for motor vehicles and most likely impair the exceptionally high earnings on autos that dealers are savoring currently. As revenue decline, so would valuations.

In the Q4 2021 Haig Report, we highlighted some medium to long-time period threats that dealers will want to look at:

Tesla and Other New Entrants: Tesla now has grow to be the main luxurious brand name in the U.S. and its following products start, the Cybertruck, is aimed at the heart of the domestic makes. Other new entrants, these types of as Rivian Automotive and Lucid Motors, also are coming into the current market, as properly as new brands remaining introduced by standard OEMs, like Polestar. These new entrants will very likely expertise blended success in the marketplace, but there is a superior likelihood that competing dealers across the place will shed buyers and earnings as a result. Maybe a larger menace to sellers is that new entrants may well force traditional OEMs to force the company design on dealers (see down below).

The Company Design: Classic OEMs have seen that thousands and thousands of customers are keen to go to a internet site, get a motor vehicle and then wait around for it to be shipped. And these OEMs also see they no for a longer time require to create hundreds of thousands of automobiles for dealers’ storage plenty, guessing at which autos clients will truly want, and then seriously promote and present incentives in get to get shoppers to acquire the automobiles. Their revenue for each car or truck are far increased when they produce only what shoppers want to acquire. And eventually, they see that stores are generating massive earnings. This new set of details is resulting in a amount of OEMs to reconsider their associations with their sellers and consumers. Ford’s strategy to individual into two divisions, the Model e Division that will create only EVs and the Blue Division that will create only interior-combustion engine (ICE) cars is an instance of a potential Agency Model in engage in. Shoppers who want to invest in an EV will have to buy from Ford’s Model e web site.

It does not show up that shoppers will be ready to acquire Model e cars straight from dealers. This is a profound modify as the OEM will now established, as an alternative of “suggest,” retail pricing and the OEM will be the position of get in touch with with prospects. The customer can select which seller will deliver the car or truck, but the price tag will be determined by Ford, which also will determine how significantly to fork out the retailer. The consumer will turn into Ford’s customer, fairly than the dealer’s purchaser. This company design, in which the vendor will become an agent and is not a retailer, is common in other parts of the earth. It is our comprehension that sellers in these parts make significantly a lot less earnings than dealers in the U.S. And Ford is not by yourself in its pondering. OEMs have been envious of Tesla’s inventory current market valuation that is partly centered on this direct product sales design.

Electrical Cars: Some sellers are anxious that EVs will demand much a lot less components and assistance do the job than ICE autos, which will harm their assistance departments.

Consolidation: Whilst however a highly fragmented sector, consolidation in auto retail accelerated in 2020 and 2021. Teams like Lithia Motors, Team 1 and Asbury Automotive Group bought dozens of retailers to extend their nationwide community of dealerships, accompanied by digital retailing tools that will let them to sell and service clients who want online purchasing. These automobile teams and other sellers are increasingly persuaded that significant scale will issue far more in the upcoming than it has in the past. They program to supply customers a more substantial assortment of automobiles and far more techniques to shop than more compact dealers can supply. If successful, they will get current market share and make sure you their OEM companions and shareholders. Their gains would appear at the price of smaller dealers that cannot match these abilities. Haig Companions gives opportunity remedies for dealers for every single of these problems. But due to room constraints, we can’t demonstrate them in element here. However, you can go through about these solutions on webpages 14 and 15 in the Q4 2021 Haig Report. These threats are actual. Having said that, dealers are highly resilient and we assume they’ll locate approaches to mitigate these risks. We are still bullish on the franchise system.

Haig Associates features possible treatments for sellers for every of these concerns. But thanks to space constraints, we can not demonstrate them in element listed here. Nonetheless, you can read through about these therapies on webpages 14 and 15 in the Q4 2021 Haig Report.

These dangers are authentic. Nonetheless, dealers are remarkably resilient and we be expecting they’ll find ways to mitigate these threats. We are even now bullish on the franchise system.

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