What Auto Dealership Owners Should Know About Selling to Private Equity Firms

By Gregg Schor, CEO, Protegrity Advisors

It's no secret that auto dealerships have become an attractive target for private equity investors such as Warren Buffet, George Soros, and Bill Gates.  As in any industry, for auto dealership owners to decide when is the right time to consider a sale to a private equity firm and how to best position for a maximum purchase price, it's important for the seller to understand the underlying motivations of the buyer, what factors to consider, and how PE firms may be different from other types of buyers.

Why are auto dealerships attractive to private equity firms?

Private equity firms raise funds from investors, and then deploy that capital to acquire companies with the goal of making a profit when those companies are sold in the future. Firms have different tolerances for risk, objectives for rates of return, and target sectors based on their collective expertise, but the underlying reason why auto dealerships have become attractive is that they strike an enviable balance between risk and return.

High barriers to entry and multiple revenue streams enable auto dealerships to thrive in almost any economy and therefore substantially mitigate PE risk.  On the reward side, a fragmented industry presents the opportunity for roll-ups, and the emerging "connected" car and other innovative technologies will not only motivate consumers to want to have the latest safety and internet-enabled features, but will also create new potential revenue streams.

Why should auto dealership owners consider selling to private equity firms?

There are several advantages selling to a private equity firm, rather than to a strategic buyer or other competitor.  Many PE firms are willing to pay a premium for a dealership that meets their target criteria.  Another major positive is that by design, a private equity firm will buy a dealership only if it believes that as a result of the PE firm's additional capital, expertise, relationships, and ability to leverage its other portfolio companies, it can sell the dealership again at a substantial profit, generally in a five- to seven-year period.  In most cases, the former owner is given the option to retain some equity moving forward as well as have a role to be defined and agreed upon. This scenario allows a former owner to continue to generate income as a consultant or employee for a period of time, and then have the opportunity for a second payoff, which can be larger than the initial check at the first closing depending upon the circumstances.

What makes selling to private equity firms different?

Private equity firms, in addition to being motivated by profit, may have certain fiduciary obligations to their investors. They also can afford to have teams of analysts, lawyers, and accountants, and as a result, targets can undergo an extremely high degree of scrutiny during the courting and due diligence process. While emotion can play a role when buyers are strategics or competitors, this is not the case with private equity firms, and for a transaction to be approved by its management committee, the prospective transaction must pass several internal tests to proceed to subsequent stages and ultimately to closing.

To successfully sell an auto dealership to any type of buyer, it is essential to have an M&A advisor with substantial experience in owning, managing, buying and selling auto dealerships.  Marketing and selling dealerships to PE firms requires an additional skillset, i.e., having an M&A advisor who is also well versed in what characteristics private equity firms find either positive or negative; how PE firms analyze information and what should be presented and when; how to establish and maintain credibility which, once lost, is difficult to regain; and how to negotiate and structure private equity sales transactions and manage all of the moving parts every step of the way, allowing the dealership owner to remain focused on his or her core business of running the dealership.

To explore selling your auto dealership, please contact me directly for a confidential discussion at 631-285-3172.


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