Lower Blue Sky Valuations as Dealership Gross Profits Decline

Fellow Dealers, you've spent a great portion of your life building your dealership from the ground up and now you might be ready for that life changing event. You're looking for an exit, and will be converting your steady income into a lump sum valuation. Are those lump sum valuations declining?

The latest insights from the HAIG Partners Annual Dealership M&A Update by Alan Haig explore this and the changing dynamics of the auto retail sector, focusing on dealership profits and the critical concept of blue sky valuations. These evolving conditions are reshaping the landscape for auto dealers, particularly those considering their business's future.

Dealership Profit Dynamics: Takeaways

The year 2022 stands out as a remarkable period for dealership pre-tax profits, which soared to an unprecedented $6.5M, spurred by the unique market conditions of the pandemic era.

Contrastingly, Alan Haig outlines a significant shift, with an estimated 23% drop to $5.0M for 2023... and trending down for 2024. This shift is linked to a variety of factors, including the resolution of supply constraints, the impact of elevated interest rates on consumer demand, and the overarching effects of inflation.

"The peak profit levels of 2022 are transitioning to more conventional figures, prompting a need for strategic reassessment among dealers."

The Blue Sky Horizon

For dealers, particularly at the point of exit, the 'blue sky' value represents the intangible worth of their dealership beyond its tangible assets. According to the HAIG Partners report, there's been a notable decrease in average blue sky valuations from the peak in 2022. This adjustment, closely tied to shrinking profits, signals a need for dealers to reevaluate their exit strategies and valuations.

"As the market adjusts, so must dealers in redefining their blue sky expectations to align with the evolving economic landscape."

Farm your Existing Customer Base and Maximize Loyalty

A key strategy for enhancing dealership value involves farming your existing customer relationships. Where many auto sales professionals focus on the transaction, sort of one-and-done, getting your customers back in door for a trade-in is often overlooked.

Offering services like "accident forgiveness " to your customers will entice them coming back to your dealership with trade-ins and new transactions.

Per-Vehicle Profits have Stabilized in 2023 off Peaks

The HAIG report also details gross profits per-vehicle for both new and used cars, based on data from public companies.

In 2023, the average gross profit per new vehicle has stabilized at $4,582, healthy but off peak in 2022. Similarly, used car gross profits have steadied at $1,781 for 2023, which is a reduction from the high experienced in 2021.

Enhancing Per-Vehicle and Dealership Profits with ValueShield

ValueShield serves as a pivotal addition to dealership profitability strategies, impacting two main areas:

1. Integration into F&I as 'Gap Wrap': Incorporating ValueShield into our finance and insurance options extends beyond offering a mere product; it's about providing customers with an added layer of security. This approach can lead to a notable increase in per-vehicle profit, thereby enhancing the dealership's financial health.
2. Addressing the 18.6% of Vehicles in Accidents: By applying ValueShield to trade-ins, we're able to elevate the Actual Cash Value of the trade, ensuring that our customers receive a fair value for their vehicles. This ACV adjustment not only boosts immediate profit margins but also reinforces our commitment to delivering added value.

Stay tuned for a detailed analysis in the forthcoming "Running the Numbers," where we'll delve into the tangible impact of ValueShield TX on your dealership's F&I performance and its potential influence on blue sky valuations in the M&A context.

More than just enhancing profit margins, introducing ValueShield aims to foster a cycle of customer loyalty, encouraging them to consider our dealership for future vehicle needs. This approach is designed to cultivate lasting customer relationships, rather than merely boosting transaction numbers.

Maintaining Value in your Dealership Exit Price

Despite the pressures of the current market, the underlying demand in the auto retail sector remains robust. Dealers are encouraged to uphold the perceived value of their businesses, resisting the temptation to undervalue their operations. A patient and strategic approach can attract substantial offers from interested buyers.

Essential Reading: "The Exit Strategy Playbook"

Adam Coffey's "The Exit Strategy Playbook " emerges as an invaluable resource for dealers contemplating their exit strategy. This comprehensive guide emphasizes the importance of timing, understanding the market's pulse, and strategically positioning one's dealership to appeal to the right buyers at an optimal valuation.

"Effective exit strategies are about more than just selling; they're about achieving the right sale at the right time and under the right conditions." - The Exit Strategy Playbook

Final Reflections

The HAIG Partners report offers a pivotal perspective on the auto retail industry's current state, especially for dealers nearing a transition. Armed with the right strategies, equipped with tactics like accident forgiveness with ValueShield, and bolstered by industry insights and expert advice from resources like "The Exit Strategy Playbook," dealers are well-positioned to navigate these changes and secure a prosperous and rewarding exit.

References:

• HAIG Partners Report
• "The Exit Strategy Playbook "