Don’t be surprised if some of the stores along “car row” in your market undergo a major ownership change some time before the end of the year.

According to the latest Blue Sky Report released this week, Kerrigan Advisors is expecting 2018 to be an active year for dealership buy/sells with an increasing number of buyers and sellers coming to market with the volume of transactions increasing as the calendar turns.

The report identified three key trends shaping 2018 and into 2019, including:

— Private dealers partner with outside capital to finance growth plans

— Public dealership groups become increasingly acquisitive

— Buyers focus on current performance rather than pro forma when pricing blue sky

“Kerrigan Advisors sees movement toward increased consolidation in auto retail, as well as continued increase in capital investment from outside the industry. Buyers are excited by the long-term opportunity and healthy pace of the current market, and see it as a chance to increase investment,” said Erin Kerrigan, managing director of Kerrigan Advisors.

“At the same time, we expect this shift toward economies of scale, coupled by current high values, to entice smaller dealership groups to sell as part of their estate planning,” Kerrigan continued.

In the report — which can be downloaded here — Kerrigan Advisors went into more detail about why and how outside capital is working its way into the franchised dealer space. The firm believes that the trend began to surface noticeably when Warren Buffet and Berkshire Hathaway acquired the Van Tuyl Group in 2015.

Firm experts said, “a growing pool of professionally managed and invested capital is looking to follow Buffet’s lead and invest in auto retail. The Buffet acquisition not only served as an endorsement of auto retail, it also showed many that such an investment could be done.

“Previously, acquiring and investing in auto dealerships seemed nearly impossible for outside capital,” the firm continued in its report. “Auto retail had a perceived impenetrable barrier to entry. The challenge for most of these private investors is how to invest and with whom.

“Traditionally, auto dealers were disinterested in bringing on equity partners, believing a partnership would overly limit their control of their business. The negatives simply outweighed the positives,” the firm went on to say. “However, as growth through acquisition has increasingly become an imperative to future success, a rising number of dealers are seeking capital partners to fund their acquisition plans.”

With those trends forming a backdrop, Kerrigan Advisors highlighted that during the first quarter the auto dealership buy/sell market continued its high level of activity, fueled by a healthy economy and an increased pool of sellers reacting to auto retail’s future.

Fresh investment and capital from new players, including international buyers, kept the Q1 pace at a high level — though down from last year’s peak, according to The Blue Sky Report.

Kerrigan Advisors explained the continued steady pace of a 17 million SAAR, compounded by pressure on dealership profits and emerging changes to the dealership business model, have essentially defined the market into two camps, which include:

— Buyers who have outside capital or resources to embrace and drive change

— Sellers who are increasingly reliant on OEM incentives for profitability and are concerned about how coming changes will impact generational succession plans

Among the most noteworthy transactions underscoring this trend is AutoCanada’s acquisition of Kerrigan Advisors’ client Grossinger Automotive Group. Kerrigan pointed out the Grossinger transaction was the largest transaction ever made in auto retail by a non-U.S. company.

“As with 2017, we’re continuing to see the economic benefits of consolidation, and how that’s attracting new buyers to auto retail,” Erin Kerrigan said. “There is also a rising interest by many dealers in selling. In particular, smaller dealership groups, who are struggling to maximize profit through economies of scale, are concerned about the viability of their family business for future generations.

“These dealers would rather sell now when values are high then risk the unknown,” she added.

Kerrigan Advisors acknowledged this cautious approach to unknown factors also has changed the way buyers are approaching the market. While the past saw them base valuations on future potential earnings, today’s focus is on current performance.

“In the last decade, buyers mostly priced acquisitions based on expected pro forma earnings post-transaction,” said Ryan Kerrigan, managing director of Kerrigan Advisors. “With industry sales slowing, however, many are now unwilling to base their purchase price on what a dealership could do. They are focused on what the dealership is currently doing in terms of profit. That is what drives value today.”

Blue Sky Report data and analysis from the June quarterly report also included:

— Actual transactions declined quarter over quarter, but the number of franchises represented in each transaction increased by 45 percent. As a result, the total number of franchises sold in the quarter remained on pace with 2017.

— Multi-dealership transaction activity increased 27 percent in the first quarter of 2018, compared to 2017. Kerrigan Advisors expects the pace of multi- dealership transactions to remain high in 2018.

— Among franchises being acquired, domestic franchises (44 percent) maintained their leading position with the highest buy/sell market share, followed by import non-luxury franchises (40 percent) and import luxury franchises (16 percent).

— Import franchises had the highest turnover rate — a reflection of high buyer demand and low franchise supply. The supply/demand imbalance of many import franchises also results in higher blue sky values and multiples.

— U.S. public auto retailers’ U.S. acquisition spending increased 62 percent in the first quarter of 2018, compared to Q1 2017. At this spending level, public retailers are tracking toward over $1.5 billion of U.S. acquisition spending in 2018, a level that would exceed 2014’s peak level.

— Private buyers, however, continue to dominate buy/sell markets with almost 80 percent of franchises. Private buyers are accessing debt and equity capital to finance their growth and compete with the publics for sizable acquisitions.

The Blue Sky Report published by Kerrigan Advisors is a quarterly report on dealership M&A activity, as well as franchise values. It includes analysis of all transaction activity for the quarter, and lays out the high, average and low blue sky multiples for each franchise in the luxury and non-luxury segments.