Kerrigan Advisors tabulated the figures and discovered the dealership buy/sell market recorded another year of tremendous activity in 2018, generating 6.9 percent in growth above the 2017 level and marking the fifth consecutive year of more than 200 transactions.

According to The Blue Sky Report’s Year in Review released this week, analysts indicated 216 transactions closed in 2018, including a record number of multi-dealership transactions. And the report emphasized this five-year streak shows no signs of abating in spite of an anticipated slump in new-vehicle sales and rising interest rates.

Kerrigan Advisors predicted that 2019 will be another robust year for buy/sell moves and valuations.

“The strength of the dealership buy/sell market over the last five years is a testament to the health of the U.S. economy, the financial markets, and most importantly, the auto retail industry. We believe the number of buyers, particularly those backed by professionally managed capital, will increase in 2019,” said Erin Kerrigan, founder and managing director of Kerrigan Advisors.

“Despite rising interest rates and a decline in new-vehicle sales, the average auto dealership remains highly profitable and valuable, continuing to appeal to private dealers who comprised the majority of buyers in 2019,” Kerrigan continued.

In addition to a strong economy and the ongoing consolidation and innovation opportunities in auto retail, among the key factors Kerrigan Advisors cites for a strong buy/sell market in 2019 include:

— A rise in the number of private investors seeking to put capital into auto retail. Year-to-date, Kerrigan Advisors noted the pace of new investors seeking investments in auto retail has risen 59 percent as compared to 2018

— Increased dealership gross profit driven by fixed operations via service and parts

— Dealerships’ historically demonstrated ability to adjust their business model to create new profit opportunities and reduce variable expenses.

“Buyers are looking for higher quality franchises which are more competitive as new-vehicle sales decline,” Kerrigan said. “These franchises tend to have more fixed operations revenue, which commands a gross profit margin nearly ten times higher than new vehicles and are benefitting from the surge of vehicles entering the “sweet spot” of customer pay post-warranty, more than making up for margin losses from a contracting vehicle market.”

Kerrigan Advisors noted that while overall Blue Sky multiple averages are lower due to a decline in lower demand franchises, valuations remain strong, although more stores are trading at average, rather than high, multiples.

Additionally, valuations are being positively influenced by high real estate valuations which are at peak levels and represented the largest portion of a dealership’s value in 2018. Kerrigan Advisors estimated the average dealership’s real estate value at $11.3 million, up 4.9 percent from 2017.

Experts explained this shift in dealership transaction values from blue sky to real estate has reduced the equity requirements of the average transaction, which Kerrigan Advisors believes is one of the reasons buy/sell activity remains so strong.

Domestics continued to show strength in the 2018 buy/sell market, according to the report, exceeding 50 percent for the first time in the last five years.

On the other hand, import luxury franchises’ market share continued to decline, a trend the report said will continue in 2019 as their high multiples will be more difficult to achieve for some buyers.

Also contributing is the sensitivity import luxury franchises have to rising interest rates, because their high valuations typically require more leverage. But, although the larger import segment will also see a decline in 2019, Kerrigan Advisors expects the top import non-luxury franchises, namely Toyota, Honda and Subaru, to grow their buy/sell market share in 2019.

“A key trend for 2019 is that the business model of the franchise will determine buyer demand: as industry sales contract, buyers become more discerning, focusing on high-performing franchises that have attractive, long-term investment characteristics that tend to outperform the industry when sales decline,” Kerrigan Advisors managing director Ryan Kerrigan said.

“Meanwhile, weaker franchises with challenging dealer business models will see lower buyer demand because today’s buyers are not attracted to franchises with poor dealer relations, highly variable incentive programs, less supportive captive finance companies, low sales per dealership and weak fixed operations,” Ryan Kerrigan continued.

The report also identified the following four market trends, which the firm predicts will meaningfully impact the buy/sell market in 2019 and beyond. They include:

— Sellers avoid image upgrades to capitalize on record real estate values.

— Rising interest rates impact blue sky values.

— Franchise business models determine buyer demand.

— Transaction activity increasingly varies by market.

Other key highlights from the full-year report include:

— 216 transactions closed, versus 202 in 2017, resulting in a 6.9-percent increase over 2017.

—Year-to-date, the pace of new investors seeking investments in auto retail has risen 59 percent as compared to 2018.

— The number of multi-dealership transactions reached a record 65 for the full year, a notable 27.5-percent increase over 2017’s level.

— Domestics’ share of the buy/sell market rose again in 2018, exceeding 50 percent for the first time in the last five years.

— Public retailers’ acquisition spending declined in 2018 by 6.6 percent as compared to 2017.

— Private buyers continue to lead industry consolidation, acquiring 93 percent of the franchises sold in 2018, about the same level as 2017.

— Dealership real estate represented the largest portion of a dealership’s value in 2018, exceeding blue sky value by 84.2 percent.

The firm added public companies are undervalued relative to private dealerships. Public blue-sky multiples now average just 5.1 times, only slightly above Kerrigan Advisors’ average blue sky multiples for private dealerships, despite the publics’ liquidity premium.

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 year and lays out the high, average and low blue-sky multiples for each franchise in luxury and non-luxury segments.

For more details and to preview the entire report, go to this website.