Along with analyzing how dealership values are changing, one transaction involving the Ken Garff Automotive Group highlighted the Q3 edition of The Haig Report released this week by Haig Partners.

The report indicated the number of private dealerships that sold in the U.S. increased 26 percent year-over-year, rising from 84 to 106.

In one large transaction, the firm recounted the Ken Garff Automotive Group purchased full ownership of 28 dealerships from an affiliated entity that drove much of this increase. 

Excluding this transaction, Haig Partners noted that the number of dealerships sold in Q3 decreased 7 percent year-over-year. Meanwhile, the report showed the number of dealerships sold during the first three quarters of this year jumped 24 percent compared to the same span in 2017.

Haig Partners added that acquisition spending in the first three quarters of 2018 by publicly traded auto retailers decreased 33 percent compared to the same period in 2017.

The report goes on to mention profits at privately owned dealerships during the past 12 months through September came in 2.6 percent lower than for the full year 2017, mostly due to rising costs.

Haig Partners lowered the estimated blue sky multiple ranges for 12 of the 22 franchises that it covers by 0.25 times-0.5 times to reflect lower offers from buyers.

The firm explained the reduction in blue sky multiples is a result of several factors, including falling profits, an increase in the number of dealerships available for purchase, and the potential of rising interest rates which could reduce investment returns.

When lower profits per dealership are combined with reduced blue sky multiples, Haig Partners estimated the value of a privately owned dealership fell 4.6 percent from year end 2017 to Q3 2018.

Other key findings from the Q3 2018 Haig Report include:

—Macroeconomic indicators such as GDP, employment, number of miles driven and consumer sentiment remain highly favorable for dealers.

—Other trends such as higher interest rates, higher average monthly car payments and declining dealership profits are hurting dealers.

—Private dealers are increasing their focus on used vehicles with volume up 4.4 percent through three quarters, even as new-vehicle sales are declining.

—Fleet sales are up 9.3 percent through three quarters, but retail sales were down 2.2 percent.

—Declines in new and used gross profits per vehicle are being offset by gains in F&I and fixed operations.

—Floorplan interest expense has swung from a credit of $119 per vehicle in 2015 to an expense of $58 so far in 2018.

—Total sales and gross profits continue to increase at dealerships, but expenses are rising faster leading to earnings declines at many public and private dealers.

—The average dealership pre-tax profit for the 12-month period that ended in Q3 was $1.36 million, down 2.6 percent from the close of 2017.

—Average estimated blue sky value per dealership dipped 4.6 percent in Q3 to $6.6 million compared to $6.9 million at the end of 2017.

—Potential threats from autonomous cars, ride sharing, and electrification have not yet had a measurable impact on dealership values, but dealers are increasingly thinking about these risks.

The firm added that more dealers are coming to the realization that scale will matter more in the future. They are preparing to “get big or get out,” according to the firm.

“The third quarter buy-sell activity was healthy but leveled out from the huge uptick we saw in the second quarter,” said Alan Haig, president of Haig Partners. “Auto retail continues to deliver attractive returns for dealers, particularly after the new tax code went into effect.  

“Lenders are also bullish and we see them providing generous credit terms for most acquisitions,” Haig continued. “That said, there are many businesses for sale right now, and buyers are increasingly focused on the risks of higher interest rates in the future. 

“As a result of having more choices and being more cautious, buyers are less aggressive than in prior years and they are reducing the multiple of earnings they are willing to pay for dealerships,” he added.

“Sellers with realistic expectations can still exit the industry with healthy valuations, but those who seek premium prices will likely sit unless they are located in booming markets like Texas and Florida,” Haig went on to say.

The Haig Report is published each quarter. Included in each edition are Haig Partners' blue sky multiples that can serve as a gauge for franchise values.  To download the report, go to this website.