With dealership profits declining, the demand for acquiring those businesses has cooled, according to the latest research from Haig Partners.

The company’s Q2 2024 Haig Report found dealership profits declined 32% in the first half of 2024 compared to the same period last year and the average pre-tax income for publicly owned dealerships of $1 million was down 35% from Q2 2023, leading to a drop in buy-sell activity and dealership values.

After a record number of transactions in the first quarter of this year, the report found a 48% drop in Q2, with an estimated 84 rooftops changing hands. Transaction volume for the first six months of 2024 was down 14.5% year-over-year, and the market was on pace for an 11% decline from 2023 for the full year.

That said, the report noted volume was still high despite the slower pace, thanks to “a sustained appetite for strong franchises in attractive markets.” Haig Partners president Alan Haig said 2024 is projected to be the fourth-busiest year ever for U.S. dealership buy-sells with some 500 stores sold, which he said would be 49% higher than the average number from 2016-2019.

“We are leaving a period in auto retail in which conditions were almost too good to be true,” Alan Haig said. “Profits at dealerships more than tripled from 2019 to 2022, thanks to high gross profits on new vehicles and low expenses. Today, gross profits on new vehicles are declining and expenses have risen. The good news? Average profits are still about double what they were before the pandemic.

“In terms of the buy-sell environment, the past 3½ years have been boom times. We have seen well over 2,000 dealerships trade hands, about double the normal rate of buy-sells. … Just like profits at auto retail, however, we are beginning to see a slight slowdown in buy-sells.”

Like acquisitions, blue sky values were down for the quarter, sinking 11% from the end of 2023, which Haig Partners said represents the peak market value. But the report said that decline was smaller than expected, and the Q2 estimated average of $21.8 million for a publicly owned dealership remained well above pre-pandemic levels for most brands.

In fact, the report pointed out some record-setting transactions in Q2, including the sale of Hollywood Kia, which it said sold for the highest price ever for Kia franchise. Ussery Motors (Mercedes-Benz of Coral Gables) was reportedly sold for more than $300 million, which Haig Partners said is believed to be the most blue sky ever paid for a single dealership.

The report also noted a shift in the market, with public company acquisition dropping 94% from Q1 as many large dealership groups looked to sell dealerships that no longer make sense for them, including stores that produce little income or are losing money, and those located away from the groups’ core markets. The most notable exception to that trend has been Lithia and Driveway, which Haig Partners said spent $79 million on U.S. franchised dealership acquisitions.

Alan Haig said the overall trend opens an opportunity for smaller dealers to grow by acquiring the dealerships being shed by the big groups.

“The large public company acquisitions get a lot of headlines,” Alan Haig said, “but by far the biggest part of the market are family-owned groups that are handing over some of their savings to other family-owned groups that have chosen to exit the industry at record-high prices.

“Dealerships that remain nicely profitable are selling for a little less today than they were at the end of 2023, a reflection of their reduced profitability. We know many dealers who wanted to grow were sitting on the sidelines over the past few years as they waited for prices to fall. Now is the time to get up.”

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