There’s a trend that may have started back before the pandemic, but is ramping up recently: Canadian dealers are increasingly looking south of the border, eyeing mergers, acquisitions and opportunities in the U.S.

Auto Remarketing Canada spoke with a variety of different leading M&A experts across the U.S and Canada to learn more.

There are a variety of different elements contributing to this trend, ranging from lower real estate rates to deeply ingrained franchise laws in the U.S.

Erin Kerrigan, founder and managing director of Kerrigan Advisors — publisher of the Blue Sky Report — said that this is the trend her firm has been watching closely and even covered in their most recent report.

“It is a trend that goes beyond Canada, to be honest,” she said. “We are seeing this as a reflection of the fact that the U.S. franchise laws provide such protection to the dealer, and in other countries they just don't have those.”

Kerrigan discussed the rapid change that is ensuing in other countries with other agency models as well as changes to the way in which dealers are compensated for the risk they take and the business run by OEMs.

“That’s changing so quickly beyond our borders, but in the U.S., we have franchise law protections that make it much harder for the OEM/dealer relationship to change, especially to the dealers’ detriment,” Kerrigan said.

Kerrigan Advisors is seeing considerably more international dealers coming to the U.S. or at discussing a potential move. The largest portion is from Canada, but Kerrigan is also in discussion with dealers from Mexico and Europe.

“I think this will continue to be something we see, because I don't see our franchise law system going anywhere,” she said. “And so those protections will continue to ensure that the capital that dealers invest is protected — and that's unique to our country.”

Beyond franchise protection laws for dealers, Kerrigan cited one more challenge sending Canadian dealers and beyond to the U.S.: electrification.

Kerrigan foresees that the U.S. will likely be the slowest to change in comparison to most other modern, Westernized countries. This is due in part to the country’s size, as well as grid infrastructure challenges.

“I think that the legacy business, the ICE (internal combustion engine) business is probably going to be with us longer in the U.S. than in Europe,” Kerrigan said.

Canada and Europe will likely move more quickly toward electrification and EVs than the U.S. This is attractive to dealers because the business model will change more slowly, giving them more time to adjust and prepare for the change.

Overall, the evolution of the U.S. industry will be slower by virtue of deeply ingrained franchise laws and the “car culture that remains in the U.S.,” according to Kerrigan, due in part to the 200-plus million vehicles on the road in the U.S. — most of which are still ICE vehicles.

“So, I think that there's just a lot longer running room in our industry, with the legacy business. And this will give us more time to adapt to the new electrified business that's coming down the pike,” Kerrigan said.

This border crossing trend, with Canada being the most prominent player — and the most logical due to its close proximity — isn’t expected to slow anytime soon.

Cliff Banks, president of Banks Media Enterprises, shared with Auto Remarketing Canada that at least the move from Canadian dealer groups south has been happening for a few years now. And he knows of at least seven Canadian dealer groups moving into the U.S. in the past three to four years.

Alan Haig, president of Haig Partners, said he can’t really define when the crossing borders shift began, but he contends it certainly started before the pandemic, in terms of Canadian dealers buying dealer groups and individual dealerships in the U.S.

There are a number of factors Haig presented. Here’s how he broke them down:

  1. In some cases, owners of dealership groups in Canada want to buy dealerships nearby, but perhaps see the benefits of the U.S. dealer group set up.
  2. There is personal interest, as well, in terms of Canadians preferring to live part of the year in the U.S., avoiding the cold in the winter months.
  3. Canadian dealerships are more consolidated and expensive than in the U.S.

“A number of our Canadian dealer friends tell us that the prices that dealerships command in Canada as a multiple of earnings is higher than the multiple in the United States,” Haig said. “And I have a feeling it's just a function of supply and demand. There's a lot of demand in Canada.”

“There are not that many left that are independent for dealers to buy. So, when something comes up (in Canada), it's expensive,” Haig said.

The cost for real estate in Toronto, even well outside of downtown, far exceeds the cost of land in a comparable city in the United States.

“Then I think the U.S.  is growing faster and is much larger. So, if you're a dealer and you're doing well and you want to expand, you have more opportunities and an opportunity for a higher return on investment in the United States,” Haig said.

And one doesn’t have to cross an ocean to get to either country from the other.

“There are a lot of Canadians in the United States, either for personal reasons or professional reasons,” Haig said. “The cultures are pretty similar, so it's not companies coming from Japan or China — or South Africa —and it seems to work pretty easily.”

Perhaps the border crossing started with personal reasons, but “they're also a lot of economic reasons why dealers find themselves wanting to acquire dealerships in the U.S. versus Canada,” Haig said.

Haig pointed out there are about nine times more dealerships in the U.S. than in Canada, “So, it's easier for Canadians to find opportunities for acquisitions in the U.S. than it is in Canada.”

Also, Haig said, in terms of Canadian dealerships being much more expensive from a real estate perspective, Canadian dealers looking to enter the U.S. are likely outbidding American dealers.

American dealers will often get a higher price when selling to Canadian dealer groups.

“For U.S. dealers that want to grow, they're competing not only with American dealers, but now with 15 or 20 Canadian groups that want to come down here as well,” Haig said.

He also touched on franchise rules, as well, in terms of our deeply engrained franchise dealer laws in America, and those being attractive north of the border.

“In the United States, every state has laws that are designed to protect the dealer,” Haig said.

For example, in Texas, there are laws making sure there aren’t any franchise dealers in very close proximity to other dealers, in hopes to not force over-competition.

“Canada doesn't have those same protections … if they get mad at a dealer, or if they think they're not being represented well in a certain area, they can award another franchise to another dealer — very close to an existing dealership, and that can harm the existing dealer,” Haig said.

And these dealers can jump on an airplane within a couple of hours, with most speaking the same language — and ”that’s a smart thing for them to do,” Haig shared.

Looking forward, Haig says dealers will continue to invest in the United States. And in many cases, Canadian dealers are looking to buy one or two dealerships a year. And many of these Canadian dealers are very large and highly profitable.

“And we absolutely expect that they will be making much bigger investments in the United States,” Haig said.

George Karolis, president of the Presidio Group, also weighed in on the topic with Auto Remarketing Canada.

Karolis said he has certainly noticed the trend of more Canadian dealership groups expanding into the U.S.

He also noted that his group has seen a pickup in general in auto transactions over the last several years, particularly the last two years, after the initial COVID-19 pandemic panic of 2020.

“We have noticed in our buyer database and in our tracking of transactions, as well, that several more Canadian auto groups are interested in growing into the U.S.,” Karolis said.

There are a lot of factors contributing to that trend, but primarily: “It’s the environment that we find in the automotive industry in general, which is one of the best environments in all time with record profits,” he said. “It’s a good time to be a car dealer, and the U.S. dealerships tend to be larger and have a really strong throughput and larger potential for profit.”

Karolis cited these statistics, which are based on Presidio Group data:

  • There are around 3,200 new-car dealerships for population of about 38 million in Canada.
  • The U.S. has a little over five times the number of new-car dealerships and 10 times the population.

That equals some serious opportunities.

“You couple that with really strong franchise laws in the U.S. and it's an attractive place to own an automotive dealership … and achieve a really strong return,” Karolis said.

Dealer profitability, in particular, in the U.S. is at all-time highs, and dealers are achieving above-average returns, according to Presidio Group.

Karolis said that some of the more dealer-business friendly states include Texas, Florida, Colorado and Arizona, among others.

“We don't see any reason why it wouldn't continue,” Karolis said. “it’s still an attractive return and business for investors and dealers.”