The Presidio Group, known as an investment banking and dealership mergers and acquisition advisory firm, has seen a distinct uptick in its automotive retail services division that helps match dealership retail services companies with strategic capital to help the companies grow.

Presidio managing director Keith Style, during an interview about the company’s dealership M&A market update report titled, Where the Rubber Meets the Road, believes the pandemic helped generate more activity in automotive retail services as dealers and tech companies sought ways to support online sales and shift from a more dealership-centric model to a more customer-centric model.

“We’re more active than we’ve ever been on that side of the business,” said Style, who oversees Presidio’s automotive retail services practice.

“There is so much interest and so much innovation, which is driving a lot of the change. You look at Carvana, and other companies as well — technology has fueled their ability to have a wider reach and a larger model.

“It’s not just sales. There are technology tools for the service side and inventory acquisition. With that comes a lot of opportunity for new entrants to play in the space and even disrupt it.”

AI pioneers change

Artificial intelligence that can gather information and perform tasks, is central to many pioneering changes taking place in the retail auto industry, the report said.

The report showcases Telepathy Labs and describes its recently launched Stella Automotive AI product as an “AI-powered voice assistant that works 24-7 handling a dealership’s inbound calls, answering questions and booking appointments.”

According to Presidio, early results for retailers using “Stella” revealed an improvement in customer experience and related customer satisfaction, as well as increases in parts and service appointments.

Presidio was not an advisor to Telepathy Labs, but said it exemplifies the companies that are developing new technology products for the retail auto industry, Styles said.

“We’re seeing that world evolve more than it ever has with entrants, and new technologies – it’s just a new frontier,” the report said. “There is so much new technology that is fueling this evolution of the automotive retail model and there are so many new and innovative companies, it’s incredible and there is so much capital that’s attracted to that.”

A robust, but different M&A market

The dealership M&A market in 2022 continues to be robust, but things are quite different from last year, said Presidio president, George Karolis, who was also interviewed about the company’s M&A report.

Public dealership groups, which led the way in the M&A market by acquiring large, dealership groups last year, are still buying dealerships, but have significantly pared their purchases compared to 2021, Karolis said.

In some cases, deals are being hampered by a “disconnect” between sellers and buyers.

Some sellers are basing their selling price on current earnings and believe their businesses are worth than what some buyers, who are taking a longer view of the market and more normal inventory levels, are willing to pay, Karolis said.

Also creating uncertainty are rising interest rates, inflation and geopolitical upheaval that are driving up costs for dealers, consumers and other businesses alike.

Industry disruptions, such as a move toward electric vehicles that will require dealers to invest in facilities and equipment, are challenging the dealership model to evolve, as well.

What’s more, public dealership companies’ cash flow multiples are significantly lower than they were earlier this year and at this time last year, Karolis said.

Public auto retailer valuations indicate the “market’s concern over sustainability of earnings,” Presidio writes in its M&A market report.

 “Historically, public companies traded at above eight times cash flow; today they’re trading well below five times,” Karolis said. “So public companies will have a harder time achieving accretive transactions, based on what dealerships are trading for.”

Dealership values may have peaked

Still, times are good for franchise new-car dealers who want to sell their stores.

Private dealers are reaping record profits, generating significant levels of cash, and “are still aggressive and buying dealerships,” Karolis said.

But he also warns that time might be running out for some dealers waiting for the right time and/or dollar amount to sell their stores.

“We know of some dealers that are going to sell their businesses that are still waiting because they are making so much money,” Karolis said. “They keep saying ‘one more month’.

“We believe that dealerships will never likely be worth more than what they are right now, and the values may have already peaked.”

Fewer stores per deal

Citing data from The Banks Report, Karolis said 408 dealerships changed hands through June 2022 representing a mid-year sales pace that is approximately 25% higher than pace of the of 619 dealerships that changed hands for the entire year in 2021.

For example, close to 100 of those 619 dealership acquisitions last year took place in two of the largest dealership purchases ever, said Karolis, referring to Lithia Motors’ purchase the Suburban Collection and its “close to 40 dealerships” in suburban Detroit and on which Presidio was the adviser, and Asbury Automotive Group’s acquisition the Larry H. Miller Dealerships of Sandy, Utah, and its 54 new-car dealerships.

Now, dealership sales involve “more one to two, to a handful of stores — more smaller groups, Karolis said. “So, the volume of deals is higher, but the number of stores per deal is lower.”

He also predicts that given the sales pace seen so far this year, and that private dealers are still “highly active” in their pursuit of dealerships, more stores will change hands this year than last year.

But he said nothing lasts forever and adds: “We have a saying that it’s better to be two years early than one day late.”