First Quarter 2021 - Kerrigan Advisors
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First Quarter 2021 June 2021
Contact Erin Kerrigan: (949) 439-6768 | erin@kerriganadvisors.com
Contact Ryan Kerrigan: (949) 728-8849 | ryan@kerriganadvisors.com
www.KerriganAdvisors.com
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
To register to receive The Blue Sky Report® digitally each quarter, please visit www.KerriganAdvisors.com/The-Blue-Sky-Report
The Leading Advisor to Higher Value Dealerships in Florida
Kerrigan Advisors’ Recently Completed Florida Transactions
ORLANDO, FL
Sold January 2021
SANFORD, FL
Sold January 2021
CAPE CORAL, FL
Sold March 2021
“No other sell-side advisor understands
the fluctuations of the auto retail market PORT CHARLOTTE, FL
Sold March 2021
the way Kerrigan Advisors does—and few
if any understand the value of dealerships
and blue sky as well as they do.”
DAYTONA, FL
Sold February 2020
JOHN FIELDS
CEO of Fields Automotive Group
“Kerrigan Advisors has specialists for every DAYTONA, FL
Sold February 2020
part of a complicated transaction. They
ensure the numbers and details of the deal
are perfect for a smooth close.” WESLEY CHAPEL, FL
Sold January 2020
BILLY FUCCILLO JR.
Fuccillo Nissan of Orange Park JACKSONVILLE, FL
Sold December 2019
Kerrigan Advisors has the honor of advising the industry’s leading dealers through the lifecycle of
growing, operating and, when the time is right, monetizing their businesses. Since 2015, we have
represented on auto retail’s largest transactions, including six of the Top 100 Dealership Groups, more
than any other firm in the industry.
If you would like to learn more about the firm, please contact Erin Kerrigan or Ryan Kerrigan at
(775) 993-3600 or visit KerriganAdvisors.com.
© 2021 Kerrigan Advisors. All rights reserved.
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
The Blue Sky Report
1
First Quarter 2021
DEALERSHIP ACQUISITION ACTIVITY
The unique factors that made 2020 a record year for the auto retail buy/sell market have continued to gain
momentum well into 2021, with 66 completed transactions in the first quarter—a 20% increase over the first
quarter of 2020 (see Chart I). This acceleration of buy/sell activity in the first quarter resulted in a record 300
completed transactions over the last 12 months, more than any 12-month period in recent history.
COVID-19 remains a key factor in auto retail’s tremendous success. As cases diminish, states reopen and the
country emerges from the pandemic, consumer demand—and their access to capital—will ensure dealership
profits remain high, especially as dealers continue to leverage and pay-forward the operational efficiencies
and digital strategies they adopted during the pandemic. This, combined with other positive macro-economic
factors, and the acceleration of industry consolidation, will ensure a thriving buy/sell market throughout 2021,
even in the face of chip shortages and inventory challenges.
Chart I | Total Number of Completed Dealership Transactions
289 300
242 66 In the first quarter, transaction
221 233 0%
202 216 55 +2 activity accelerated 20% quarter
over quarter, culminating in an
unprecedented 12 months of
activity, with 300 transactions
completed since the second
quarter of 2020.
2015 2016 2017 2018 2019 2020 TTM Q1 2020 Q1 2021
Mar-2021
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
“We are in the most active consolidation environment that we have seen in the last two decades.”
Bryan DeBoer, President & CEO, Lithia Motors
First Quarter 2021 Earnings Call
Today’s buy/sell activity levels are largely a byproduct of auto retail’s unprecedented earnings growth since April
2020. Through the first quarter of 2021, the average dealership earned $2.6M on a trailing twelve-month basis,
achieving a historic 4.1% net-to-sales margin (see Chart II). At this level, dealership profits are now 82% higher
than their six-year average before the pandemic.
Chart II | Average Dealership Pre-Tax Profit ($ in Millions) vs. Pre-Tax Profit-to-Total Revenue (%)
$ 3
.0 0
$2.59
2014-2019 Average: +82.2%
$ 2
.5 0
Pre-Tax Profit: $1.42M Auto dealership profits showed
$2.11
no signs of abating, already up
82% through the first quarter
$ 2
.0 0
4.1%
$1.50 $1.47 $1.42 compared to the six year pre-
$ 1
.5 0
$1.38 $1.39 $1.36 3.6%
pandemic average. A perfect
2.6% 2.7% 2.5% combination of government
2.3% 2.3%
$ 1
.0 0
2.2% stimulus, low interest rates,
$ .5
0
pent-up demand and shrinking
inventories resulted in a historic
$ .0
average profitability of $2.6M in
2014 2015 2016 2017 2018 2019 2020 TTM
Mar-2021
the last 12 months.
Pre-Tax Profit ($ in M) Pre-Tax Profit-to-Total Revenue (%)
Source: NADA Industry Analysis
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
2
First Quarter 2021
Most dealers, regardless of location, franchise and facility, continued to achieve historic profit levels in 2021. The
rare mixture of record government stimulus, the reopening of a dormant economy, low interest rates and pent-
up consumer demand, combined with limited inventory, has resulted in tremendous industry-wide success. Not
surprisingly, the rising tide of industry profits is lifting the valuations of all franchises in today’s active buy/sell
market.
“Everyone looks great, everyone is reporting good numbers, everyone is showing high margins.”
David Hult, President & CEO, Asbury Automotive Group
First Quarter 2021 Earnings Call
Kerrigan Advisors estimates that the average dealership blue sky value reached another peak in the first quarter,
driven by earnings growth, as well as a slight increase in average blue sky multiples (see Chart III). Similarly,
the publicly-traded auto dealership groups saw their valuations rise in the first quarter with the Kerrigan Index
hitting new heights. Year-to-date through April, the Kerrigan Index of the largest seven public auto retailers is up
37.4%, outperforming the S&P 500 by over 230% (see Chart IV).
Chart III | Average Dealership Blue Sky Value ($ in Millions) vs. Annual Change (%)
$8.5
$7.7
Record dealership
$6.8 20.7%
$6.6
$6.3 $6.4 earnings—and an
$6.1
increase in blue sky
9.9% multiples—drove average
4.8% dealership blue sky
-2.4% -2.6% values to another peak in
-4.9% the first quarter.
2015 2016 2017 2018 2019 2020 Q1 2021
Blue Sky Value ($ in M) Annual Change (%)
Source: NADA Industry Analysis, Kerrigan Advisors’ Analysis
Chart IV | The Kerrigan Index™ (January 2, 2020 - April 30, 2021)
THE
KERRIGAN INDEX TM 1,098 The Kerrigan Index
1,200 4/30/2021 continued to rise,
4% surpassing the 1,000 mark
+37.
1,000 in the first quarter and
ending April up 37.4%. The
800 Index has outperformed
the S&P 500 by 230%
600
year-to-date.
400
Apr-21 YTD
Index
200 Change
0 The Kerrigan Index™ 37.4%
20
20
21
0
0
20
20
0
0
1
0
0
0
1
0
1
S&P 500 Index 11.3%
l-2
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Ap
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Ja
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Fe
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Source: Yahoo Finance, Microsoft Finance, Kerrigan Advisors’ Analysis
Methodology: The Kerrigan Index™ is composed of the seven largest publicly traded auto retail companies with operations focused on the US market,
including CarMax, AutoNation, Penske Automotive Group, Lithia Motors, Asbury Automotive Group, Group 1 Automotive and Sonic Automotive.
The Kerrigan Index™ is weighted by the market capitalization of each company and benchmarked at 100 on 1/3/2000.
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
3
First Quarter 2021
Wall Street clearly believes the largest auto dealership consolidators have tremendous earnings growth potential,
particularly as the industry continues to consolidate. Today, the publics’ average blue sky multiple is 8.1x, 76%
higher than the average private dealership (see Chart V). At these valuation multiples, most private acquisitions
are accretive to the publics’ earnings.
Chart V | Average Blue Sky Multiples (Private vs. Public), First Quarter 2021
8.1x
4.6x The power that consolidation lends to
the publics’ potential earnings growth
is reflected in their average blue sky
multiple of 8.1x, 76% higher than the
average private.
Average Private Average Public
Source: SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske and Sonic, Yahoo Finance, Kerrigan Advisors’ Analysis
Wall Street investors are also increasingly enamored by the transformative potential of the publics’ proprietary
omnichannel strategies. Many investors believe these investments could dramatically disrupt the traditional
dealership distribution model and ultimately supercharge their future sales and earnings growth. Some
investors believe the return on investment in the public auto retailers could yield Amazon-like results, with the
expectation that these companies’ market share will grow disproportionately as they tap into the equity and
debt markets.
“Our multi-faceted strategy for disruption begins by combining our proprietary technology with the
scale of our people, inventory and network to modernize the industry.”
Bryan DeBoer, President & CEO, Lithia Motors
First Quarter 2021 Earnings Call
While many investors are attracted to auto retail’s tremendous financial performance in 2020 and 2021, there
are some who worry about the staying power of current auto dealership profitability levels when the chip crisis
abates. They are concerned the OEMs will once again overproduce vehicles, ultimately leading to a decline in
new vehicle gross margins. While Kerrigan Advisors recognizes this economic risk, there are specific reasons
for continued optimism about industry profits in 2021 and beyond.
First, today’s auto retail market appears to be primarily demand driven. The US consumers’ access to capital
from savings, government stimulus and low interest rates, combined with a strong desire for personal mobility,
are driving record spending on new vehicles (see Chart VI on the following page). According to a recent Cox
Automotive study, 40% of consumers surveyed were willing to pay 12% above MSRP to purchase a car today.
As a result, even with new unit sales below pre-pandemic levels for the last four quarters, spending on new
vehicles in the US surpassed prior records. As the economy continues to reopen, the only limitation to consumer
spending appears to be supply.
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
4
First Quarter 2021
Chart VI | Total Consumer Spending on New Vehicles, $ in Billions
$136
$115 $120 $123 $123 $118 Consumers’ access to
$100 capital and desire for
$94 $89 personal mobility spurred
spending on new vehicles
to $118 billion in the first
quarter. The first quarter
of 2021 surpassed the
first quarter of 2019’s
spending levels despite
Q2 Q3 Q4 Q1 limited inventory.
2019 2020 2021
Source: JD Power, Kerrigan Advisors’ Analysis
“Demand continues to exceed supply for new vehicles and we expect this to continue through 2021 in
part due to the production disruption. More importantly, low interest rates and consumer preference
for vehicle ownership versus ride-sharing and public transportation are supporting demand.”
Mike Jackson, CEO & Director, AutoNation
First Quarter 2021 Earnings Call
Second, dealers are learning to operate in a more efficient manner, resulting in higher sales per employee and
less expense per sale. Despite supply constraints, the SAAR approached 18 million for the first time in almost
16 years in March, followed by an 18.5 million SAAR in April, the 6th highest monthly SAAR on record (see Chart
VII). Dealers are selling vehicles before they hit the lot and demonstrating increased operational efficiencies and
pricing power as days supply plummets to less than 30 days. While it is unknown when supply will rebound, when
it does, many dealers plan to avoid the “race to the bottom” pricing strategy that proliferated prior to COVID-19
and retain their more efficient and profitable business model going forward.
Chart VII | Light Vehicle Sales: Autos & Light Trucks, Millions of Units, Monthly, Seasonally Adjusted Annual Rate
20.00 Rank by Monthly SAAR
18.51 Month-Year
17.96 Monthly SAAR In Millions
18.00
1 Oct-01 21.71
16.00 2 Sep-86 21.22
14.00 3 Jul-05 20.61
4 Feb-00 18.88
12.00
5 Sep-85 18.81
10.00 6 Apr-21 18.51
7 Sep-00 18.25
8.00
8 Jan-00 18.11
6.00 9 Aug-02 18.11
10 Jun-05 17.97
4.00
11 Mar-21 17.96
2.00 12 Aug-15 17.94
0.00 13 Aug-03 17.93
14 Sep-17 17.91
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15 Oct-17 17.91
Ap
Ap
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O
Source: Federal Reserve Bank of St. Louis
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
5
First Quarter 2021
“We’ve never seen demand like this.”
Bob Carter, Executive Vice President of Sales, Toyota Motor North America
Interview with CNBC on June 2, 2021
Some OEMs are discussing implementing more profitable and balanced production plans once chip availability
rebounds. These companies have experienced the economic benefits of undersupplying the market, including
lower incentive spending. If habits are formed in 60 days, then a year spent operating with a constrained supply
may bring about more balanced inventory levels post-COVID, potentially creating a new normal where supply
meets, instead of exceeds, demand.
“When these vehicles are balanced with supply and demand, the auto manufacturers make more
money. And so I think there will be a material change in the way the distribution network works with
the OEMs when the dust settles. I think we’ll both be more productive and efficient.”
Earl Hesterberg, President & CEO, Group 1 Automotive
First Quarter 2021 Earnings Call
Lastly, as vaccinations roll out across the nation, consumers are hitting the road again in a meaningful way,
returning to work, leisure travel and school. Since the low in April 2020, miles driven in March 2021 increased
58% and was just 3.2% lower than the 2019 monthly average. With this increase, fixed operations has fully
recovered (see Chart VIII). In the near term, new vehicle inventory levels will be historically low during the critical
summer selling season; however, rebounding fixed operations, as well as higher margin used vehicle sales, will
help to offset these short-term challenges.
Chart VIII | Average Dealership Revenue by Department, $ in Millions
$16.5 $16.6 $16.9
$16.0 $16.1
$14.4 $14.8 $1.9
$2.1 $1.9 $1.9
$1.9 $13.1 $13.2 Consumers are back in
$1.9 $1.8
their vehicles—heading
$1.8 $1.5 $5.1 $5.9
$5.4 $5.0 $5.3 to work, school and on
$4.4
$4.9 vacations—with “miles
$4.5 $4.6
driven” nearing normal
levels, all of which
$9.1 $9.1 $8.6 $8.9 $9.6 $9.1 benefitted high margin
$7.7 $6.8 $7.1 fixed operations, which
has fully recovered
from pandemic lows.
Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021
New Used Fixed Operations
Source: NADA Industry Analysis
“So, the customers are back on the road, the service business is back.”
David Hult, President & CEO, Asbury Automotive Group
First Quarter 2021 Earnings Call
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
6
First Quarter 2021
With this backdrop, Kerrigan Advisors has identified the following three important trends we expect to
meaningfully impact the buy/sell market in the second half of 2021.
Ø A growing number of dealers will sell in 2021 hoping to lock in current tax rates
Ø Buyers finance growth with low interest rate debt rather than expensive private equity
Ø An alternative dealership valuation model emerges based on revenue instead of earnings
The Blue Sky Report® is informed by Kerrigan Advisors’ nationwide experience enhancing the value of the
industry’s leading dealers through the lifecycle of growing, operating and selling their businesses. Our firm has
represented on the sale of the industry’s largest transactions, including six of the Top 100 Dealership Groups,
more than any other firm in the industry.
Our team oversees and manages our client engagements from beginning through a successful outcome. In our
view, dealerships are far too valuable to be advised any other way. We do not take listings, rather we develop a
customized sales approach for each client to achieve their transaction and financial goals. Our sale process is
extremely successful and has led to the highest sale price per transaction of any firm since 2015.
We hope you find the information presented in this quarter’s report helpful to your business. We look forward to
answering any questions you may have regarding The Blue Sky Report, The Kerrigan Index or Kerrigan Advisors’
client services.
A Leading Sell-Side Advisor and
Thought Partner to Auto Dealers
At Kerrigan Advisors, our firm’s success is
attributed to our team’s laser-focus on fulfilling
each client’s personal and financial goals.
SELL-SIDE CAPITAL-RAISING CONSULTING
SERVICES SERVICES SERVICES
© 2021 Kerrigan Advisors. All rights reserved.
Securities offered through Bridge Capital Associates, Inc., Member FINRA, SIPC
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
7
First Quarter 2021
Total Acquisition Activity
In the first quarter of 2021, 66 dealership buy/sell transactions were completed, a 20% increase over the first quarter of
2020 (See Chart IX).
Chart IX | Total Number of First Quarter Completed Dealership Transactions
66
60 0%
55 56 54 55 +2 66 transactions were
completed in the first quarter
39 of 2021, a 20% increase over
the first quarter of 2020, and
more than any first quarter
on record. At this rate, 2021
is tracking to surpass 2020’s
buy/sell record.
Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020 Q1 2021
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Of the 66 completed dealership transactions, 23 were multi-dealership transactions, up 53.3% from 2020. The first
quarter’s multi-dealership transactions represented a record 35% of total completed transactions in the quarter (see
Chart X). The rising number of multi-dealership transactions is a testament to the support of the capital markets for buyers
seeking to make significant acquisitions, as well as a continuation of the industry’s larger consolidation trend.
Chart X | First Quarter Completed Multi-Dealership Transactions
23
+53% 35% Capital market support and
14 14 15 of industry consolidation trends
12 11 Total led to a 53.3% rise in multi-
10 Buy/ dealership transactions,
Sells representing over one third
of completed transactions in
the first quarter.
Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020 Q1 2021
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
“I think you’re going to see more buy-sells and consolidation into bigger entities, and the ultimate
winners are those who have scale, a big brand, freight experience, a digital platform, oh, and the
ability to do all that profitably.”
Mike Jackson, CEO & Director, AutoNation
First Quarter 2021 Earnings Call
Among the franchises being acquired, import non-luxury franchises saw their share of the buy/sell market rise by seven
percentage points to 37%, at the expense of luxury and domestic franchises (see Chart XI on the following page). Kerrigan
Advisors believes these shifts were a result of several emerging buy/sell trends, including the increasing availability of
higher quality non-luxury import franchises for sale, such as Toyota (8.3% of the buy/sell market in the first quarter—see
Chart XII on the following page) and the very high price points of luxury franchises, which may be limiting the buyer pool
for those franchises. The decline in domestic buy/sells could be a reflection of the inventory crisis, which appears to be
more dramatic for domestic manufacturers.
Professional. Confidential. Proven. www.KerriganAdvisors.com
The Blue Sky Report
8
First Quarter 2021
Chart XI | Buy/Sell Market Share by Type of Franchise
31% 31% 30% 37% In the first quarter of 2021,
37% 38%
47% import non-luxury franchises
took share from the luxury
14% 13% 20%
17% and domestic franchises in
19% 18% the buy/sell market, driven
22% in part by more top non-
luxury import franchises
55% 56%
44% 44% 50% 47% coming to market.
31%
2015 2016 2017 2018 2019 2020 Q1 2021
Domestic Import Luxury Import Non-Luxury
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Chart XII | Buy/Sell Market Share by Franchise, First Quarter 2021
Ford Toyota represented 8.3% of
Others first quarter transactions,
Acura BMW Porsche Volvo 5.3% 11.3%
0.8% 0.8% 0.8% far exceeding any other
0.8%
Mazda import franchise, especially
1.5%
luxury brands whose high
JLR
1.5% Chevrolet price points may be limiting
Honda 10.5% their buyer pool.
1.5%
Audi
2.3%
Nissan
3.0%
Lincoln
3.0%
Buick GMC
9.8%
Lexus
3.0%
Volkswagen
3.8%
Subaru
CDJR
3.8%
8.3%
Cadillac
3.8%
Mercedes
Toyota
4.5%
8.3%
Kia
5.3% Hyundai
6.8%
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Professional. Confidential. Proven. www.KerriganAdvisors.comThe Blue Sky Report
9
First Quarter 2021
US Public Acquisition Activity
The six largest new car public dealership groups spent $433 million on US dealership acquisitions in the first quarter of
2021, an impressive 220% increase over the first quarter of 2020 (see Chart XIII). Lithia continued its significant acquisition
lead over its public competitors, closing on the purchase of 10 dealerships during the quarter, including two dealerships
in Orlando, Florida (Land Rover and CDJR) from Kerrigan Advisors’ client, Fields Automotive Group.
“The opportunities for rapid consolidation within our industry remain plentiful and our acquisition
pipeline remains full.”
Bryan DeBoer, President & CEO, Lithia Motors
First Quarter 2021 Earnings Call
Chart XIII | US Public Dealership Groups’ US Dealership Acquisition Spending, $ in Millions
$2,457
The publics’ spending on
acquisitions continued
to ramp up in the first
$1,449
$433
quarter, increasing 220%
as compared to the first
$832 $795 +220 % quarter of 2020. Lithia
$742 $671
$659 $661 has been the most active
$135
acquirer in recent quarters,
picking up 10 dealerships
in the first quarter alone.
2013 2014 2015 2016 2017 2018 2019 2020 Q1 2020 Q1 2021
Source: SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske & Sonic, Kerrigan Advisors’ Analysis
Lithia is executing on its plan to become the top auto retailer in the US. Since the first quarter, the company announced
another sizable acquisition of Detroit, Michigan-based Suburban Collection, ranked #21 on Automotive News’ 2020 Top
150 List, with $2.4 billion of annual revenue. This transaction brings Lithia’s total annualized revenue acquired since 2019
to $7.0 billion and demonstrates the company’s ability to successfully execute on its stated plan to add $50 billion in
revenue over the next 5 years.
In addition to Lithia, Group 1 made its first dealership acquisition since 2019, acquiring two Toyota dealerships in the
Northeast from Prime Automotive Group. This acquisition is consistent with the company’s priority to allocate more
capital toward accretive acquisitions in 2021.
“Our balance sheet and liquidity position have never been stronger, and we look forward to growing
the company through M&A. We are seeing a strong flow of potential deals and anticipate closing or
entering into contracts to acquire additional dealerships this year.”
Daniel McHenry, Senior Vice President & CFO, Group 1 Automotive
First Quarter 2021 Earnings Call
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10
First Quarter 2021
The increase in public acquisitions is not surprising given their significant earnings increase during the quarter. As
compared to the first quarter 2019 before the pandemic, the publics’ net income rose 124%, an impressive feat given the
comparison to pre-pandemic earnings (see Chart XIV). The publics have clearly demonstrated their ability to leverage
economies of scale and further enhance their operational efficiencies in the face of an evolving auto retail environment.
Chart XIV | US Public Dealership Groups’ Net Income, First Quarter 2019 vs. 2021, $ in Millions
$827.6
$54.2
$183.1 The publics’ robust
%
24 acquisition activity is fueled
+1
$156.2 by the first quarter’s 124%
$369.4 growth in earnings compared
$101.9 to the first quarter of 2019 pre-
$42.2
$99.2 pandemic. Economies of scale
$56.4 $239.4 and operational efficiencies
$38.6 were key factors in their
$92.0
$40.9 $92.8 earnings success.
Q1 2019 Q1 2021
Asbury AutoNation Group 1 Lithia Penske Sonic
Source: SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske & Sonic
Not surprisingly, most of these companies reached record market capitalizations during the first quarter, driving up their
blue sky multiples. Based on the first quarter 2021 earnings, the publics’ average blue sky multiple stood at 8.1x at the
end of April, slightly higher than the fourth quarter 2020 (see Chart XV). Today, most private dealership acquisitions are
accretive to public company earnings. As more sellers come to market in the second half of 2021, Kerrigan Advisors
expects these companies will have enhanced opportunities to execute on their acquisition strategy (discussed further in
the Buy/Sell Trends section of this report on page 15).
Chart XV | US Public Dealership Groups’ Estimated Average Blue Sky Multiples
8.0x 8.1x
6.5x 6.2x 6.1x
5.7x
5.1x
4.4x Record public earnings led to
record market capitalizations,
2.8x resulting in higher blue sky
multiples.
Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021
Source: SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske & Sonic, Yahoo Finance, Kerrigan Advisors’ Analysis
In addition to allocating capital to dealership acquisitions, most of the publics are investing in their digital retailing
platforms, viewing these investments as potential game changers in the future (see Chart XVI on the following page).
Many of the publics believe their proprietary digital solutions will further differentiate them from their smaller competitors
and potentially accelerate future earnings growth and market valuations.
“If you’re competing against us and you’re buying off-the-shelf manufacturer cookie cutter tools to
compete in retail, you are really in an unsustainable position because you don’t have the scale to go
out and build your own tools. I mean it.”
Mike Jackson, Chairman & CEO, AutoNation
First Quarter 2021 Earnings Call
Professional. Confidential. Proven. www.KerriganAdvisors.comThe Blue Sky Report
11
First Quarter 2021
Chart XVI | US Public Dealership Groups’ Capital Allocation, First Quarter 2020 vs. 2021, $ in Millions
Q1 2020 Q1 2021
International & Other Acquisitions
$9
US Dealership 1%
Acquisitions
$135
23% Stock Buyback Stock Buyback
$232 US Dealership $378
39% Acquisitions 33%
$433
38%
Capex Dividends
$172 $53
Dividends 5%
29% Capex
$51
$255
9%
23%
Dealership acquisitions represented the biggest share of the public auto retailers’ spending
in the first quarter. Behind acquisitions and stock buybacks, capital expenditures represented
nearly one quarter of the publics’ spending, increasing $83M quarter over quarter. Digital retailing
came of age during the pandemic and the publics were ahead of the pack in investing in these
technology platforms, which is reflected in the rise in capital expenditures in the first quarter.
Source: SEC Filings for Asbury, AutoNation, Group 1, Lithia, Penske & Sonic
Top 100 Dealership Groups Sold by Kerrigan Advisors
Kerrigan Advisors has represented on auto retail’s largest transactions and achieved
the highest sale price per transaction of any firm in our industry since 2015.
20 th Largest Dealership Group 55 th Largest Dealership Group
9 Franchises | Los Angeles, CA 7 Franchises | Los Angeles, CA
88 th Largest Dealership Group 89 th Largest Dealership Group
15 Franchises | Portland, OR 17 Franchises | Louisville, KY
94 th Largest Dealership Group 95 th Largest Dealership Group
17 Franchises | Utica, NY 15 Franchises | Chicago, IL
Professional. Confidential. Proven. www.KerriganAdvisors.comThe Blue Sky Report
12
First Quarter 2021
Private Acquisition Activity
Private buyers continue to lead industry consolidation. They acquired 95% of the franchises sold in the first quarter of
2021 (see Chart XVII). The top 150 dealers, excluding the publics, represented only 5% of the buy/sell market in the first
quarter. By contrast, for the full year 2020, this cohort completed 20% of the industry’s buy/sells. Kerrigan Advisors
expects their acquisition activity will rise as the year progresses and these companies seek to enhance their scale and
geographic reach.
Chart XVII | Percentage of Franchise Acquisitions by Buyer Type, First Quarter 2021
Public
6 Franchises
5% Smaller private buyers
dominated the buy/sell market
Top 150 Dealership
in the first quarter as the
Groups* Top 150’s activity dropped
7 Franchises to 5%, compared to 20%
5% for full year 2020. Kerrigan
Advisors expects the Top 150
to increase buy/sell activity as
Private the year progresses.
120 Franchises
90%
Source: The Banks Report, Automotive News, Kerrigan Advisors’ Research
Note: This chart reflects franchises, not dealerships. CDJR is counted as one franchise for this analysis.
*Excludes US public dealership groups
It is notable that since 2014, the top 50 private dealership groups increased the percentage of dealerships they own by
20.9% (see Chart XVIII). Today, these companies own 8.1% of US new vehicle dealerships. As scale becomes a requirement
for success, Kerrigan Advisors expects the top 50 private dealers will increase their market share, acquiring dealership
groups who decide they prefer to monetize their business rather than navigate the evolving auto retail market.
Chart XVIII | Percentage of US Dealerships Owned by Top 50 Private Dealership Groups (Ranked by New Unit Sales)
8.1%
7.9% 7.9%
7.7%
7.2%
% The top 50 private dealership
6.7% +20.9 groups own 8.1% of US
new vehicle dealerships, a
20.9% increase since 2014.
Kerrigan Advisors expects
their market share to increase
over the next decade as more
dealership groups opt to sell.
2015 2016 2017 2018 2019 2020
Source: Automotive News, Kerrigan Advisors’ Analysis
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13
First Quarter 2021
Dealership Real Estate
Dealership real estate values rose again in the first quarter of 2021 (see Chart XIX), supported by record low mortgage
rates and high loan-to-value financing. The credit quality of the auto retail industry, and its proven success through the
most challenging economic cycles, has drawn more investors to the industry. As a result, capitalization rates on dealership
real estate are also on the decline.
Chart XIX | Kerrigan Advisors Estimated Average Dealership Real Estate Value ($ in Millions) vs. Annual Change (%)
$11.5 $11.7
$11.3 $11.1
$10.7
$10.3
$9.6
7.3% Lower mortgage and
4.3% 4.9% capitalization rates drove
3.7% 3.7%
dealership real estate values up
1.6%
1.6% in the first quarter of 2021,
-1.7% as compared to 2020.
2015 2016 2017 2018 2019 2020 Q1 2021
Real Estate Value ($ in M) Annual Change (%)
Source: NADA Industry Analysis, Kerrigan Advisors’ Analysis
Higher real estate values and image upgrade expenses are also leading to rising rents. The average dealership rent
expense in the first quarter of 2021 reached a record $816,470 on a trailing twelve-month basis (see Chart XX). While these
higher payments add risk to the dealership business model, the rising gross profit levels of the industry resulted in an
overall decline in the rent-to-gross profit margin, demonstrating the industry’s ability to absorb this rising fixed expense.
Chart XX | Average Dealership Rent Expense ($ in 1,000s) vs. Rent Expense as a Percentage of Gross Profit (%)
$804 $816
$788 $775
$751
$724
$675
11.5%
11.2% Rising real estate values
11.0% 11.0%
10.7% 10.6%
translated into increased
10.3% rents, a record $816,470 for
the average dealership in the
first quarter. Higher dealership
gross profits in the first quarter
led to the lowest rent to gross
profit margin since 2016.
2015 2016 2017 2018 2019 2020 TTM
Mar-2021
Rent Expense ($ in 1,000s) Rent-to-Gross Profit (%)
Source: NADA Industry Analysis
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First Quarter 2021
As gross profit per new vehicle retailed rises above rent per new vehicle retailed (see Chart XXI), OEMs are increasingly
emboldened to ask for more facility upgrades and investments. Kerrigan Advisors expects auto retailers’ remarkable
profit performance in 2020 and 2021 to result in a rise in facility investments in the near term. These investments will likely
result in further increases in rents over the next several years.
Chart XXI | Average Dealership Rent per New Vehicle Retailed (PNVR) vs. Gross Profit PNVR, Excluding F&I
$1,400 $1,289
$1,200 $290
PVR
$1,000
$999
$800 After several years in which
rents exceeded front-end gross
$600 profits per new vehicle retailed,
$400 the trend reversed in 2020. In
the trailing twelve months, the
$200 difference hit $290.
$0
2015 2016 2017 2018 2019 2020 TTM
Mar-2021
Rent PNVR Gross PNVR (excl. F&I)
Source: NADA Industry Analysis
The high rents and real estate prices for luxury franchises (see Chart XXII) may also be driving a decline in luxury buy/sell
market share (see Chart XI on page 8). Today, rent expense as a percentage of gross profit for luxury dealerships is
12.4%, 17.0% higher than the industry average. While luxury sales continue to outperform non-luxury, should the tide turn,
the high rent factors associated with luxury franchises will dampen future profits and limit operational flexibility given the
fixed nature of this expense.
Chart XXII | Rent Expense ($) vs. Rent Expense as a Percentage of Gross Profit (%) by Type of Dealership,
TTM Mar-2021
$1,388,078
$981,150 Luxury franchise rents hit a
new high in 2021. At 12.4% of
$816,470
12.4% gross profits, luxury rents are
$640,993 11.7% the highest in the industry,
10.6% which may have contributed to
9.3% the decline in luxury’s buy/sell
market share in 2021.
Domestic Average Import Luxury
Rent Expense ($) Rent-to-Gross Profit (%)
Source: NADA Industry Analysis
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15
First Quarter 2021
FIRST QUARTER 2021 BUY/SELL TRENDS
Kerrigan Advisors’ successful sell-side advisory work across the US, as well as our experience providing strategic
consulting services to growing dealership groups, gives our firm a unique perspective on the trends affecting today’s auto
retail buy/sell market. For the first quarter of 2021, we identified the following three trends which we expect to meaningfully
shape the buy/sell market in 2021.
Ø A Growing Number of Dealers Will Sell in 2021 Hoping to Lock in Current Tax Rates
Ø Buyers Finance Growth with Low Interest Rate Debt Rather than Expensive Private Equity
Ø An Alternative Dealership Valuation Model Emerges Based on Revenue Instead of Earnings
A Growing Number of Dealers Will Sell in 2021 Hoping to Lock in Current Tax Rates
The economic roller coaster ride of the last 12 months has led some owners of valuable dealerships and dealership
groups to consider a sale. Kerrigan Advisors estimates that over 50% of the industry is in the midst of some form of
generational transition. These families are assessing the value of their business relative to the risk of handing it down to
the next generation. Increasingly, dealership families view 2021 as a unique opportunity to exit at peak values, particularly
given the challenge in assessing the impact of industry change on future valuations.
“We’re talking to more acquisitions today than we ever have since I’ve been employed here.”
David Hult, President & CEO, Asbury Automotive Group
First Quarter 2021 Earnings Call
These families are also drawn to an exit in 2021 with the hope of locking in lower capital gains tax rates in light of proposed
changes under the Biden administration. Most dealers have almost no tax basis in their franchise. As such, their entire
blue sky value is subject to capital gains tax. Biden’s proposed 43.4% capital gains tax rate, the highest in more than 65
years (see Chart XXIII), would meaningfully reduce a seller’s after-tax proceeds from a sale. As of the writing of this report,
there is some suggestion that this tax rate could be imposed on a retroactive basis; however, there is debate as to whether
Congress would support such a measure.
Chart XXIII | Maximum Tax Rate on Capital Gains
50%
Proposed: 43.4%
45%
40%
35%
President Biden’s proposed
30%
capital gains tax increase
25% of 43.4%, the highest in 65
years, would meaningfully
20%
reduce sellers’ after-tax
15% sales proceeds.
10%
5%
0%
1954 1964 1974 1984 1994 2004 2014
Source: US Dept. of Treasury, Office of Tax Analysts, Tax Foundation
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First Quarter 2021
At the proposed higher tax rate, a dealer with no basis in their blue sky would pay 81% more capital gains tax on the sale
of their business, reducing after-tax proceeds from the sale of blue sky by 26% (see Chart XXIV). An increasing number of
dealers and dealer families who were considering a sale before the presidential election have fast-forwarded their plans
and are actively seeking an exit in 2021, with the expectation that capital gains taxes will not increase until 2022.
Chart XXIV | Kerrigan Advisors’ Estimate of Capital Gains Tax and After-Tax Proceeds at Current and Proposed
Capital Gains Tax Rates Based on Average Dealership Blue Sky Values as of Q1 2021
Average Dealership Blue Sky Value: $8,495,000
$2,038,800 81% More
$3,686,830 Capital Gains
Tax Potential new tax rates
are accelerating 2021 exit
considerations: dealers with no
basis in blue sky value would pay
26% Less an estimated 81% more capital
$6,456,200
After-Tax gains tax on the sale of their
$4,808,170 Proceeds business. After-tax proceeds
would be reduced by 26%.
At Current Rate At Proposed Rate
After-Tax Proceeds Estimated Tax
Source: Kerrigan Advisors’ Analysis, NADA Industry Analysis, Tax Foundation
Buyers Finance Growth with Low Interest Rate Debt Rather than Expensive Private Equity
Despite a rising pool of equity investors seeking auto retail investments (see Chart XXV), most dealers find private equity
capital expensive relative to debt financing, particularly given the highly attractive borrowing terms available through
existing lenders and even the bond markets. Morgan Auto Group, #11 on Automotive News’ 2020 Top 150 Dealership
Group list, successfully raised $700 million of debt through a bond offering in May at a rate of 4.85%. At these low rates
on corporate debt financing, few dealers see any benefit in teaming up with an equity capital partner who seeks a 20% to
25% return on invested capital, as well as a seat at the governance table.
Chart XXV | Number of Investors in Kerrigan Advisors’ Proprietary Investor Database
394
377
326
261 Outside capital is actively
assessing ways in which they
can invest in auto retail. Since
173
2015, the number of investors in
116 Kerrigan Advisors’ proprietary
95 investor database has increased
315% to nearly 400.
2015 2016 2017 2018 2019 2020 Q1 2021
Source: Kerrigan Advisors
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First Quarter 2021
Moreover, private equity investors, including family offices, often value auto retail businesses far below strategic acquirers.
Private equity’s conservative approach to valuation is the reason few have succeeded in equity investments here to date.
This trend has been exacerbated in recent quarters by the industry’s record setting performance. In Kerrigan Advisors’
experience, private equity investors’ valuations can be as low as half of a strategic buyer’s offer. Our firm believes the
rising pool of private investors seeking investments in auto retail will either need to alter their investment assumptions to
support higher valuations or partner with auto retailers who are willing to accept a higher cost of capital, likely because
they have no alternative source.
Many of these firms’ high return on investment thresholds make investing in top quality franchises and dealership groups
challenging. As such, they may self-select riskier investments at lower multiples to achieve their desired returns. The
history of auto retail is replete with stories of outside capital investing in risker franchises—which require a higher degree of
operational know-how and have more volatile earnings, leading to lower investment returns. We caution outside capital to
learn from their predecessors’ mistakes and reconsider their investment thesis. Paying a premium for lower risk franchises
or existing, established management teams may prove to be the better investment in the long term, particularly on a risk-
adjusted basis.
An Alternative Dealership Valuation Model Emerges Based on Revenue Instead of Earnings
Evolving industries are often valued by financial markets and investors in a different manner than the traditional multiple
of earnings methodology. We saw this during the dot.com era when Wall Street valued eyeballs over earnings. Similarly,
Amazon taught the markets to be patient as the company worked for a decade to turn a profit, while gaining tremendous
market share.
Auto retail has historically stuck to traditional franchise valuation methodologies primarily due to its highly fragmented
structure. The average dealer still owns approximately two dealerships. Furthermore, systemic barriers to entry, as a
product of franchise laws and OEM buy/sell approval requirements, have impinged the rate of consolidation. Without the
free flow of capital into the acquisition of dealerships, the valuation methodologies for blue sky have remained relatively
constant for decades, with most buyers focused on multiples of past earnings to determine franchise value.
The disruption associated with digital retailing, accelerated by COVID-19, may be the catalyst for change to auto retail’s
historic valuation paradigm. Lithia, for example, is beginning to discuss its total economic reach through its digital platform,
Driveway, and total US market share goals, rather than incremental earnings projections. With this shift, we are potentially
seeing the beginnings of a transition in the way the largest buyers, particularly the publics, value acquisitions. Rather than
focusing on a multiple of earnings, Lithia has introduced the concept of a percentage of revenue, reporting that most of
its transactions are valued between 15% and 25% of revenue.
This revenue valuation methodology, which is highly accretive based on Lithia’s current blue sky multiple and above market
profit margins, is designed to feed Wall Street’s appetite for high revenue growth companies. The example outlined in
Chart XXVI on the following page walks through the tremendous value creation Lithia can achieve when it executes on its
revenue acquisition strategy. Carvana is perhaps the best example in the automotive industry of Wall Street’s preference
for high revenue growth over current earnings (see Chart XXVII on the following page). Its market capitalization, despite
reported losses, was $49 billion as of April 30, 2021, more than the six largest publicly traded new car retailers combined.
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First Quarter 2021
Chart XXVI | Sample Revenue Valuation Model Based on Average NADA Dealership Performance
Dealership Purchase Price at 20% of Revenue
Average Dealership Revenue (2021 TTM) $62,675,150
Enterprise Value* at 20% of Revenue $12,535,030
Less: Estimate for Working Capital & Fixed Assets $2,007,287
Estimated Blue Sky Purchase Price $10,527,743
As demonstrated here, Lithia’s
strategy creates tremendous
shareholder value. Lithia’s new
Average Dealership Earnings (2019 & 2021 TTM Avg.) $2,007,287 acquisition strategy introduced
Implied Blue Sky Multiple 5.2x percentage of revenue into
the industry’s valuation
methodology, with most
Lithia’s Expected Proforma Earnings** $3,340,847
transactions valued between
Lithia’s Q1 2021 Blue Sky Multiple 10.9x 15% and 25% of revenue.
Estimated Market Value of Purchased Revenue $36,415,229
Estimated Value Creation
$25,887,486
(Market Value Less Blue Sky Purchase Price)
* Excludes Real Estate
** Average Dealership Revenue x Lithia’s Q1 2021 EBIT-to-Revenue Margin of 5.3%
Source: Kerrigan Advisors’ Analysis, SEC Filings, NADA
“It is important to note that the consolidation of the largest retail segment in the country can be
accomplished in a highly accretive way and these cash flow positive businesses further add to our
massive capital engine.”
Bryan DeBoer, President & CEO, Lithia Motors
First Quarter 2021 Earnings Call
Chart XXVII | Carvana’s Share Price & Annual Revenue
$350 $8M
$300 $7M
$250 $6M
Annual Revenue
Share Price
$5M Wall Street’s appetite for
$200
$4M revenue growth versus current
$150 earnings is demonstrable in
$3M the clear correlation between
$100 Carvana’s revenue growth and
$2M
its share price growth.
$50 $1M
$0 $0M
2017 2018 2019 2020 TTM Mar-202 1
Share Price Annual Revenue
Source: Microsoft Finance, SEC Filings
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First Quarter 2021
Since Lithia started its acquisition marathon in 2014, the company’s stock price has outperformed its peers by 235%.
Today, the company has the highest market capitalization in the industry, not because it has the most earnings, but rather
because it has the most revenue growth and is thus valued at the highest multiple of revenue (see Chart XXVIII). Lithia’s
successful execution of its growth plan drives its stock price higher, enabling the company to raise capital at an elevated
multiple and redeploy it at lower multiples, resulting in tremendous value creation for its shareholders. In May 2021, Lithia
raised nearly $1 billion of capital at a stock price of $322 per share and secured $800M of 3.875% senior notes due
in 2029. As Wall Street continues to reward Lithia’s revenue acquisition strategy, Kerrigan Advisors expects its public
competitors to take note and consider this alternative valuation method, particularly as revenue, rather than earnings,
growth increasingly determine valuation.
Chart XXVIII | Market Capitalization (as of April 30, 2021) as a Percentage of Revenue (TTM Mar-2021)
70%
Wall Street continues to reward
50% Lithia’s revenue acquisition
strategy: Lithia’s high revenue
38% growth translated into the
33%
27%
highest market capitalization
20%
as percentage of revenue in
the industry, 20 percentage
points higher than the nearest
competitor.
Sonic Group 1 Penske AutoNation Asbury Lithia
Source: SEC Filings, yCharts
The introduction of a new approach to valuation in auto retail, the first material adjustment in a generation, underlines that
change is afoot in our industry, and the pace of change appears to be accelerating.
Distinct Advantages of Working with Kerrigan Advisors
No other firm has the breadth of skills, experience and client support services to work with dealers to
successfully grow or sell their businesses.
TRANSACTION & VALUATION EXPERTS HIGH LEVEL OF CLIENT SERVICE
We are considered the industry authority on We treat our client’s business as if
blue sky valuations and multiples. it were our own.
ENGAGED CLIENTS, NOT LISTINGS LICENSED SELL-SIDE ADVISOR
Our commitment is to our sell-side clients and Our firm’s managing directors are fully-licensed
their objectives, not the transaction. with FINRA and the SEC.
HIGHLY-SPECIALIZED TEAM TRANSACTION TERMS DATABASE
Our team of certified professionals is focused We provide our clients and their attorneys with
exclusively on supporting our clients. a distinct negotiating advantage.
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First Quarter 2021
KERRIGAN ADVISORS’ BLUE SKY MULTIPLES
Kerrigan Advisors’ blue sky multiples and accompanying analysis outline the high, average and low blue sky multiples
for each franchise in the luxury and non-luxury segments. Most dealerships are valued based on their assets plus blue
sky, excluding working capital. Kerrigan Advisors’ blue sky multiples should typically be applied to trailing twelve months
adjusted earnings before non-floorplan interest and taxes. Given the tremendous improvement in dealerships’ profits
since the economic lockdown of 2020, Kerrigan Advisors finds most buyers are applying blue sky multiples to an
average of 2019’s pre-pandemic profits and 2021’s trailing twelve months post-pandemic earnings. In so doing,
buyers are hedging their bets, giving equal weight to the potential for 2021’s profit levels to sustain in the near
term while considering the possibility of a return to pre-pandemic levels in the future.
Kerrigan Advisors’ blue sky multiples are based on our view of franchise values in the current buy/sell market. Each
dealership has its own unique valuation drivers and significant analysis should be done to determine the market clearing
price for a dealership’s blue sky. Accurately adjusting earnings, for instance, is critical in determining blue sky value.
Kerrigan Advisors’ high, average and low multiples reflect the variability in dealership values, depending on specific
circumstances and situations. In our experience, the seven key factors that drive valuation of a specific franchise are:
(1) earnings growth expectations; (2) buyer demand; (3) real estate; (4) market vehicle preference; (5) franchise market
representation; (6) customer relations and (7) revenue mix. The combination of these seven factors determines the blue
sky multiple a buyer is ultimately willing to pay.
Higher Multiple
Low Rent/ Franchise Single-
High High High CSI High Level of
Image Highly Point
Growth Demand & SSI Fixed Ops
Compliant Suitable Market
Average 1 2 3 4 5 6 7 Adjusted
Blue Sky Earnings Buyer Real Market Market Customer Revenue Blue Sky
Multiple Growth Demand Estate Vehicle Repres- Relations Mix Multiple
Expectations Preference entation
High Rent/
Low/No Low Franchise Over- Low CSI Low Level
Building
Growth Demand Unsuitable Franchised & SSI of Fixed Ops
Project
Lower Multiple
Factor One: Earnings Growth Expectations
• Higher Growth = Higher Multiple: Underperforming dealerships, particularly those in high growth markets, often
command higher multiples. Buyers of these underperformers expect earnings to grow post-closing and are thus
willing to pay a higher multiple, knowing they will achieve a strong ROI.
• Lower Growth = Lower Multiple: Dealerships which are overperforming, either due to an aggressive operator or
unsustainable market dynamics usually command lower blue sky multiples.
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First Quarter 2021
Factor Two: Buyer Demand
• Higher Demand = Higher Multiple: Certain markets are in higher demand than others. Dealerships in high population
growth, low tax, business friendly states, such as Texas and Florida, command multiples several times higher than
the published ranges herein. High buyer demand, with limited seller supply, drives up price and may be the biggest
determiner of blue sky value in 2021.
• Lower Demand = Lower Multiple: Less demand means less competition and lower blue sky multiples. As an example,
there are fewer buyers seeking dealerships in smaller/rural markets, resulting in lower multiples in those markets.
Factor Three: Real Estate
• Image Compliant Facilities & Low Rent = Higher Multiple: Image compliant dealerships with low rent command higher
multiples. These dealerships are highly attractive to buyers because they require no additional investment and have
an attractive rent factor, thus low fixed expenses and less risk. In general, if a dealership is image compliant and its
rent-to-gross profit is below market averages, it is considered to have low rent.
• Real Estate Investment Required and/or High Rent = Lower Multiple: Dealerships that require major real estate
investments or have high rent command lower multiples. Most buyers are not looking for real estate development
projects. When a dealership requires a significant real estate investment, both known and unknown costs are
anticipated. These costs result in increased future rent, which could reduce future earnings. As such, buyers often
price non-image compliant franchises or franchises with high rent at lower multiples to consider the risk to future
earnings and operation disruption during construction.
Factor Four: Market Vehicle Preference
• Highly Suitable Franchise for a Market = Higher Multiple: Franchises that are highly suitable for a market receive
higher multiples. For example, a domestic franchise located in a truck market, such as Colorado or Texas, is more
valuable than the average domestic franchise in the US, and thus will likely command a higher multiple. This is
because unit sales volume and dealership earnings in those markets are expected to be far above the average
domestic franchise.
• Unsuitable Franchise for a Market = Lower Multiple: Franchises that are unsuitable for a market receive lower multiples.
For example, a luxury franchise in a small city with few high-income wage earners will be much less valuable than a
luxury franchise located in a major metro.
Factor Five: Franchise Market Representation
• Single Point Market = Higher Multiple: A franchise with no like-franchise competition in its market will usually sell at
a higher multiple than a franchise which competes with one or more like-franchises. The exception to this rule is if
a buyer knows a new point will be added to a market. In that instance, the price premium would be reduced, as the
buyer would expect sales and margins to decline when a competitor enters the market.
• Over-Dealered Market = Lower Multiple: Markets with too many like-franchises command much lower multiples.
These franchises face higher competition and typically lower margins, thus lower profits.
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First Quarter 2021
Factor Six: Customer Relations
• High CSI/Dealer Rating/Customer Retention = Higher Multiple: A dealership’s brand and reputation is playing an
increasingly important role in franchise value. Dealerships with high customer retention rates and exceptional customer
relations will command higher multiples, as the profits associated with those businesses are more sustainable.
Kerrigan Advisors believes a dealership’s social media brand will become increasingly important to franchise value
in the future.
• Low CSI/Dealer Rating/Customer Retention = Lower Multiple: Dealerships with poor online reputations, coupled with
low CSI and SSI, receive lower blue sky multiples. Buyers of these dealerships are concerned about the time and
capital required to change customer perceptions. Furthermore, low customer retention results in higher customer
acquisition costs and a less efficient business model. With social media’s growing commercial importance, poor
dealer ratings will also have an increasingly negative effect on franchise value.
Factor Seven: Revenue Mix
• High Share of Fixed Ops = Higher Multiple: Fixed operations is the highest margin, most consistent revenue stream
associated with the dealership business model. Dealerships with strong fixed operations trade at higher multiples
because their earnings are more predictable and less cyclical. These dealerships usually have higher UIO counts,
above average service retention, excellent CSI/SSI and high fixed absorption rates, resulting in a more attractive
business model that is less susceptible to economic cycles.
• Low Share of Fixed Ops = Lower Multiple: Dealerships with weak fixed operations trade at lower multiples. These
dealerships’ earnings are reliant on vehicle sales to achieve their profitability and thus more exposed to economic
cycles. They also tend to have lower UIO counts, weak service retention and low fixed absorption, thus riskier business
models.
Kerrigan Advisors’ blue sky multiples reflect a buyers’ required return on investment in exchange for the perceived risk
associated with a franchise’s future income stream. Franchises with higher operational risk command lower multiples,
while franchises with lower operational risk command higher multiples (see Chart XXIX).
Chart XXIX | Expected Unlevered Return on Investment Based on Blue Sky Multiple
33%
Expected Unlevered Return on Investment
25%
20%
17%
14%
13%
11%
10%
2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x
Blue Sky Multiple
Source: Kerrigan Advisors’ Analysis
Note: Analysis excludes real estate and assumes working capital and fixed assets collectively represent a single turn of earnings.
Analysis also assumes there is no change in dealership earnings post-transaction.
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