VIDEO: Vehicle Aftermarket & Powersports Dealerships M&A Update

Hi, I’m Yogi Punjabi, Senior Director at Capstone Partners. I cover the Automotive and Vehicle Aftermarket segments for the company. Today I’ll be talking a bit around M&A activity in the dealership segment, specifically.

“WHAT IS ACTIVITY LIKE IN THE VEHICLE AFTERMARKET?”

Overall, activity in the Vehicle Aftermarket sector is pretty strong. If you just look at the demand drivers of the aftermarket, average age is up to 12.2 years, the highest that it’s ever been.

The car parc is up to 290 million vehicles on the road. You look at just miles driven, that has rebounded post-pandemic, or up to pre-pandemic levels, and continues to grow.

If you look at the M&A side of the aftermarket, it’s growing, albeit at a slower pace than last year. It’s not also as broad based as it was last year.

If you look at service providers, whether we’re talking collision, or car wash, or quick lube, or general repair, those businesses are doing great, and M&A continues to flourish in those markets.

If you look at other areas of the aftermarket, such as branded suppliers or e-commerce providers, those businesses, especially ones that are relying upon imports, are facing challenges.

Whether it’s supply chain, elevated-cost driven, or whether it’s driven by a more cautious consumer, or driven by labor issues and the like. A lot of those businesses are facing some challenges. There’s still growing, just not at the same rates as they were last year.

All that means is there’s more opportunity for consolidation.

“WHAT ABOUT ACTIVITY IN THE DEALERSHIP SEGMENT?”

Dealerships have been rising and riding a wave of record profits. There have been nearly 400 transactions that have taken place just in the first quarter alone.

That said, we know that margins and growth rates will normalize. Supply chain shortages will go away at some point. We know that the supply and demand imbalance will abate.

That said, dealerships are fragmented and that means that they are prone to consolidation. We certainly expect dealership M&A activity to continue to be strong for quite some time.

“WHAT’S DRAWING PRIVATE INVESTORS TO DEALERSHIPS?”

So on the automotive side, there have been lots of examples of private capital investing for decades. Just look at how Asbury Automotive started themselves around 20 years ago through private capital.

The majority of dealerships are fragmented, they’re independently owned, and private investors love the opportunity for consolidation in a fragmented arena. They love the ability to be able to develop a regional or a national platform, realize potential back-office synergies, and have a diversified business across brands as well as product lines as well as services.

We also see the same thing effectively happening across different elements of the aftermarket service sector. Whether we look at general repair, look at quick lube, look at car wash and the like, you will see effectively the same type of thought pattern here by private capital investing in platform investments and growing to regional and national scale.

“WHAT ARE SOME RECENT NOTABLE TRANSACTIONS?”

Over the last 18 months, there have been several marquee transactions that have taken place within the automotive dealership sector.

If you drill a little bit deeper into the powersports dealership space, RumbleOn with their $600 million acquisition of RideNow early last year, followed by their acquisition of Freedom Powersports in the fall of last year for $130 million has certainly taken up the headlines. However, other businesses such as Lithia and John Elway Group have also invested in the Harley-Davidson dealership space.

What you saw most recently was one of the first acquisitions by private capital into the Harley-Davidson dealership sector. That was, of course, Navigant Oak’s acquisition of Calculated Risk Motorcycle Group, a combination of eight locations in the Texas area.

We feel that while that’s probably the first acquisition of private capital in the space, or first example, rather, we feel that other dominoes will fall in the space and we feel that there will be a heightened level of activity by private investors in powersports dealerships going forward.

“HOW ARE BUYERS VALUING DEALERSHIP BUSINESSES?”

It’s certainly been a very profitable time to be a dealer, especially over the last 18 months.

That said, market dynamics have made valuation challenging even for the most astute buyers.

What we are seeing and experiencing across our dealers and with our clients especially, is that buyers are looking at a weighted-average multiple of the prior 2-3 years of earnings, whether it be on a blue-sky basis or a multiple of EBITDA.

The rest of it really just comes down to negotiation over real estate, fixed assets or owned inventory or other aspects.

“WHAT’S THE OUTLOOK FOR POWERSPORTS M&A?”

A lot of consumer enthusiast end markets have been facing pressure, whether it’s driven by price inflation, supply chain disruptions, or threats of a potential recession.

The powersports sector is certainly not immune.

However, we know that enthusiast consumers are resilient, and we expect the sector to continue to grow.

In terms of consolidation, we certainly expect that to continue as larger and more sophisticated players really seek to take advantage of this current situation and gain market share across the board.

“HOW CAN OWNERS PREPARE FOR A SALE?”

There are several things that I would highly recommend here.

First, make sure that your financial house in order, whether that means having your financials reviewed or audited by an external third party. This piece ends up being very important in the sale process.

Second, this may sound obvious, but the best thing a business owner can do is really focus on the business. Lay out a 3-5 year growth strategy and one that will really excite the new owner of your business. Along those lines, also make sure that any management or executive level holes in your organization are filled.

Third, it may sound a little bit early, but it’s very important to start talking to an investment banking advisor, whether it’s our team at Capstone or someone else who also focuses on the automotive space.

It’s critical to develop a relationship early, maintain a pulse on the M&A markets, and really have a sense for the optimal timing to go to market for your business.

For a deeper dove into this topic, read our full article and feel free to reach out to me directly.

Thank you for your time.