A Generational Shift is Boosting Buy/Sell Activity

by Mike Esposito, president and CEO, Auto/Mate

As published in the March, 2020 issue of Dealer Magazine

Auto dealership buy/sell activity remains brisk, according to the latest Blue Sky Report by Kerrigan Advisors. There were an estimated 231 acquisitions in 2019, up 7% from 216 acquisitions in 2018.

In 2019, average dealership blue sky values increased nearly 3% and earnings increased over 9%. Despite declining margins on new vehicle sales, dealers are showing resiliency by focusing on and growing used vehicle and fixed ops revenue. The stock market and consumer confidence levels are at or near all-time highs.

It’s a good time to be an auto dealer, so why are so many dealers selling?

A significant factor is a generational shift in ownership. Much of auto retail is family owned with most dealers being second generation or greater.

In the 1930s, approximately 40,000 dealership owners were first generation. The vast majority were small Mom and Pop operations. By the 1970s, that was cut in half. Approximately 20,000 dealership owners were second generation. Generally speaking, we can attribute much of the industry’s consolidation, growth and innovation to this generation.

If you’ve ever studied business (or life), you’ve probably heard of the three-generation rule. The first generation starts the business, investing every penny they have and toiling long hours to get it going. The second generation, seeing how hard their parents have worked, feel invested in the business. They take it over and grow it to the next level. Then the third generation takes over and in many cases the business goes downhill.

I’m not saying this rule applies to everyone. I know third generation owners who run very successful auto dealerships. In fact, in the decade from 2010 to 2020, there are approximately 8,000 dealership owners who are third generation.

But how many of those will successfully transition their dealerships to the fourth generation? An estimated 50% of dealerships are currently in the process of transitioning to the next generation, whether it’s to the third or fourth generation.

Most will find this transition challenging, since the odds are stacked against them. Only 12% of businesses make it to the third generation and only 3% to the fourth generation.  I don’t know for sure, but I’m guessing that auto dealerships might have a more successful transition rate than average.

Still, we can assume that in the next decade, the number of successful fourth-generation owners will significantly drop, perhaps to less than 2,000.

As a second- or third-generation owner, it’s a tough situation to be in. Do you sell now while valuations are high? Or do you transition to the next generation—assuming your child or one of your children is even interested—and risk future valuations falling due to mismanagement and other economic factors beyond your control?

No wonder so many are choosing to cash out.

If you really want to keep the family legacy alive, and one or more of your kids are interested in taking it over, it’s still not an easy decision. Here are some hard questions to consider, and they need to be answered honestly.

Are your children truly interested in, and passionate about, the car business? Or are they working for you because it’s all they know and it’s an easy paycheck?

Do your children value your employees and treat them as family? Were they willing to start in menial positions to learn the business and work their way up, or did they feel entitled to a better job from the start because they were family? Transitioning a business to your child is likely to spark at least a little bit of resentment or envy from employees, but it will be that much worse if they don’t respect your child.

Does your child have business acumen and leadership traits that they can bring to the position? If not, it would be a good investment to send them to a program that can teach them these skills.

How much do you want to stay involved in the business? If you transition to a child, you are likely to stay involved, even if it’s on the sidelines. If you and your child have different management styles or a different vision for the future of the dealership, this may cause problems. You might expect your child to run your dealership the way you always ran it, but they might have different ideas. Just remember, there’s more than one way to skin a cat.

Running a business is difficult and requires long hours. Do you really want to pass the burden, stress and heartache of business ownership on to your children?

The auto business is changing. How adaptable and resilient is your child? Are they keenly aware of the future threats and challenges to dealership owners, and do they have their own ideas about what can be done to keep your dealership viable? Because one thing’s for sure: if your dealership is to survive, you can’t continue to sell and service cars the same way you’ve been doing it for the last 40 years.

These are tough questions that require honest scrutiny of your family members’ talents and motivations. It might be worthwhile to ask a trusted friend for their insights, as long as you promise not to get upset if you don’t like what they say.

It’s inevitable that in the near future, the consolidation of the of the auto retail market will continue and quite possibly accelerate. Unfortunately, for second- and third- generation owners, there are no crystal balls that provide clear answers as to whether the next generation can keep their business thriving.