Expert Insights: Key considerations for dealers thinking about selling their dealership

Peter Heasty learned decades ago that a five-page letter of intent in an auto dealership transaction is the first leg of the race, not the whole distance. Getting to the finish line on a deal, the longtime buy/sell advisor and recently named president of Baker Tilly WM Dealer Acquisitions Inc. said, takes an intimate understanding of the industry, a firm grasp of the numbers, and a calming presence to keep emotions and personalities in check. For many dealers, Heasty added, the transaction represents their life’s work.

“There’s going to be rocks, there’s going to be deal-fatigue, there’s going to be egos — all kinds of stuff’s going to get in the way. “That’s where yours truly comes in,” Heasty said. “You just get me in the door, and that door is staying open.”

As a dealer himself, a chartered professional accountant and an advisor who has been doing buy/sells for more than a decade, Heasty said he brings all the street-level experience and financial expertise that dealership transactions demand, plus a natural ability to dial down the temperature in a room at key junctures.

“What you get with me is a car dealer, a car guy, who talks the talk and walks the walk for the last 40 to 50 years. I grew up in the business — my father was a dealer — but you also get a full spectrum of professional services.”

The big four accounting firms still have their mergers and acquisitions departments that deal with dealership buy/sells, Heasty said, but they’re generalists.

“When the going gets tough and you go and speak car dealer language and wade into intricate industry issues, they can’t necessarily do that.”

A ONE-STOP-SHOP

Heasty, 60, on the other hand, has seen it all.

As president of Baker Tilly WM Dealer Acquisitions Inc., which was formed in April, he will spearhead the international audit advisory and tax accounting firm’s new business unit specializing in auto dealership transactions.

Baker Tilly itself has a long history of catering to the entrepreneurial market — a mould that fits car dealers perfectly, Heasty said. With its international headquarters in London, Baker Tilly employs about 37,000 people globally. In Canada it operates as a co-operative, bundling together several separate business units across more than 50 offices. Heasty’s “sharpshooter division” is tucked into Baker Tilly WM, the firm’s Canadian corporate finance arm that has offices in Toronto and Vancouver.

Heasty said the added infrastructure he draws from Baker Tilly WM gives him “more heft on the backend.” The firm’s full breadth of certified business valuators, due diligence experts and assurance professionals provide added support to Heasty’s decades of experience in automotive. The firm’s international reach also lends assistance with issues such as the U.S. tax code for the increasing number of dealers working on cross-border deals.

At the same time, Heasty said the wider Baker Tilly support structure is only there for reinforcement, meaning there is no chance he will “disappear into the woodwork like other buy/sell guys.”

“I don’t care if you’re a big guy or a little guy, you’re dealing with me. You’re not going to get pushed off to some analyst, you’re not going to get pushed off to the regional manager. You get me from soup to nuts.”

CASHING OUT

It is no secret the Canadian auto dealership market has seen significant consolidation over the past few years. It is a trend Heasty expects to continue as an increasing number of dealers reach retirement age, run up against new challenges, and consider cashing out.

Many dealers who are 55 or older are beginning to reach this point, Heasty said. Especially from those at the smaller or middle end of the market he has begun to hear a common reflection. “They’ll say: ‘You know what, this has been a great run. There’s tons of money out there, the market’s still buoyant, I’m going to take a cheque now.’”

Age is one factor, but the business has changed too, Heasty said. More sophisticated marketing tools that the older generation is not always as well equipped to handle are just one example. The encroachment of the agency model and advent of electric vehicles are two others.

Dealership valuations are another driving force.

“If you’re a dealer thinking of selling, now’s the time because those gross profits per unit will start coming down again as there’s supply in the market,” Heasty said. “I think dealers will continue to maintain profitability, but it won’t be as easy as it was through the pandemic.”

So far, Heasty added, goodwill values in dealership transactions have remained high. Significant hikes in interest rates could start to bring valuations down, he said, but with dealers getting a handle on expense control as they worked through COVID-19 closures, he sees much higher interest rates as one of the contributing factors that could harm goodwill values.

“There has been a permanent shift in overhead,” Heasty said, noting dealers can do the same amount of business they were doing before the pandemic, but with fewer workers and less advertising. The realigned expense structure simply means net profits have gone up, making dealerships more valuable.

THE RIGHT BUYER

The same factors that have led to heightened profitability for small- to mid-size dealership groups also apply to the industry’s consolidators.

A lot of the “big boys” made a lot of money through the pandemic, Heasty said, and they are feeling pressure to spend it on adding more rooftops.

This sizable pool of buyers “itching to put cash on the street,” means there is no shortage of potential matches, he added. The trick is connecting the seller with the buyer that will “take us to the end game quicker, easier and without a hassle.”

“You would be surprised by what a seller goes through emotionally when a deal falls apart.”

As a dealer himself, Heasty said he understands the countless hours of work that dealers have put into their businesses over the years, and he takes the responsibility of finding a buyer and finalizing the deal seriously. In the often-tense negotiations involved in fleshing out a five-page letter-of-intent into a 60- or 70-page agreement of purchase and sale, Heasty said he focuses on shouldering the sellers’ interests so they do not have to.

“It’s my job to make sure that that cheque crosses the table.”

Given today’s unique market conditions, Heasty said, the value of the acquisition does not even need to be for the full value of the dealership. With experienced operators in high demand, dealers toward the end of their careers, who are ready to partially cash out, but not prepared to exit the market entirely, are finding buyers for controlling interests in their dealerships. “There’s a lot of buyers who would be happy to cut a cheque for 80 per cent, or all of it.

There’s many ways to have a dealer monetize the bulk of his net worth and have fun continuing to run the operation.”

This option gives the buyer continuity at the helm and the seller the financial certainty of having locked in most of the value of his or her life’s work.

STAYING POWER

While there are compelling reasons for dealers to look at selling today, Heasty has few long-term concerns for buyers, despite new trends such as the shift to electric vehicles and an increasing number of automakers selling vehicles directly to consumers.

After several years, the “scare” associated with the decline of internal combustion engine vehicles is beginning to taper off, Heasty said. And all the while, he added, goodwill values have remained at high levels as the major automakers bided their time to counter upstarts such as Tesla.

The incumbents said they would enter the market “when there’s a critical mass,” Heasty said, and they have, racking up huge backlogs for vehicles such as the Ford F-150 Lightning and Ford Mustang Mach-E. He expects Tesla to hold onto part of the market, but those following in its wake may as well “forget” about competing with the established players.

Meantime, Heasty sees little future for the direct sales or agency model certain automakers have begun experimenting with.

“From a lot of the manufacturers’ points of view, they’re looking at this 100-year-old distribution network that they’ve created called the dealer network, and they know damn well that’s the way to go.”

Recent recommitments to dealers made by Ford and other automakers illustrate that the role of the dealership may evolve as electric vehicles slowly take over North American roads, but dealerships are not going away, Heasty said.

Faith in the traditional vehicle sales model is backed up on the consumer side as well. Research shows even young people prefer to go to a dealership as opposed to buying a vehicle online and having it delivered to their home, Heasty said.

“The dealer network is sound, and I think the smart manufacturers are seeing that.”

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