Digital Dealer - May 2018 - 14

By RYAN KERRIGAN
Managing Director,
Kerrigan Advisors

// Ownership

Key Buy/Sell
Trends for 2018
Anticipating
Another Strong
Year of Transaction
Activity
2018 promises to be
a very active year for
buy/sells with more
private and public buyers
eager to put their capital
to work. Buyers believe
growth is the answer to a
changing auto retail
environment and are
eager to capitalize on
economies of scale and
scope. Kerrigan Advisors
also observes more
sellers coming to market
in 2018. As more dealers
find their succession plan
unviable, we expect the
number of sellers to rise
progressively throughout
the year, particularly
given the drumbeat of
change reverberating
throughout the industry.
(The drumbeat could not
have been louder at the
recent NADA convention
in Las Vegas.) We also
continue to see transaction sizes increasing and
multi-dealership groups
coming to market at a
rising pace.
With this backdrop, we
have identified three key
market trends that will
meaningfully impact the
14

M AY 2 0 1 8

THESE COMPANIES
EXPECT THEIR
DIVERSIFICATION
STRATEGIES WILL
BETTER POSITION THEM
FOR ANY POTENTIAL
DISRUPTION..."
buy/sell market in 2018
and beyond.
 Tax reform benefits
auto retail and results in
increased buy/sell activity
 Dealers' investment
strategies shaped by auto
retail's expected evolution
 Dealership profit
variability widens blue sky
pricing ranges
TAX REFORM BENEFITS AUTO RETAIL
D I G I TA L D E A L E R . C O M

AND RESULTS IN
INCREASED BUY/SELL
ACTIVITY

Auto retailers will be
positively impacted by
the recent US tax reform.
First, most consumers will
experience an increase
in their after-tax income
which will likely ensure
continued growth in the
US economy and help the
auto retail industry main-

tain a high level of sales
for several more years.
Second, reduced corporate taxes will increase
many of the largest
dealers' after tax-income,
more than making up
for the industry's slight
decline in pre-tax profits.
As such, groups who are
looking to grow will have
more free cash flow to
do so.
This is particularly true
for the publics. Kerrigan Advisors expects
the public retailers to
be more acquisitive in
2018 in part because of
a material increase in
their free cash flow. The
public auto retailers, all
of which are structured
as C Corporations, will
receive a 40% reduction in their federal tax
rate from 35% to 21%
in 2018. (See Chart 1)
With this change, public
companies will not only
have the additional cash
flow to allocate towards
acquisitions, they will
also be at a competitive
advantage in pricing
transactions relative
to most private buyers
because their after-tax
return on investment
(before dividends to
shareholders) will be
higher than the returns
most private dealers can
achieve. Thus, we may
see public acquirers
increase their pricing
on acquisitions relative
to private buyers and
ultimately winning more
competitive transactions.
http://www.DIGITALDEALER.COM
Table of Contents for the Digital Edition of Digital Dealer - May 2018
