Digital Dealer - March 2020 - 18

DEALER OPS & LEADERSHIP

Buy/Sell

By
Mike Esposto
President & CEO,
Auto/Mate

A Generational Shift Is Boosting
Buy/Sell Activity

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 by nearly 3% and earnings
increased by 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 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

[ d i g i t a l d e a l e r. c o m ]

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 why 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 like 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 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.
To share feedback or submit questions/topic
suggestions, email magazine@digitaldealer.com

March 2020

http://www.digitaldealer.com

Digital Dealer - March 2020

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