George Karolis, president of the Presidio Group, discusses the evolving landscape of dealership mergers and acquisitions post-COVID. With increased liquidity and profitability, the focus has shifted from high multiples to sustainable earnings quality. Karolis highlights the importance of fixed operations and technology in maintaining competitiveness, especially for single-store owners. He also shares insights from a recent dealer desirability survey, revealing brand performance trends and the impact of economic factors on dealership valuations. The conversation underscores the need for dealers to adapt to a more disciplined market environment.
Today I’m joined by George Karolis, President of The Presidio Group.
George breaks down the tension between record-high blue sky multiples and the rising cost of capital, offering a rare look at who is buying, who is selling, and why the "big get bigger" trend is accelerating.
Visit @ https://thepresidiogroup.com/v2ud to download the data discussed in today’s episode.
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Topics:
00:12 What does the current M&A market look like?
09:56 How are valuations and buyer behavior playing out?
18:25 How does technology impact dealerships?
22:50 What are vehicle brand-specific challenges currently?
27:21 What is the future outlook of the M&A market?
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"...of course, Toyota and Lexus leading the pack. We see Honda stable and strong at number three..."
Toyota is a car company that makes popular vehicles known for being dependable and lasting a long time.
Toyota is a leading automotive manufacturer known for its reliability and strong resale value. It consistently ranks high in customer satisfaction and dealer desirability surveys.
"...of course, Toyota and Lexus leading the pack. We see Honda stable and strong at number three..."
Lexus is a luxury car brand that is part of Toyota, known for making high-end vehicles that are very comfortable and reliable.
Lexus is the luxury division of Toyota, recognized for its high-quality vehicles and customer service. It often ranks at the top of luxury vehicle satisfaction surveys.
"...and strong at number three in our survey, Subaru right up there as well..."
Honda is a car manufacturer that makes reliable and fuel-efficient vehicles, often favored for their practicality.
Honda is a well-respected automotive brand known for its efficient engines and practical designs. It consistently ranks high in reliability and customer satisfaction.
"...Mercedes who just leaped ahead of BMW in our survey, rounding out the top five..."
Mercedes is a luxury car brand that makes high-end vehicles known for their comfort, style, and advanced features.
Mercedes-Benz is a prestigious automotive brand known for luxury vehicles, advanced technology, and performance. It often ranks highly in dealer desirability and customer satisfaction.
"...Ford came into our top 10s. Ford just jumped in, I think. So they're jumping on? They jumped up some. They've waded through some of the noise they had with their EV issues..."
Ford is a popular car brand in the United States that makes many different types of vehicles. They are currently working on electric cars but have had some issues with production and how dealers feel about them.
Ford is an American automotive manufacturer known for producing a wide range of vehicles, including trucks, SUVs, and cars. Recently, they have been focusing on electric vehicles (EVs) and have faced some challenges in production and dealer relations.
"This episode is brought to you by Amazon Autos. Amazon Autos is your key to growing your dealer business."
Amazon Autos is a service from Amazon that helps car dealerships sell cars online. It makes it easier for people to find and buy cars through the internet.
Amazon Autos is a platform that connects car dealerships with online shoppers, allowing dealers to list their inventory for sale. It aims to streamline the car buying process by leveraging Amazon's vast online presence.
"...for example, Audi is real soft right now. That's one of the brands that we've taken their multiple down in our report that are released today. They've got, you know, they've had tariff issues..."
Audi is a car brand that makes luxury vehicles. Right now, they are having some problems with tariffs and how many cars they have available to sell.
Audi is a luxury automotive brand known for its performance and technology. Recently, the brand has faced challenges related to tariffs and inventory issues, impacting its market position.
"...Porsche is not as hot as it used to be. That's also a tariff and production related issue that we're seeing."
Porsche is a famous car brand that makes sports cars. They are not selling as many cars as before because of issues with tariffs and production.
Porsche is a renowned sports car manufacturer known for high-performance vehicles. Currently, the brand is experiencing a decline in demand due to tariff and production challenges.
What does the current M&A market look like?
How are valuations and buyer behavior playing out?
How does technology impact dealerships?
What are vehicle brand-specific challenges currently?
What is the future outlook of the M&A market?
Select text to request an explanation
If you take all the additional earnings that occurred as dealership profitability increase
and as dealership model proved itself out after COVID, we saw a ton of increased liquidity,
a ton of increased earnings capacity, which created more cash flow for the average dealer.
To go and acquire, we saw a lot of new buyers come into the market, and we don't see that ending.
Today, I'm joined by George Corollis, president of the Presidio Group.
As the industry moves away from the post pandemic lottery period of record profits,
dealers are facing a new era of discipline where buyers are focused on the sustainability
of earnings rather than just high multiples. George breaks down how public companies have
deployed $25 billion since COVID and why the 3,400 remaining single store owners
must prioritize fixed ops and tech driven productivity to stay competitive.
A big thank you to our sponsors for making this episode possible, Amazon Autos,
fullthrottle.ai, and of course, the Presidio Group. And now let's get into the show.
What an entrance. George Corollis on the CDG podcast. George, welcome.
Thanks. Good to be here, buddy. Good to have you here. I got my South Florida fit for all those
joining us on video. So excited to work with you. George, it's January. M&A is bustling right now
industry. Can you start off by just giving us a high level overview? How's biz right now from
your perspective? Yeah, our business is on fire. We had a record year last year, 19 transactions,
really strong year for us. And our pipeline for the first quarter alone is more than double
it was this time last year. We see height and pace of M&A activity happening this year and into the
future years and a lot of levers and reasons for that. But, you know, it's nice to say business
is strong and M&A is alive and well. Tell me more about the industry. One, I want to talk about why
is, why are you seeing increasing demand on M&A? First of all, to just start there. Sure. Well,
you know, there's some macro concepts there and then some just general concepts on a macro basis.
You know, pandemics have been passed us a little bit here, but the reference to post-pandemic is
important. So pre-pandemic, the industry was kind of puttering along. There was a couple hundred
transactions a year and after the pandemic and the boom that dealers saw and hit the lottery
for lack of a better term for a couple years, profitability tripling in some cases at the peak,
dealers became flush with cash and the public companies are a great parameter for that. There's
a lot of data on them and we saw a public company liquidity go through the roof. You know, pre-pandemic,
they had about 700 million in liquidity and as we said at the end of the year, it was close,
it was double that, closer to 1.4 billion. We saw the public's execute transactions during that
period of time and deploy $25 billion on deals. In what period of time? Post-COVID. So from COVID
until today, about $25 billion. And how does that track relative to historical? That's about 426
dealerships that they bought. So how does that compare to historical averages
in terms of public demand for dealerships? Well, the story is not the public's,
but it's a good barometer because the data is available. The story is that there are 3,300
dealerships sold post-pandemic and so that 426 that the public's acquired was about 13%. So that
means close to 87% of the other transactions were private to private. So not only would you see the
public's be extremely active, but the private's are equally as active, right? There's a little around
6,600 dealer owners in the country, right? And so typically 9 out of 10 deals that we see are
private to private. And so it's not a public story, but the public's have led the way. And we talk
about this, there's a flywheel effect of the public company. So if you take all the additional
earnings that occurred as dealership profitability increase and as dealership model proved itself
out after COVID, we saw a ton of increased liquidity, a ton of increased earnings capacity,
which created more cash flow for the average dealer to go and acquire. We saw a lot of new buyers
come into the market and we don't see that ending. I mean, we see the dealership industry
extremely fragmented, about 90% unconsolidated. And so we see this sort of flywheel effect of
consolidation continuing for a lot of reasons. I want to shift for a second to the broader industry
in terms of just performance. I know you keep your polls very close to the vest. You work with
lots of dealers, right? You're out there and you also have access to lots of data. What are you
seeing in terms of just general industry performance right now? We have a great partnership with NCM
and we'll release quarterly data, which we're going to release within the next few days,
our end of year NCM data. And through the third quarter, the average profitability of
dealerships rose about 7% year over year. But a lot of that was driven by domestics,
which lagged the prior year. So they were off in the prior year, so they kind of just picked up
some steam. So if you remove that, the industry was generally about flat. If you remove the
domestics through the third quarter, there were a lot of triggers and a lot of levers that were
being pulled during the year to keep profitability reasonable. And on a normalized basis, we saw
in the first quarter and in the second quarter, election exuberance and tariffs driving
increased sales for dealers and increased margin. And then we saw that roll into EV
pull forward because of credits expiring. So for the first three quarters of the year,
there were levers that were being pulled that were driving demand. There's nothing in the fourth
quarter now that all that's gone. The EV credits expired, the tariff noise is mostly over. And so
we see the fourth quarter being a little bit more challenged. The data will be reported in the next
few days. And so that's driving sort of a little bit more reasonable approach by dealers, more
focus on how to sustain earnings and how to become more efficient as we kind of normalize in the
industry. Yeah. And when you say the demand has been shifting, is that across all brands? Are you
seeing that now? Or any specific more than others? Yeah. Well, you know, not all brands are created
equal. So the story is all about brand and geography now more than ever. It has been in the past, but
now more than ever. So tell me again, I'm trying to understand, when you say you're seeing across
brands, what are you seeing there? Like specifically across brands? Yeah, we're seeing a lot of
differentiation amongst the brands now more than ever. We do a survey twice a year, we recently
released our survey results. And we call it dealer desirability survey. And there's a lot of leaders,
and then there's a lot that are kind of less desirable. We see a lot of the same names at the
top, of course, Toyota and Lexus leading the pack. We see Honda stable and strong at number three in
our survey, Subaru right up there as well. And then Mercedes who just leaped ahead of BMW in our
survey, rounding out the top five. And then right after that, we have... Has that ever happened?
Mercedes leaping BMW? They've moved between each other. Yeah, but there's a lot of positivity
around Mercedes these days. We covered that recently. We did a great article about Adam
Chamberlain, new leadership. And there's a lot of optimism amongst Mercedes dealers with announcements
and the more friendly nature of the OEM dealer relations with Mercedes. Why does it not seem
that any other OEM is able to replicate what Toyota and Lexus has done with their dealers?
I spoke about this with a dealer yesterday, so it's top of mind. But he specifically said
he was complaining about their OEM, not of domestic, but he was just saying, hey, why can
they just emulate their playbook, their strategy? To me, it felt like maybe like an oversimplification,
like this isn't just like a strategy that you can just click on and launch. This is years of
brand building, consumer perception, which feeds the beast. I don't know. What do you think about
that? Why have no brand been able to replicate what Toyota and Lexus have been able to achieve
with their dealers? Yeah, there's a couple that are close, but for Toyota, they've got it right on
the production side and providing what consumers want. They've got that right hybrid, of course.
But the story with Toyota is all about OEM relations and how they treat their dealers
and the partnership they have with their dealers. And that's the number one driver behind, I think,
them being at the top of our dealer desirability list. But you take the average Toyota dealership,
it has the most throughput of any dealer, any make, around 1600 units per dealer, I think sold. So
they have high throughput. There's still a little over 1200 Toyota dealers. And then you take Lexus,
who's got a little over 200 dealers. Lexus is the top. They have the fewest of the main
line volume luxury dealer franchises out there. And they have tremendous relationship with their
dealer body. So you have great execution from the OEM level, from producing the cars that customers
want and from being able to produce what's in demand and the needed demand. And then you also
have great relations, great support that they give their dealers. And so everybody loves Toyota
Lexus. Okay. And then back to the dealer survey, did any of the results surprise you? Is there any
brand that's shifting whether positively or negatively right now in the market? I wouldn't
say surprise because we track this and we have our finger on the pulse, but... Or would surprise a
listener, maybe? Perhaps. Well, Ford came into our top 10s. Ford just jumped in, I think. So
they're jumping on? They jumped up some. They've waded through some of the noise they had with
their EV issues and things like that and production issues and dealer sort of sentiment.
We saw, you know, I think Subaru surprised me. And again, I'm not that surprised, but they're
number four in our survey. Subaru. Yeah. Right? You would think, okay, all the luxuries, perhaps,
Toyota, Honda, right? In terms of just dealer desirability. Dealer desirability. So Subaru,
that's why I said they're closer to Toyota in terms of dealer sentiment and how dealer relations
are with the brand. So, you know, I wouldn't say those are surprises, but you know, there's a lot
of interesting tidbits happening with the brands. A lot of changes, right? This might be
completely, or it's completely irrelevant, but it might be naive of me, but I saw the other day
that Subaru like measures trunk space in terms of dogs. Did you see that? I did not see that.
Am I? Do you know what I'm talking about? You see, so they literally put like,
like little images of dogs to measure. Like, I was, wow, they know their customer. Wow. So,
it seems to be something about these brands are really close to the customer that
do well with the dealers as well. Yeah, look, they used to be known as more of a regional play.
I'm not going crazy. You're not crazy. You're a little crazy. Cool. But some days.
Little more weather driven, you know, all wheel drive type customer, but they're mainstream.
They're all over the place now. So, go back to Ford. Are you seeing this manifest in valuations?
The fact that, you know, dealer desirability has risen. Has that trickled into valuations yet?
Or what do you see? A little bit. I mean, we update our multiples twice a year and we
just released our new multiples today. And we have three brands that we've increased multiples
on Ford's one of them slightly, but, you know, that's manifested in the stabilization of the brand,
more optimism amongst the dealer body, et cetera. So, yeah, definitely.
This episode is brought to you by Amazon Autos. Amazon Autos is your key to growing your dealer
business. They connect dealerships like yours with the millions of online shoppers who visit
Amazon every day. And yes, they're shopping for cars. The Amazon Autos marketplace makes it easy
for dealers to list their new, used, and certified pre-owned inventory for purchase ready local
customers. Because having deals walk through the doors of your dealership is better than chasing
cold leads. Best of all, you maintain complete control of your inventory, pricing, and customer
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