The End of the M&A Lottery – Why Earnings Quality Now Outweighs the Multiple | George Karolis, President of The Presidio Group
Car Dealership Guy Podcast
The End of the M&A Lottery – Why Earnings Quality Now Outweighs the Multiple | George Karolis, President of The Presidio Group
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Brand
Toyota
Toyota is a car company that makes popular vehicles known for being dependable and lasting a long time.
Brand
Lexus
Lexus is a luxury car brand that is part of Toyota, known for making high-end vehicles that are very comfortable and reliable.
Brand
Subaru
Subaru is a car company that makes vehicles known for their all-wheel drive, making them great for driving in tough weather conditions.
Brand
Honda
Honda is a car manufacturer that makes reliable and fuel-efficient vehicles, often favored for their practicality.
Brand
BMW
BMW is a car manufacturer that makes sporty and luxury vehicles, often known for their performance and handling.
Brand
Mercedes
Mercedes is a luxury car brand that makes high-end vehicles known for their comfort, style, and advanced features.
Brand
Ford
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.
Company
Amazon Autos
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.
Brand
Audi
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.
Brand
Porsche
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.
LIVE
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.
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click the link in the show notes below. Before this, we were having lunch and you were
staying mental notes and you were pretty critical of putting a focus on multiples versus earnings.
I'm curious to know like what is your thought process on that as a dealer thinks about
their dealership or acquiring a dealership, just growth in general. What's your kind of
philosophy on focusing on the multiple of the transaction versus earnings in general?
It's a balancing act, right? Multiple is just math. The most important part of the equation,
and there's tons of drivers that go into valuation. And quite frankly, every dealership is unique.
And we like to say that all the time. But the biggest component of dealership value is big
biggest portion of the equation is the earnings. And what are the earnings? What are the sustained,
we call the sustainability of earnings? What are the quality of earnings? What are those earnings
likely to be go forward? And that's what you're acquiring. There's dealers that have their own
model and look at those earnings and look at how they can improve them or apply their metrics and
their model to the earnings. But in general, the earnings piece equation is the most important.
Way too many dealers focus on the multiple. I want X times for my dealership. I paid X times
for a dealership without focusing more on what the times is on the earnings, what that earnings
part is, right? And not all dealerships are created equal. Every dealership is going to
have a different earnings profile. Quite frankly, every dealership financial statement that we've
seen is missing something is not completely accurate, one for one reason or the other.
And in terms of a transaction, how dealerships valued oftentimes has to be adjusted. And so the
more important piece is that earnings level. Multiples have been around for a long time,
folks report on them, we do. They haven't changed all that much over the years, maybe a couple
points here and there, up or down within each brand, but they don't change as often. We also
look at revenue multiples and actually think that's a better barometer. It takes the noise
out of the variation in earnings any one dealer could have. And it sets a bench noise, enough
transaction data, enough transactions that happen where you can more so apply a percentage of
revenues for your blue sky to equalize all that, just a general way. Again, there's a very sophisticated
way to value dealerships and there's a lot of things to look at. There's a lot of drivers. We
publish a report and we have this whole matrix of the key drivers and its brand, geography,
facilities, reputation. We just added technology to the mix there. And then we call it the quality.
What do you mean by technology? When you added that to the valuation?
Yeah, look, technology is everything these days. Everything is about tech. And in our recent survey,
we surveyed folks at 93%, I think, of folks that said they're going to increase the use of technology.
AI is a big piece of that, but service tools and efficiency and productivity tools. And so
dealers that employ technology and are using cutting edge technology and focus on it,
that's a lever in terms of how dealers are valued and how they're performing. And it's also a
lever for dealers that are analyzing these dealerships and what does their tech stack look like and
what are the opportunities to help enhance and improve in house technology.
Does that just reflect in the earnings though, or are you quantifying that specifically in per
deal? Not necessarily quantifying it yet. It reflects in the earnings. It's also you want to
understand CRM systems and what AI and what tools are being used and what tools dealerships are using
for efficiency and productivity. Now, what are you seeing in terms of buyer behavior,
like dealer buyer behavior, not consumer buyer behavior, right now in the market, right? Like
obviously have many outstanding deals in the works, right? What is the sentiment out there,
right? What are the expectations? How are you valuing forward looking earnings?
How are dealers, you know, looking at it, right? I'm trying to understand
the number one question I always get and the number one thing we ask dealers and within
circles and on the platform is, how's biz, right? What are you seeing right now? Like,
how are things performing? How do you think things are going to perform? That's the number
one question everyone wants to know. Everyone wants a benchmark. And so I have to imagine
with all your deals, there's clearly a lot of, you know, analysis into the future of what people
are expecting. Dealers are expecting sophisticated deals who are acquiring. So what are you seeing
right now in terms of within your deals? Well, on a macro basis in terms of the deal
environment, with our survey that was just pushed out, about 59% of dealers are saying they are
interested in growing and buying dealerships this year and that jumps up actually higher
over the next three years. Okay, so that expresses some optimism.
There's optimism. Majority dealers that are surveyed and it's around 300 dealerships represented
are on the buy side, right? Looking to buy, looking to grow. That did tick down a little bit
from last year. Last time we did the survey mid-year, which was with 64%. But so on a macro
basis, it's a seller's market. We're seeing a much more disciplined approach from dealers and brand
and geography. Again, I used that a little bit before or more important than ever. And so
there's a lot of, there's a lot more deals out there that we're seeing. Again, our business is
supporting that as well. But there's some tougher deals, right? There's some overpriced deals. There's
some deals with quote, we'll say quote, hair on them. And so I think buyers, whereas those deals
were a little bit easier to get sold during the height of the pandemic, when rates were basically
at zero and dealership earnings were double and triple pre-pandemic levels, we're seeing a lot
more disciplined approach. And we think this year and into the future is going to be the year of
discipline by dealers. Margins on the new vehicle side are sort of leveling out and in this balancing
environment right now where dealership affordabilities is an issue. The average price per
vehicle is over $50,000 now. And there's pressure on the consumer. And again, none of those levers
that we saw that were increasing demand last year are here today. However, there are a couple things
that we think are going to be tailwinds for buyers. One is record tax refunds that are coming
to the consumer. Two is some likely interest rate cuts that a lot of folks are partaking. So that
should hopefully help the consumer and help drive sales for dealers. Story going into this
year and into the future is about fixed operations, used vehicles, and efficiency and productivity
focus, right? And using AI and technology on the efficiency productivity side is going to be really
important. You know, interestingly, I don't have this exact value, but around 45% of the gross
profit generated by dealerships, it gets paid to people. So it goes to the people that work at
the dealerships, 45%. So nearly half of gross profit goes away to people, right? So how do we,
there's an opportunity there because that's a pretty decent chunk of that margin. How does,
you know, the dealers that are going to win are going to find out ways to be more productive,
more efficient, maybe do more with less, be more efficient on a per per per per per employee basis
and drive more productivity with the use of a lot of technology. And then parts and services king,
right? That's the sticky part of the business. In our survey, we saw over 80% of respondents,
85% of respondents at parts and services is going to be one of the key things that helps them
sustain earnings this year and helps them stabilize. Second is pre-owned. And again,
third is this efficiency and productivity. Okay, so a couple of things there. Number one,
you mentioned deploying technology. How meaningful is the variance that you're seeing between the
more technological dealers versus the ones who are least during your transactions right now?
I'm trying to understand, there's still a lot of reluctance out there with many dealers with
certain AI tools, whether it be, you know, voice and service or text or, you know, sales and,
you know, there's many, many different tools out there. But I'm curious to see if you're seeing
a large variance in your sales between the dealers who are more heavily invested in those
tools today versus those that aren't. Yeah, essentially, we tend to represent larger companies
which employ technology. You know, I think the story is more about the future. And, you know,
in our survey, 93% of respondents said they're going to use, increase their use of technology.
And the story as it relates to investment in dealerships and the M&A environment is
the smaller groups, the one store owners, the groups that may not necessarily have the
capital and the capacity to continue to invest in technology to help bridge that gap
are may fall behind, right? And so we may see that manifest in more transactions at that level.
But I think it's a future story about technology is going to win and be the king and help drive
productivity. You know, it's not, you know, as quantifiable right now. But the best,
the largest and best groups have extremely efficient economies of scale. They have great
technology. They continue to invest in technology. They're cleaning up their tech stacks,
trying to weed through the noise and focusing on the 80-20 rule. But they are focused heavily on
technology constantly and as the industry evolves. How are you seeing a reflect in the deals right
now? You know, I think, again, folks will be more disciplined on the buy side, but also it's bringing
more sellers to market, right? It's bringing more sellers to market. Sure. I mean, the
normalization of earning, the more challenged environment that we're facing as margins have
compressed and coupled with the affordability crisis out there, you know, again, the average
price per vehicle, where it is today is driving a lot of that. You know, the average age of the
dealer is still over 70. And so there's, you know, some lack of succession. There's some dealers that
have rode a great wave over the years and are saying, okay, we got a lot of uncertainty here.
It might be time to sell. So we're seeing that manifest a little bit more in more
transactions coming to market. And transactions coming to market. Are you like,
what does the prominent seller look like right now? Is it just, you know, the seller that is
getting old and wants to retire or wants to get out of the business? Or are you seeing
some of the smaller single points that maybe can't compete or don't have the economies of scale?
Like, are we seeing any more or less of one or the other growing or declining right now?
That's interesting. Our book of business, we have a lot of long-term clients. And so we're
seeing a lot of existing dealers that are actually net growers looking to grow, sell stores off,
employ portfolio management, which we've been talking about for years. About three quarters
of our deals coming right out of COVID were folks that were just, were selling and getting out of
the business, right? Basically retiring or selling the business, not in the business anymore. Today,
that number has changed drastically in about two thirds of our deals are portfolio management
type transactions with existing dealers that are growers that are optimizing the portfolio
and selling the businesses. Wow. That's two thirds. It's a lot.
It's interesting. It's a great concept. And we're seeing the best and largest dealers out there.
We do a lot of work for the publics. Oftentimes sell off deals that don't make sense. Private
dealers do the same, whether it's a geographic outlier or a brand that's a challenge for them,
or just a dealership that they just can't make work. And they're focusing 80% of their time on
doing a percent of their business. And so we see a lot more of that. And we see that trend
continuing. There's always a regular cadence of deals where an aging dealer body is retiring
or doesn't have succession. But we've also seen a lot of opportunistic sellers that say,
hey, I want to take advantage of strong pricing of the seller's market that it is to sell. So
it's cross-supported. There's not one cut or kind of a seller out there still.
So what's driving portfolio management right now? I mean, you mentioned geography,
but what about brands? Are there any brands that are deeply concerning to you right now?
This has shifted for the last couple of years. There's been waves of concern. Early 2020s,
it was like a four, then it was when CDJR, NISA. Where are you at right now? What's concerning
to you from a brand perspective? I think some of it's temporary, of course. And we see that.
So, 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 and they've got inventory and supply, you know, kind of product issues that are going to
have a tough road for me or two. But hopefully, that's temporary. Porsche is not as hot as it
used to be. That's also a tariff and production related issue that we're seeing. And we see
more challenges with Porsche because of a little tougher dealer OEM relation.
With Porsche? On set with Porsche. Yeah, it's tougher. Porsche is about a lot of the Porsche
model is about allocation and facilities. And, you know, we see challenges with dealers that
don't have updated facilities or sort of aren't in the, you know, in the green there.
So, you know, but hopefully that's temporary. You know, there's a lot of contrarians that
think, hey, let's go ahead and invest in Nissan and Salinas deals now because hopefully they've
bought them and we've seen some positive news coming out of both of them. What's your take on
that? I think there's some truth to that, but it's all about market. And if a market's not
over-dealered and if it's growth market. I mean, with four leadership transitions is tricky,
you know, and I'm rooting for them. Like, you know, I'm sure many people would want them to do
well, but it's been a bumpy ride there. Yeah, yeah. I mean, but we see a lot of folks saying, hey,
I'm interested in acquiring those brands right now. And contrarian play might not necessarily
be the right term, but, you know, there's a good value there right now because there's,
yeah, and depending on what you're holding, it's a little bit cheaper. If it troughs.
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the show notes below. I want to talk about, so with all these brands and a different sentiment,
talking about where you're seeing earnings, haircuts happening. And I'm curious to know if
there's something thematic right now, or there's these like, you know, structural
sections of the dealership, which you see this on every transaction forever,
or I'm sure there's both, but like, where are you seeing haircuts to earnings coming up in
diligence right now in today's market? Well, I think that's an interesting question.
I wouldn't necessarily say it's haircuts to earnings. I'd say it's the quality of earnings,
right, of each dealership. And so you peel the onion back and you say, okay, where are these
earnings coming from? And so you look at the gross profit and the fixed operations of the
business and is the fixed operations a key component, a reasonable component based on
industry benchmarks of the overall gross profit of the store? Or is it highly variable? Are there
margins per unit at a whack versus a typical average, you know, dealership of that kind, right?
And so you have some red flags when you see dealers making way more money per vehicle than is typical
versus the average margins. You have some red flags when, for example, a dealership group,
80% of their margin is coming from the variable side, right? That's tougher to sustain, right?
You don't have this fixed sticky business component that's more sustainable as part of that. So
we look at a lot of those drivers. We'll, you know, again, geography comes into play.
Is it a growth market? Is a business friendly area? Or is the market growing? And then what's
the local competition like? So I think those are the drivers that you look at more so.
When you're looking at the quality of earnings and sustainability of earnings,
then an earnings haircut, now the earnings here could come into play if something bad happened to
a brand. And, you know, production, you know, there's a production delay or production issue
or some stale inventory that we know is going to be of issue the next couple years. And so we
talked about a couple of those brands already. And so that comes into play. You say, okay, well,
I don't know that these historical earnings are necessarily going to hold up for the short
in your term. And that doesn't necessarily happen in due diligence. It happens up front in valuation.
Due diligence is typically, you know, you find something that isn't accurate.
And then there's a haircut there, but that's fewer and further between.
And sticking on the theme of just demand, you know, we talk about geography and, you know,
many times the conversation is, oh, this is a good market. This is a bad market.
I would say especially in this past year with, you know, with DC and
all the cuts to government spending, you know, many dealers, DC stores were a lot softer than,
you know, the typical, or you'd say if those stores were historically the recession resistant,
that was suddenly not the case. Are you seeing any nuanced factors now playing into geography
beyond just like the sunbelt's hot, right? Like, are we seeing anything beyond that playing into
dealers minds? You know, if I had a dollar for every time a dealer asked me for a deal in Florida,
Texas, you know, it's interesting, you know, there's local and regional players all around
the country. And for as many dealers that say they don't want to buy dealerships in California,
it's been one of our most active markets. California has been active, extremely active.
And we've had, you know, positive results there and we're active with some other deals there now.
And so, you know, one out of every nine cars in the country sold in California. And so,
you know, I think there's a deal for everyone and there's a preference for every dealer and
every geography and, you know, folks, you know, in the U.S. buy cars everywhere. But there are
hotter markets and there are less hot markets. And we talked about the sunbelt in Florida and
Texas, of course. Tennessee is a really hot market and Colorado, Arizona, for example.
But we see deals happen all over the place. And I wouldn't necessarily,
serially say we're seeing discounts in markets like D.C. We haven't seen that. We're active in
those markets. You know, the Northeast has historically, in particular, New England,
we've seen pricing be a little lower there, for some reason. There's a lot of folks that
just don't want to deal with the cold weather per se. But there's a lot of dealers up there.
The cold weather discount.
Yeah, the cold weather discount. But, you know, the story is more about the
number of transactions and the number of buyers out there. And we see that just continuing for
years. You know, it's interesting, we have a lot of data on this. And there's about 3400
dealers that own just one store. 3400 dealers own one store. Okay.
And then if you take that to up to five stores, it's over 10,000. And then you take that to under
15, it's close to 18,000 dealerships. And so we look at that as sort of unconsolidated, right?
And again, not all of those are sellers, for example. But the, you know, dealer owners over
50 dealerships is just 24. And over 100 is nine. And so we think the industry is very unconsolidated.
And there's on average about 400 transactions a year that have occurred
since the pandemic. And it's double the level pre pandemic. We see that pace continuing. And if
you just, you know, extrapolate and do some math there, that's, you know, 40 years of deals at
this pace just to continue consolidation and catch up with other industries that are consolidated.
Well, I think what we've discovered here also at Cardioship Guy is that being a dealer today is
just a lot different and a lot tougher than it used to be. You have, you know, all these other
new factors playing into your decisions. Of course, we talked about technology and drive trains,
types of vehicles and training. I mean, we're seeing just the levels of training that dealers
are investing. I never thought I'd see so many dealers with a university. I mean, there's four
universities within dealerships at this point, which again, these are, these are investments.
This is not like a computer app. Like you're really seeing investment going to this. So,
you know, it's, it creates challenges, I think for, you just need that economies of scale, at least
from my perspective, it's, it clearly can be a lot more competitive in the market we're in today.
I reference this number at this stat a lot from Steve Greenfield, which is, you know,
the average dealer spending about $29,000 a month in SAS. And of course, the big chunk of that is
their DMS, but it's, you know, it's a big chunk of their day-to-day and understanding what tools
and how do I position myself to best compete in my market? Yeah, and some of them don't even know
some of the tech that they have. So talking about headwinds, what are, what are dealers, you know,
what are they saying right now? Yeah, the number one things we hear from dealer,
dealers all every day in our discussions concerns about affordability and concerns about
OEM margin pressure. So that's OEM, OEM's who are struggling right now and to keep up with,
with, you know, pricing and production and things like that and costs because of inflation and
otherwise and changing, changing models, you know, potentially putting pressure on margin that dealers
they'll just get, whether it's cuts to, to the back end and incentives, whether it's just cuts
in the senate, you know, general programs where you get back in money from OEMs. And so those are
two big concerns of dealers on a headwind and, and of course, you know, inflation on the
concerns about disruption in our survey, this, this confirmed this as well. One of the largest
concerns is the direct sales model, another concern from a disruption perspective and
disrupting business, the margin equation and then third is China. And so China's part of the equation
and on dealers minds. Really? Good portion of dealers are concerned about it. I'll also see
it as an opportunity, but are concerned nonetheless. And so, you know, there's, there's a lot,
there's pressure on the consumer. So affordability pressure from the OEM side, because of the OEM
model and sort of dealer OEM relations. And then there's, you know, general pressure on the system
itself in terms of direct sales, things like that, right? We have
SLS of the world and, and, you know, you see a lot of news about Scout recently, things like that. So
that direct sales model is on mine. And if China, China, you know, comes into the US and we have
Chinese vehicles in the US, that opens the floodgates. What else are dealers asking you right now?
Headwinds aside, but what is on top of dealers minds in your conversations right now?
Yeah, I mean, a lot of dealers are asking us to help us evaluate their portfolio and help them
look for optimization opportunities. We'll help clients evaluate their brand, their diversity
brands, their geography, their footprint, even their performance with our partners with NCM.
We have a lot of data that we can help look at benchmark data.
So generally where they stand with what they have?
Where they stand with what they have, you know, is there, are there dealerships
performing optimally or their opportunities? Do they have some that are, let's say,
imbalanced in terms of the value of that dealership vis-a-vis what it would be valued out in the
marketplace versus what, what it's earning? And sometimes we see, and we see dealers having a
oftentimes focus too much time and effort on a store that they can't get fixed or can't get going.
So too much personnel and too much just, you know, human and capital resource going into a deal
that it's not performing, whereas that deal might be worth more, you know, to someone else or in
the marketplace. And so those are opportunities for portfolio management and cleaning up the
portfolio because that helps dealers be more efficient and focus more of their time on their
stores that can provide outsized profits and have higher growth opportunities.
I want you to talk to me about efficiencies. We spoke about this, you know, earlier,
but I'm curious from, I'm definitely in the same boat as you, like thematically that is,
now it's about efficiencies and hunkering down and way more than it's been over the last couple
of years where it's been like add, add, add, add everything from costs, investments, you know, now
I'm seeing a lot of pullback. Where are you seeing pullback and efficiency happen right now across
a dealership? Well, I think where the opportunity is, is on employing technology to help employees
be more efficient and to help the process be more efficient for customers. Customers want it.
And, you know, who wants to go to a dealership and wait two hours, you know, to get their car and
a dealer that I actually know that I'm friends with. And I went to the store to pick it up,
I was paying cash, it was all good. And I had to, you know, it took me a couple of hours to get
through because I had to go through your department. Well, there's a lot of folks touching that,
that sale that don't need to be touching it. It's not the most efficient process that a customer
wants to deal with. And so if you can clean those two things up, which a lot of dealers are pushing
for and doing, then, you know, that can help drive cost savings, better customer retention,
better customer satisfaction, things like that. And ultimately, I think we see those two things,
the focal point of dealers looking at employing technology again, how to make their team more
productive, more efficient, and how to make a better process for customers and ultimately how to get
more customers. So what's in your mind now? It's, I guess, you know, we're Q1 and business is
obviously great still. What's in your mind as we go is we're entering this year and what are you
thinking from where our industry is headed? Well, NADA, can't wait to go and then get back home.
What's your plan there? We're speaking at the Auto Team America conference, we're doing the
buy sale update. And then Jason Stein from our team is going to be leading a couple of panels
for Toyota, as well as with Senator Bernie Marino and Rob Koenig from Penske. And so we're pretty
excited about our participation with Auto Team America and that conference is Tuesday morning,
8am at the win on February 3rd. So we hope everyone will sign up and be there. But aside from that,
we're going to do a lot of parties and a lot of private meetings with dealers and clients. So
into that, it's really continuing to build on the relationships that we're blessed to have with
such great long-term clients and great relationships we've built, manage our pipeline that's pretty
strong. And we've got a lot of closings in the first quarter coming and a lot more deals coming
throughout the year and just do the right thing continually to help support our clients.
What's most exciting for you for this year? What's most exciting?
Well, George, this is softball. Yeah, most exciting. I mean, is probably having a record
year on the deals. You think you're going to have a record year?
Yeah, I think so. Yeah, it's looking that way. Our pipeline's the right way and we built upon it.
You know, I'm just excited. We'll hold you to that.
Yeah, we'll talk. We'll do another one of these and see how we ended up and hopefully I won't be
wrong. It won't be fun to be wrong on that. But I'm most excited about the thought leadership
and the cadence of research and data that we provide to the industry with our partnership with
NCM, with our survey that we do with the great Jason Steins podcast, and with Kevin Tynan,
who was one of the lead analysts, auto analyst at Bloomberg for years, who's on our team.
I'm really excited about the information data that we can provide to the industry to help
dealers be more productive and plan better for the current and future times.
So, if you had to leave any dealer listening right now with just one takeaway, what would you say?
Don't believe when a broker calls and tells you they can get you X for your deal, right?
Ooh, spicy. I like it. Well, that's what we hear from dealers all the time.
You like that? Over promising?
Yeah, look, a lot of folks over promise. It's a complex world that we're in. It's a busy world.
It's a competitive world, the M&A space. And this is the life's work for many dealers. And so
treated that way, right? Incredible. George Corollis, Presidio Group. George, thanks for coming on.
Thanks for having me.
All right. Hope you enjoyed that episode. Please give the podcast a rating. Consider subscribing
to the show and check the show notes for links to what we talked about. Thanks for tuning in.
I'll see you guys next time.
About this episode
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.
Original notes
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.
This episode is brought to you by:
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3. The Presidio Group - The Presidio Group is one of the longest standing investment banks entirely focused on the auto retail sector in the United States and was founded in 1998 with the simple mission to relentlessly put the interests of its clients first. During their careers, the professionals at Presidio have collectively closed more than 300 transactions for over $20.0 billion. The Presidio Group, based in Denver and Atlanta, publishes Presidio Perspectives: A Quarterly Outlook on Auto Retail and M&A Trends, a leading source of information about the automotive retail landscape. Click here to subscribe to our market insights: https://go.thepresidiogroup.com/cdg-x-the-presidio-group-strategic-insights-for-the-road-ahead
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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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