The auto retail business is red hot and getting hotter as dealership profits continue to rise. It's no wonder everyone wants in.
In 2013, the average U.S. dealership produced return on equity of 29 percent, according to the National Automobile Dealers Association. That figure has risen in four of the past five years and is now more than double the 12 percent return recorded in 2008 when U.S. vehicle sales collapsed.
"Those who have dealerships want more, and those who don't have a store become increasingly interested in that dealership opportunity," said Alan Haig, president of Haig Partners, a dealership buy/sell advisory firm in Fort Lauderdale, Fla.
Dealerships also are enjoying record profits, according to the newly released NADA statistics. The average store made $923,248 in net pretax profit in 2013, the highest noninflation-adjusted amount since NADA started tracking the data in 1970. That's the third straight record year. The net pretax margin was 2.2 percent in 2013 and 2012. That's barely down from 2.3 percent in 2011, which was the highest that NADA had seen since at least 1978.
"You have a much smaller number of dealers, post-global financial crisis," said Steven Szakaly, NADA's chief economist. "Now these dealers are selling more vehicles per dealership, which is helping your return on equity."
The robust profit and return picture makes for many happy dealers -- and a lot of interest from those who want to get in on the action.
After all, asks Haig, where else can investors make such high returns? Dealership buyers base their decisions on return on investment instead of return on equity. The former is a different calculation that includes the cost of buying the business. It is currently in the low 20 percent range for someone who borrows about half the money needed to purchase a dealership, Haig said.
The rising interest from buyers means more competition for the stores that do come on the market. And some potential sellers are hanging on to dealerships longer than they might otherwise have because of the shortage of better places to invest their proceeds.
Alternatives for people with money on the sidelines include the stock market, with a long-term average annual return of 6 or 7 percent, the bond market, with an average return of around 3 percent, or real estate, which can produce returns in the 5 to 8 percent range, Haig said.
Haig predicts high profits and returns for dealerships are here for the foreseeable future as vehicle sales continue to rise.
It's a picture that has commercial banks and automakers' captive finance arms clamoring to lend money for potential dealership acquisitions.
Banks are avidly seeking additional business from existing dealer clients and trying to win away business from competitors, Haig said. Lenders were comforted by the payment records of both car buyers and dealer borrowers during the recession.
"The automotive category for lenders was the best-performing asset class they had in any industry," Haig said. "Those commercial lenders are very interested in putting more money to work in automotive."