As private equity, family offices and other Wall Street investors take a growing role in dealership buy-sells, they increasingly are willing to buy less than 100 percent of a dealership.
"You're seeing a noticeable increase in outside capital coming up with creative structures to enable them to invest in auto retail," said Erin Kerrigan, managing director of Kerrigan Advisors in Irvine, Calif., a buy-sell advisory firm. And for their part, more sellers are willing to "not sell 100 percent of their store," she said. "They continue to run it knowing they took a significant amount of their chips off the table."
Buy-sell advisers say this development holds advantages for both buyers and sellers:
Rising dealership values from market growth and industry consolidation make it difficult for many buyers to purchase 100 percent of certain dealership groups in one shot.
Keeping the seller on as the head of operations smooths approval by the factory.
Dealers who were reluctant to embrace partners now find that selling a majority stake is a lucrative way to ease into retirement or grow the business while mitigating their personal risk.
"They can use the buyer's capital to invest and grow the business," said James Taylor, managing director of buy-sell advisory firm Presidio Group in San Francisco. "The remaining portion of equity might then be worth more when they go to sell it later."
Consider GPB Capital Holdings, a New York private-equity firm. GPB has 66 U.S. dealerships owned or under contract, with stakes of 75 to 85 percent in each. The selling dealer owns the balance and runs operations. GPB's name stays off the buildings.
"When we go into these deals, we don't expect to buy anyone out," said Scott Naugle, managing director of GPB Capital's automotive strategy.
Presidio Group represented Jimmy Ross in his sale of a majority stake in Kenny Ross Automotive Group, of Pittsburgh, to GPB in June. It also was involved in former AutoNation Inc. COO Mike Maroone's purchase of a majority stake in four dealerships in Colorado Springs, Colo., from Serra Automotive Inc., of Grand Blanc, Mich., in May.
Presidio's Taylor expects to close another less-than-everything sale yet this year.
Five years ago, Presidio did no such deals, Taylor said.
"It was discussed many times, but it was rarely executed then," he said. "What's changed is the dealership values have gone up so much in five years that it's become a more desirable way to do it. It's much more of a win-win than it was in the past."
Buy-sell adviser Alan Haig recalls just two deals structured this way five years ago. Today, he can think of at least half a dozen. "It has become a major factor" in buy-sells, said Haig, president of Haig Partners in Fort Lauderdale, Fla.
There are "a good number of dealership groups that are worth hundreds of millions of dollars," he said. Haig said the estimated blue-sky value of the average dealership in 2010 was $3.43 million. Last year, it was $6.92 million, he said.
"So it's more than doubled. The market has recovered, and so the profits in dealerships have gone from an average of about $800,000 per store in 2010 to $1.5 million in 2016," said Haig.
Blue sky is the intangible value of a dealership, including goodwill and items such as customer lists and marketing materials. The rise in dealership valuations allows a buyer who structures a deal as a majority buyout the chance to acquire a dealership group in "more than one bite," said Taylor.
"Say they buy 70 percent today with the opportunity to buy 10 percent more in a few years and more after that," Taylor said. "These big capital holders, like private equity or large dealer groups, can grow without the same risk. They have a partner sharing that risk, yet they still get substantial rewards."
It also eases fears of the factory approval process by having a proven operator in place, he said.
Berkshire Hathaway Inc., the Bechtel family office's Fremont Private Holdings and George Soros' Soros Fund Management, to name a few, have bought or invested in dealership groups in the last five years. All needed proven operators on board to win factory approval of the deals and to run the dealerships.
"What the [investors] bring to the table is lots of capital and a desire to invest more in the future," said Haig. "What they lack is the knowledge of operating a car business."
Meanwhile, sellers have slowly warmed to outside investors, seeing a chance to divest yet still come to work, Haig said. It is "a marriage for a dealer who wants to continue to grow but doesn't want to invest his own capital and have the risk."