For many owner-operators who’ve spent decades running franchised dealer groups the decision to sell is likely to be the most significant – and emotional – financial deal of their career. But, with valuations softening and buyer sentiment shifting, solid preparation has never been more critical. The market context has rarely been more complex.
After the high profits of 2021-2022, fuelled by vehicle demand exceeding supply post-COVID, dealership valuations are now softening.
OEMs are regularly reviewing their network requirements while acquirers are becoming more selective in their criteria. Opportunities remain for well-prepared sellers – those who can anticipate what buyers want, align with the right manufacturers and present a clean, resilient financial story. “If I were looking to exit, I would start by thinking how an acquirer will see the business,” says David Kendrick, automotive corporate finance expert at Cooper Parry.
“Are you representing the right brands in the right locations? Are your sites CI (corporate identity)-compliant and well-invested? You want to shape the business into what you believe will be the most attractive asset in the market.” That lens forces owners to think long before they launch a sale. Even five years out, preparation may mean refreshing tired showrooms, updating manufacturer standards, and maintaining an engaged, well-performing workforce and leadership successors that would carry the business forward even after the owner’s exit. It could even mean terminating a franchise or closing a location that is struggling if the portfolio is otherwise prime.
“Upper-quartile and premium marques are especially sought after, and financial performance should be balanced across multiple sites, avoiding reliance on a single location or brand,” says Chris Bond, head of motor retail at BDO. He adds: “For a retailer to be considered a strong candidate, it must first demonstrate consistent profitability with robust margins since the COVID period, supported by strong operational cash flows. Crucially, this track record should show year-on-year growth, even when facing tougher new and used car markets, proving resilience and adaptability.”
Investment in the business’s culture and people also pays off. Bond adds: “Operational excellence underpins everything. This means strong management teams across sites, not just reliance on a single leader, with succession planning in place.” While the ability to demonstrate resilience in tough conditions is important, so too is reading the market and choosing the right moment to sell up.
“Selling into a buoyant market, when sentiment is positive and buyers are feeling confident, can make a big difference,” adds Kendrick. “Don’t try to sell on the slide when everyone’s watching the pennies.” Industry surveys, positive NFDA dealer satisfaction scores, and the volume of deals being completed all provide useful signals for potential acquirers. If competitor groups are actively bidding, if consolidation activity is high, and if valuations are being sustained in similar transactions, confidence levels are likely solid. Conversely, if deals are stalling and OEMs are hesitant, it may not be the right time. Valuation methodologies – typically pegged to net assets and adjusted for market dynamics – are remaining relatively consistent at the moment. However, the COVID-19 pandemic acted as both disruptor and catalyst. -pandemic boom in used vehicle demand bolstered dealership earnings.
But, since then, our AM100 research shows profitability is coming under increased pressure, as the industry manages economic headwinds, brand investment demands and increased competition for new car buyers from ambitious Chinese brands. As Andy Feeke at MHA corporate finance points out, prospective acquirers are examining the future as well as past performance. He says: “Today, it’s about the sustainability of earnings, not just the past 12 months.”
It is the businesses that can point to growth strategies, operational efficiency, and scalable systems and processes that are likely to command premium valuations going forward.
The experts agree that prime dealerships in strong locations can still attract competitive interest. “If you’ve got the right asset in the right location, you can still get good value for your business. But perhaps the super profits of 2021-2022 are behind us, and that is having an impact,” says Kendrick. “Over recent years we have seen a rush of foreign investors allied to record – and probably not repeatable – profitability levels, resulting in huge goodwill payments. This has now paused as they digest acquisitions, meaning that sellers have to work harder to identify the right buyers,” adds Kendrick.
This feature was first published in the AM100 report, here.
As valuations soften and external pressures rise, factors that set apart ‘premium’ dealership assets from those likely to be absorbed at lower multiples are becoming clearer: an ability to preserve brand distinctiveness in line with the OEM’s strategy and to meet, or exceed, customers’ changing expectations. Consultant and former Hyundai UK boss Tony Whitehorn points to the shifting dynamics of brand identity in a crowded marketplace. He says: “With the steady increase in the number of brands coming to the UK and the development of multi-franchised premises, brand identities are starting to become eroded. Brand agnosticism and reduction in loyalty by customers is adding to that pressure. Prestige brands are able to hold their distinctiveness, but premium and volume brands less so.”
For Whitehorn, the key lies in how OEMs themselves will adapt. He says: “Pragmatism by OEMs without diluting the brand experience for the customer – no more vanity projects from the OEM, please – will become the order of the day. That is already happening and those OEMs who realise this will be ahead of the game.” David Manchester, managing director of Automotive Assets and a former Peugeot dealer, stresses that the fundamentals of franchise viability and product pipeline matter greatly. He says: “It’s one thing to have a strong market share and good returns, but if the future product line-up isn’t there to sustain that, why would anyone invest? “The most important factor is whether the brand is consistently renewing its range with vehicles people actually want to buy. That’s what really underpins long-term confidence.”
The manufacturer factor
“Any buyer is buying into future profitability,” notes ex-ASE chairman Mike Jones of Fresh Track Holdings. “Having strong brands is key to this as it is a main driver of the goodwill multiple – albeit having too many brand partners can create challenges for a purchaser. Anything sellers can do to give the buyer confidence over the long-term profitability of their retail proposition will help,” he says. For Jones, a dealership is only worth what a buyer is willing to pay for it: “Getting competitive tension between rival bidders is the best way to maximise the price, however, this is not always possible given the required approval from the franchise.”
Communication with the manufacturer can be one of the most sensitive aspects of selling the business. While OEMs can be supportive, they can also be highly prescriptive about who they want as the franchise partners. “There’s a fine balance between involving them early and ending up being told what you must do,” says Kendrick. “Their input matters – but as a privately-owned business, you still have to prioritise finding the right buyer for your people and securing the best value for your investment.”
Kendrick stresses the importance of seeking advice from advisors who understand the OEM marketplace independently before engaging in any process. “Some people think they can just do what they want and then get it wrong, while others involve the OEM but end up being steered in a way that doesn’t maximise value. It’s a delicate balancing act,” he adds.
The risk? Being shut out entirely or being steered into a closed-shop deal with a single buyer, which rarely maximises value.
Done well, the dealer secures the right value and the OEM gets the right partner. Jones says: “Ultimately, it is the franchisor’s train set and their approval is required, particularly for new entrants into the brand. Where the brand has a set target for market area consolidation it is very difficult for a seller to sell to anyone who isn’t the approved buyer.” Yet Kendrick suggests OEMs may have to be pragmatic to preserve valued representation points as dealers’ appetite for acquisitions varies. “Soon, there may only be a dozen or so major groups genuinely competitive in acquisition processes,” he adds. “If an owner wants to sell and retire, and none of the OEM’s preferred buyers are interested, what then?”
A common question is whether sellers should rationalise or change their franchise mix ahead of a sale. Having many franchises can create challenges for some potential purchasers and, in some instances, closing loss-making dealerships may make sense. Yet Manchester advises sellers not to refranchise as part of an exit strategy.
“You could change your brand portfolio, and they may not start to perform for two or three years,” he adds. It’s better to focus on profit from existing brands, used cars and aftersales. “Dealerships have almost got to be in a situation where, if the brand isn’t doing as well, they’re still very profitable. Do the basics well and there’s no reason why you shouldn’t, as what we base our goodwill numbers on is three or four years of previous profits.” Sellers mustn’t feel tempted to disguise the truth. Even when OEM sentiment is positive, the detail within financial disclosure can make or break a deal.
Clean financials, accurate KPIs and transparent disclosure can help build trust and accelerate negotiations, although, according to Manchester, the two common problem areas are property and data. Property due to the size of the asset, and data because if the quality isn’t there any acquirer “might as well throw it away and start again”, he says. He adds: “It’s really about having the business in the right condition to sell, and that comes down to the property, the people and the processes. If those three elements are strong, the business will always be attractive to a buyer.”
An emotional dimension
Selling the business is time-consuming – and emotional. Manchester sees this regularly. He says: “It is very emotional, and I would always advise a seller to appoint an advisor because the seller can’t manage the sale and continue to run the business. The ones that try to end up probably messing up the sale and messing up their business. “You can never appoint an advisor too early. The earlier you appoint them, the better. If you’re thinking of selling five years down the line, now would be a good time.” Jones, who has advised on many transactions and sold his own business, agrees: “Having an advisor to sit between you and the purchaser is vital to smooth the sale to completion. Difficult as it is, particularly when a business has been built up over decades of hard work, the seller needs to emotionally disassociate themselves from the process as much as they can.”
A wave of mergers and acquisitions within the AM100, and outside it, is driving potential motor retail buyers to scrutinise every aspect of their target business more closely. The property element has become one of the most complex and strategically sensitive parts of any transaction. Bobby Barfoot, associate at property consultancy Savills Automotive, says while the UK’s dealership footprint is contracting, the value of dealership property is improving. He says: “The reduction in the number of dealerships is being driven by rising operational costs, planning restrictions, market uncertainty and pressure on long-term profitability. “But this is not just a story of decline. What we’re seeing is a repurposing and restructuring of the sector. Dealerships are becoming leaner, more digital and more focused on experience and service rather than traditional sales.”
Demand is good for dealerships in high traffic locations, fuelled by the new Chinese brands’ ambitions to rapidly build retail networks from scratch. But change of use is always a consideration for dealer groups with properties to sell. Thanks to their substantial footprint and parking areas some former showrooms are suited for alternative uses such as gyms, restaurants and other retail stores, or for replacement with residential properties. Yet Manchester warns of the risk to the workforce if a site is quietly still working out the termination notice. “Selling for alternative use is far more complex as you have to keep it quiet until the last moment – and yet a planning application makes that difficult,” he says. “I’ve seen dealers turn down offers twice as high as those for continuing use because they couldn’t face closing the business, making staff redundant and letting customers down. To take that path you need a very clear strategy.
“It’s painful and it’s risky, because you don’t know if planning will be approved until it’s done. By that stage, everyone knows.” Property experts stress the importance of ensuring assets remain saleable. Manchester doubts whether every dealer understands either how to maximise their property’s value or how to gauge market appetite accurately.
“My advice to dealers is to be realistic about property,” he says. “The market has changed. Someone might have been offered £5 million a year or two ago, but property values are no longer rising in the way people assume. With Government moves on stamp duty and taxation, values are flattening. Waiting another five or 10 years in the hope of doubling your money just isn’t going to happen.”
Compliance considerations
Barfoot says the due diligence for a dealership sale now covers an array of legal, compliance, environmental, condition and financial considerations – each with the potential to derail a deal if overlooked. Reviewing leases, deeds of variation and rent review memorandums remains fundamental to understanding future liabilities, but there are also more hidden risks, from wayleaves and easements to title ownership disputes, access rights and third party consents.
Revaluations of business rates are further expected to push up liabilities next year. Compliance demands are also mounting. Fire risk assessments, asbestos surveys, safety audits, planning permissions and confirmation of use class status all come under increasing scrutiny. Condition surveys, maintenance logs, utility and drainage plans can help build a picture of operational risk. Environmental issues now feature as a core part of any valuation. Flood risk and contamination surveys have become standard.
Minimum energy performance certificate (EPC) ratings (currently E, rising to C in 2027) must be achieved to sell or let property while new biodiversity rules also mean that any development must deliver a 10% biodiversity net gain, on-site or off-site, all backed up with robust documentation.
Daniel Cook, Rapleys partner and head of automotive and roadside, says biodiversity gain and energy performance standards have become a hugely significant issue for purchasers. He adds: “Such matters are now an absolute pre-requisite of the planning process but these additional requirements add to cost and complexity of planning applications.”
At the same time, dealers face growing expectations to invest in insulation, solar panels and EV charging, making an assessment of power capacity critical. Cladding and insulation materials are under tighter control post-Grenfell, with implications for both valuations and insurance. It all means property due diligence has become much more strategically significant in dealership transactions. He recommends surveys are provided up front, plus as much information is shared as possible, to help the sale proceed more quickly. Cook says the biggest property-related risks in dealership M&A are mainly to do with issues arising from due diligence such as no provision for dilapidations and the lack of available information.
When the purchaser has already committed finance to the deal this delays the transaction and, in some cases, collapse it completely. Cook says showroom transactional activity is quite subdued at the moment, mainly as a result of groups consolidating or rebranding surplus sites for new brands such as Omoda, Jaecoo, BYD and Changan. Nevertheless, OEMs and dealer groups need an increased requirement for future-proofing properties. “Flexibility to change brands in the future is important as, historically, premises have been very brand specific – Lexus being a prime example with their ellipse-shaped showroom. Much of this is cost driven. Build costs and property procurement costs are enormous and in a consolidating world, this needs more consideration,” he says.