Introduction
In the fierce race to acquire automotive dealerships, some buyers are employing a strategic maneuver reminiscent of the iconic "shake and bake" move from the NASCAR parody film "Talladega Nights: The Ballad of Ricky Bobby."
Industry Consolidation and Shifts
The auto dealer industry is experiencing a rapid consolidation akin to a high-speed race. Dealer groups are aggressively seizing market share by devouring their competitors. Recent innovations such as online sales, the rise of electric vehicles, and shifts in dealer sentiment have propelled more sophisticated organizations ahead of their smaller rivals. Independent operators are cashing out, dealer groups are diversifying away from certain manufacturers, and some are exiting specific geographical markets.
Opportunities and Challenges in the Buy-Sell Market
These trends have created opportunities for dealers seeking growth through acquisitions, resulting in a thriving buy-sell market. However, challenges in lending have introduced a valuation gap for dealmakers. Fortunately, the dealership model offers a potential solution, as auto manufacturers can step in and assist dealers in financing the purchase of another dealership's operations. However, one crucial aspect remains to be addressed—the real estate.
The "Sale Leaseback Slingshot"
Similar to Ricky Bobby's shake-and-bake move, also known as "the slingshot," which involves drafting behind another vehicle to gain speed and surpass competitors, a sale leaseback transaction can yield a similar effect for buyers. By unlocking capital through the sale of real estate, a sale leaseback provides a significant boost.
Many auto dealership buyers, who traditionally prefer to own real estate, face challenges in sourcing capital or find themselves stretched thin when acquiring both a dealership and the associated property. This is where a sale leaseback arrangement can offer substantial value. By establishing a long-term lease for the continued operation of the dealership and selling the land and improvements, dealer-owned real estate can often be sold at two to three times its appraised value.
Approaches to Sale Leaseback Transactions
Typically, there are two ways to approach this:
- Structuring a sale leaseback for already-owned or recently acquired property to replenish cash reserves and bolster resources for ongoing growth.
- Facilitating a simultaneous sale leaseback alongside the acquisition of the business, wherein the real estate is overfunded to cover part of the required equity or finance additional acquisitions.
The Appeal of Auto Dealerships to Investors
Similar to the shake and bake move in "Talladega Nights," the sale leaseback strategy can propel dealer groups forward, particularly in a tight market liquidity situation. Although it is currently advantageous, this approach is not entirely novel.
Compared to conventional net-lease retail investments, auto dealerships boast a strong credit profile. In 2020 and 2021, the average sales per dealership location were $48.29 million and $58.69 million, respectively, with gross margins of 12.3% and 14.1%. These impressive site-level metrics attract a wide range of investors, including those involved in 1031 exchanges, family offices, public/private REITs, private equity firms, and sovereign wealth funds.
Maximizing Value through Sale Leasebacks
By leveraging a dealer's robust financial performance, value can be maximized, allowing transactions to occur at multiples surpassing the dealership's intangible operating value. Our history of successful closings demonstrates that dealer capital has a higher and better purpose when it is freed from real estate, where it would otherwise remain idle, and invested back into operations.
Sale leasebacks empower dealer groups to outperform their competitors and surge to the forefront of the industry. In alignment with acquisitions and overall growth strategies, this approach offers a solution to overcome liquidity challenges and successfully conclude deals.
Conclusion
In the words of Ricky Bobby, succinctly capturing the essence of this strategy: "Slingshot engaged."
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