What are OEM Business Drivers?

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What are the biggest factors driving the consolidation we’re seeing today?

We see a confluence of two major trends that are driving faster consolidation. First, buyers are more aggressive. They are making record profits and are comfortable with the trends in theindustry that will reward larger groups that have more access to capital, people and technology. Groups like this, such as Lithia, are confident about their futures in the auto retail industry and they want to own more stores. The other reason for more rapid consolidation is that a growing number of dealers are becoming concerned that it will be harder for them to compete in the future. They worry about the increased  need  for investments in facilities and technology. And they wonder about the impacts of electrification, new OEM entrants, the desire for OEMs to sell directly to consumers, and other potential changes that could reduce the value of their businesses. And for some dealers, there is a bit of a rush to the exits in 2021 for tax reasons.

Is the looming growth of electrified vehicles (EVs) affecting consolidation and if so, how?

The uncertainty of what EVs will mean has added another layer of anxiety regarding the future of their businesses. A major concern is that their facilities are not designed for EV vehicles. And because facilities represent a large amount of their dealerships’ net worth, they believe that EVs put at risk the value of their facilities and their operating companies.

What can dealers interested in capitalizing on this trend do to make their dealerships more attractive to buyers?

Higher profits usually drive higher prices, but this is easier said than done. There are several things that all dealers can do to make every dealership more attractive to buyers:

·       Make the  dealership compliant with OEM requirements prior to a sale, or have a plan to do so. If the dealer doesn’t want to make the investment before a sale, they should be able to present a clear plan for how the buyer can satisfy OEM  equirements. Have property under control, plans drawn, and bids from contractors in hand.

·       Avoid long-term contracts. DMS contracts can be the most troublesome. Buyers won’t want to assume a contract with a vendor they are not using. This can cost a seller hundreds of thousands of dollars unless they can easily terminate the contract. Also try to wind down tires for life, oil changes for life, and other such loyalty plans that create issues for buyers.

·       Market the dealership correctly. Describe the past and add-backs clearly, then show opportunities for upside to a buyer. Identify the most likely buyers. Then create a process that creates competition between these buyers to maximize the value of the business,while still maintaining confidentiality.

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