These are the strangest times in Bel Air’s 22 years of existence. Horrible unemployment, fear of conducting the normal patterns of life and unpaid mortgage and rent payments at historic levels are just a few of our social and economic disruptions. Contrary to conventional expectations, we are not seeing panic in the dealer community. Concern yes, panic no.
From our informal canvassing of dealers nationally, the fear of a total collapse has proven false. Dealers, as has been the case since the first dealership opened in 1898, are supremely agile business people, and this time is no different. In many cases despite governments’ restrictions, dealers have found ways, primarily digitally, to maintain a semblance of parts and service and unit sales. The Payroll Protection Act hasn’t hurt either.
Surprisingly, we are not getting calls from sellers; rather the calls are from dealers looking for acquisitions. Many are coming from large dealer groups who have strong balance sheets and are successfully navigating through these troubled waters. They believe that bargains might be available.
Here’s the rub. Buyers are ready, but potential sellers are not about to accept discounted Blue-Sky offers, not to mention the reduced valuations of real estate (more on this topic in a later posting). Ultimately they may be sellers – but not at distressed prices if they don’t have to. In fact, these potential sellers are more consumed with immediate challenges than going through a sale process. They’re putting their fingers in the dike rather than selling the dam.
Beyond that, the typical routine of deal making is problematic. It’s tough to negotiate a deal when financial institutions are reluctant to underwrite Blue-Sky or a mortgage. Normal activities such as traveling to meetings and on-site due diligence are complicated.
Deals have been thwarted by the pandemic. Here are two examples which illustrate the incongruity in the market right now. As usual, we were conducting a quiet auction and fielding Blue-Sky offers in the $30 million plus level. This is a very desirable high-line dealership with excellent proven performance, immaculate facilities and great upside potential. We were excited to market a sweet deal with so many willing buyers. Out of the blue, if you’ll pardon the pun, the Covid-19 pandemic hit, and the world turned upside down.
We still had at least four pre-Covid bidders who now want pricing concessions. After all, the public auto retailers were down approximately 30%. Our buyers are now offering Blue-Sky in the $20 million range, a 33% discount. Our client has rejected these offers out of hand, preferring to hang in there until a semblance of normality returns.
On the other end of the spectrum, we were in the purchase agreement stage of a smaller deal where the entire package including real estate was agreed at $7 million. The buyer still wanted to go forward, but with a 30% concession. Our client’s response was “absolutely not”. Both the client and the buyer agreed to revisit the deal at a later, more propitious time.
In time, we believe that the prices being offered today will look parsimonious. We agree with those dealers who see a better future as we work through the pandemic. However, the reality in the Buy/Sell market today is they just won’t pay for that future when evaluating acquisitions. We expect that will change as uncertainty subsides.