Mark M. Martiak
Managing Director Investments, AIF®

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© 2018 Mark Martiak, AIF®  |Managing Director Investments

Why Private Equity Firms Should Focus On Dealership Income Development, NOT Reselling

Friday, January 19, 2018

 

Private equity firms have taken notice of the automotive industry’s success over the past few years in the form of car sales. Having made a huge jump from 10.4 million car sales in 2009 to 17.5 million sales in 2016, the car industry is looking at another banner year in 2017.

 

These private equity firms are looking for the best return on their investment dollar, and they see it can come from the automotive industry. The problem is that cars, like most industries, are volatile and come with an ebb and flow kind of sales cycle, meaning that although they may appear as a worthy investment right now, that doesn’t mean the predictability will continue.

 

The Reselling Disaster

 

It seems that private equity firms are on a mission to buy a bunch of dealerships and resell them as a packaged deal to another, larger private equity firm for a quick and lucrative profit. It has become a game of musical chairs with no one caring about the actual integrity and development of the dealerships in question.

 

The likes of George Soros, Warren Buffet, and Bill Gates have all invested and snatched up auto dealerships, citing their interest in the fact that large numbers of dealerships can be purchased through a single transaction.   Unfortunately, consumers still have extremely unfavorable views of car dealers because nothing is really being done by the new owners to improve their reputation.

 

Income Development

 

These private equity firms may not be thinking about the development and fortification of auto dealerships today. They may not know how to make the business better and increase income.

 

Instead, before passing the dealership onto the next owner, these firms stand to gain more and help the automotive industry if they step back and take some time to learn about how to improve sales processes. They should consider focusing on income development in Finance & Insurance, Parts & Services, as well as minimize the regulatory risk through a comprehensive compliance program.

 

Right now, the automotive industry is dragging its heels with it comes to digitization, and sales are being lost through the online purchase process as consumers are looking for ways to settle all costs and vehicle add-ons right from their phones or laptops.

 

For private equity firms to better understand the struggles that auto dealerships experience, the book Perfect Dealership: Surviving the Digital Disruption will allow them understand how innovative and convenient digital startups and services threaten to disrupt the traditional car-sale process.  Because the book also offers help and hope to dealerships struggling to adapt to the digital-based paradigm shift, private equity firms will have a guide on how to approach the threat.

 

Critical Collaboration

 

Private equity firms need to work with the automotive professionals before they pass on the dealership like another number in their game. By doing this, they will minimize the risk and be smart about other people’s money. Not to mention, there’ll be more of a return when it’s time to cash in by reselling a dealership that is profitable and doubling down on sales.

 

The key is income development first, reselling after.

 

 

 

Disclaimer:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

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