Investing in Car Dealerships - How to Do it Right

The financial characteristics of the automobileexperience, signed-on as used car manager.
dealership are attractive:Subsequently, after going to dealer school and passing
"....moderate growth and risk and high returns.through the chairs, Jimmy's dad took over as General
Franchised new car dealer revenues have grown at aManager; the store thrived; and Jimmy not only bought
7.2% annual rate since 1992, about twice the rate ofthe dealership land and facility, but bought the Ford
GDP. Moreover, this growth has come with onlystore in the next town, and is currently building a new
moderate risk, as the dealer body didn't lose moneyToyota store so that his Chevrolet and Toyota
(on a pretax basis) for a single year in the last twentyfranchises can have separate facilities.
- even during the 1989-1991 industry down-cycle. Finally,WHAT DOES IT TAKE TO BE SUCCESSFUL?
despite major changes in the auto industry's structure,Good advice. Good advice is both important and hard
dealer returns have remained high, with pretax ROEto find. In the words of Trace Armstrong, past
averaging 26.1% over the last twenty years".president of the NFL Players Association: "There's just
[MerrillLynch, April 19th, 2004 Report on "Automobileso much bad advice out there being given to these
Dealers".]guys. It's really kind of scary." [Reported by Eric Fisher,
Athletes from almost every major sport have investedMarch 27, 2000.]
in new car dealerships: Rick Hendrick, Roger Penske,As with the Entertainment and Sports Industries, there
John Elway, Troy Aikman, Evander Holyfield, Arnoldis so much money in the car business, that everybody
Palmer, Michael Jordan, Scottie Pippen and Alexwants to get a piece of it. Consequently, everybody
Rodriguez to name a few.thinks he or she is an expert in analyzing and
The idea isn't new. Johnny Lujack, 1947 Heismanstructuring deals, when in fact they just want to be a
Trophy winner and Chicago Bear Pro-Bower, startedbroker that gets a commission from the deal.
a business in 1954 that would eventually expand to 16Sidebar: New car dealership revenues reached almost
franchises; spread over 40 acres, with sales of overOne Trillion Dollars in 2004. The dealerships and dealer
10,000 vehicles and $150 million, per year. Lujack retiredrelated industries account of over 15% of the Gross
from the auto business after almost 50 years as aNational Product of the United States.
successful dealer.HOW TO CREATE A SUCCESSFUL TEAM?
WHEN IS THE RIGHT TIME?An investor needs a team. Generally, it's the same
"This is the time you have been waiting for", reportsteam they have, supplemented by an expert in the car
Greg Gilmore in the June 2005 issue of Dealerbusiness. Don't get lulled into a false sense of security
Magazine.that loyalty is synonymous with the "factory" or
Dealer Executive reported that last year (2004)"bankers".
ranked as the 4th best for new unit sales byFor example, Ford made one of its black dealers (a
franchised new-vehicle dealers. Total dealership dollarssuperstar athlete) the point man, brokering meetings
exceeded $714 billion, up more than 2% from 2003.with senior executives and acting as a conduit
The fact is that anytime is the right time. In 1991, in thebetween the company and Jesse Jackson. He
depths of an automotive depression, John Elwaymediated disputes between Ford and its dealers, and
asked me, prior to signing his purchase contract, if "this"he promoted the company in public appearances. He
(1991) was the right time to buy. I told him that it is howeven had a close relationship with some Ford family
you buy it and how you sell it that count. That year hemembers.
made a $20 million investment. At the time he had a"He had some friends in high places," said John Clissold,
single Mazda store on Arapahoe Road, in Englewood. Ia retired Ford Credit executive. "[The head of Ford
sold the Mazda franchise for him and Nissan gave himCredit] was a very strong supporter." But, when trouble
its franchise to put in the old Mazda building. Shortlycame, it didn't matter. Business was business. " ...one
thereafter, I put together another transaction that hadfactory executive familiar with the situation summed
John buy the Mazda store on 104th Avenue, inup the prevailing feeling at corporate headquarters:
Thornton. John then terminated Suzuki and put the'[the superstar] was headed for a cliff and we weren't
Mazda store with his Oldsmobile and Hyundaigoing over with him.'" [Story by Bill Vlasic and Mark
franchises. After that he bought one more dealershipTruby / The Detroit News Sunday, May 26, 2002.]
(a Ford franchise) and then, in 1995, sold the entireThe fact is that the factory and bank employees have
package to Republic Industries for $86 million.a duty to do what is best for the factory or bank, not
A lot of people were afraid to buy a dealership in 1991what is best for your client. It's the law. They have a
and thought that John took a big gamble. But, he didn'tlegal obligation to their shareholders - no matter how
"gamble". He structured his purchases and salesnice or how close your client is to them.
correctly, and then capitalized on his investment.Financial statements and an accountant are not
For example, although GM and Ford lost money (asenough. Your client needs a member of your team
they did in 1991), individual dealers made millions,that is a student of the industry. A profitable
according to NADA (National Automobile Dealersautomotive statement can be certified and comply
Association) and Automotive News statistics, thewith every principle of accounting, yet still convey a
average dealers' pretax margin varies between onefalse impression of success. There are so many
and two percent of their total sales. Why? Thenuisances in defining and structuring automotive
dealers capture a broader business base than thetransactions, that your client needs an expert in the
manufacturer. While the manufacturer makes itsfield who can determine both what automotive deal is
money on new car sales, the dealers have thebest for the athlete and what is the best way to get it.
additional balance of the parts departments, serviceSo while your team may consist of accountant,
departments, used car departments, financeattorneys, agents and managers that are excellent at
departments, insurance departments and, in sometheir jobs, unless a student of the industry is added
instances, body shops. Consequently, while the(someone who does nothing but structure buys and
manufacturer is dependent upon each year's new carsells everyday), a key ingredient to success will be
sales, a dealer's success is based more on the totalmissing.
number of vehicles in operation.Think of it in terms of any sport or business. If a
DOES THE DEALERSHIP'S HISTORY MATTER?person wants to create a championship team in a
A little, but don't be intimidated by it. After Jimmyparticular sport, is it created with people who play the
Vasser won the CART racing championship forgame 50% of the time, 75% of the time, or someone
Target, I put together a transaction for Jimmy to buy awho plays it everyday?
dueled Chevrolet-Toyota franchise, in Napa, that lostRemember: The nicest thing they ever said about
money for the previous 10 consecutive years. I putRichard Nixon was: "He looks like a used car
Jimmy together with a dealership manager andsalesman.
Jimmy's dad, who had some previous used car