The purchase of dealerships south of the border by Canadians recently made headlines. It had been rather anticipated that American groups would come to shop in Canada and now the exact opposite is happening. The reasons are many, but here are the main ones.
The value of dealerships in the United States are lower on a comparative basis. In fact, to buy a franchise of the same brand in a similar market in size with a comparable volume, the price paid is much lower in most cases than that paid in Canada.
In some cases, for certain banners such as GM and Ford, we are downright talking about half the price in the US, which is a strong incentive to try an expansion to the south. And since the value of dealerships are lower for a comparable profit, the returns on investment are therefore attractive.
The American legal environment is completely different from the Canadian context. The same applies to the rights of franchisees to manufacturers. The dealers’ interests are very well represented in the United States and agreements with manufacturers are considered more favorable than those prevailing in Canada.
Take a trip to Detroit and see for yourself. The manufacturers’ Image programs are not as demanding there as they are here, even if we are in the American capital of the automotive industry. You will have difficulty recognizing certain Ford, GM or Chrysler dealerships, because the installations are not updated according to the standards applied in Canada.
At first glance, you might think that the exchange rate, in favor of the United States, could discourage Canadians and harm the return on their investment. Except that, while the acquisition price in Canadian dollars seems higher, profits in American dollars will also be converted into Canadian dollars. Now this… makes the accountant very happy!
The key is that the exchange rate remains relatively stable. Exchange gains or losses are realized when there is a lot of fluctuation in the money market. Although it is impossible to predict exchange rate fluctuations, it is possible to mitigate this by purchasing foreign exchange contracts which could neutralize or limit the risk.
For some buyers who wish to grow their business, the American market offers enormous potential. There are more than 16,500 automotive dealerships there, about five times more than in Canada as a whole. In addition, the average American dealer sells more than 1,000 new units annually, an average much higher than that of his Canadian colleagues.
In terms of geography, Canadians are mainly looking for acquisitions in the “Sun Belt”, that is, the southern states. The values of the dealerships are indeed higher there, because they reflect demand, especially since American groups are also eyeing these markets favored by a mild climate and a desirable quality of life.
There are many good reasons to shop for a dealership in our neighbors’ backyard, but the fact remains that there are also several legal and financial consequences to consider. For the benefit to justify the cost, a potential buyer must first establish a geographical strategy to optimize their travel and operations management.