Current reports show that M&A activity in North America for the first six months of 2020 across all industries is down significantly compared to the past few years. In fact, numbers are as low as during the Great Recession in 2009.
However, for the auto dealership market, the data is very interesting, and even, one might say, the opposite. I bet that no one had have predicted that, just a few months after the outbreak of the pandemic in North America, the market for company transactions would be as active and healthy.
Obviously, since mid-March, when confinement began, and for the weeks that followed, the level of activity was practically neutral. However, most of the transactions that were in progress were not canceled but simply postponed in time. These transactions began to close again since June 1. We anticipate that the second half of the year will overall be particularly active in terms of the number of transactions that will close.
What allowed transactions to resume again so quickly is the great recovery of business activities and demand as showrooms started to open their doors in May and many experienced a record high in June. Once again, auto dealers have shown that their business model can overcome any obstacle.
Obviously, the current environment makes conducting business affairs more complex and this is also true for purchasing an enterprise. The main obstacle in the current market is financing. The major lenders have changed their approach very quickly and are very conservative in today’s market. They concern themselves more with working with their current clients rather than being committed to expanding their portfolios. The fact remains that some are ready to work with a growing entrepreneur, but no doubt will they ask for sufficient guarantees or a more significant capital injection than before COVID.
Since the pandemic, certain terms and conditions, unknown to auto dealers before, are now customary in transaction discussions; such as vendor take-backs and “earn-outs”. These mechanisms make it possible to reconcile the differences between the expectations of sellers and buyers and the requirements of financial partners. It must therefore be said that it is more important than ever to be creative and engaged in the process to ensure a win-win transaction.
There is no doubt that the current market can encourage and stimulate certain transactions. While values are relatively stable for auto companies, it is possible that the current climate is motivating some to revise their retirement schedule. Indeed, the last few months have been particularly difficult financially and personally. Dealing with dozens and sometimes hundreds of layoffs and administration of health issues has taken a heavy toll on entrepreneurs and unfortunately car dealerships have not been spared.
Most car dealers are relatively optimistic about the next few months and years, but all remain somewhat cautious. For the majority, the last decade has been unbelievable with stable annual increases in retail sales for most manufacturers and a correction was to be expected. However, such a rapid and intense correction with a health factor bringing its share of complications was not expected. Those who will fare the best and who will have the chance to take advantage of the crisis to position themselves in the market and possibly expand will be those who had sufficient liquidity in place and who have a policy of managing cash flow efficiently.
Our most recent data is very encouraging and shows us that the market remains very active as values continue to remain stable and the automotive industry has shown great resilience since the onset of the health crisis. In addition, thanks to our experienced team, we manage to find solutions to any obstacle that may arise. Finally, thanks to the great business relationships we nurture with our clients, with manufacturers and with financial sources, we are successfully getting our transactions across the finish line, to the great satisfaction of all of our clients.