The Kids Are (Gonna Be) All Right

Valuation, Buy-Sell andSuccession Planning – October 2014

Erin Kerrigan Michael J. Dommermuth Bruce A. Fowler

Dealerships Are Far Too Valuable To Be Sold Any Other Way

Colorado Automobile Dealer AssociationOctober Seminars

Table of Contents

I. Introduction to Kerrigan Advisors

II. Today’s Auto Retail Market

IV. Buyer’s Market Perspective

V. Seller’s Market Perspective

III. The Kerrigan Blue Sky Charts

VI. Q&A

Busch Push

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Our focus is on sellers. We work with our clients to develop the best sale’s strategy to maximize value.

We are industry experts with deep knowledge of today's buy/sell market and over $2 billion* of transaction experience.

Our sales process is highly professional, actively managed, competitive, and, most important, discreet.

We do not take listings or build “inventory”; rather, we focus on a select number of client engagements each year.

We Serve Sellers. We Know Buyers.Kerrigan Advisors Sell-Side Services

Serving clients in the most important business decision of their lives: The Sale

Focused on Sellers

Experienced, Industry Experts

High-Level of Service

Engaged Clients, Not Listings

* Includes transaction experience in auto retail, investment banking and private equity industry

SUCCESSFULSALE

OFDEALERSHIP

Managing the Sale Process from Beginning to EndKerrigan Advisors Sales Approach

Kerrigan Advisors (KA) Learns of

Dealers Personal and Financial Goals

Seller Engages KA

to Sell

KA Prepares Detailed

Presentation for Sale

KA Proposes Customized Buyer List

Client Approves Buyer List & Buyers Sign

Confidentiality Agreement

Buyers Receive KA’s Detailed

Sale Presentation and Access to

Data Room

Offers Received and Analyzed; LOI Negotiated &

Signed

KA Manages Due Diligence &

Signing of Purchase

Agreement

KA Assists in Closing Process

Kerrigan Advisors Sale Process: Phase I (Before Going to Market

Kerrigan Advisors Sale Process: Phase II (Marketing/Negotiation/Close)

Average Transaction Time Frame – Current MarketDealerships Are Far Too Valuable to Be Sold Any Other Way

Phase I – Prepping

Month 5 Month 6Month 4Month 3 Month 2Month 1

Phase II – Marketing/Negotiating/Closing

Complete sales presentation

Contact approved buyers

Obtain buyer NDA Populate data room Send approved sales

presentation Open data room to

buyers

Answer buyers’ questions

Receive LOIs Analyze LOIs Choose buyer Negotiate final LOI

Manage due diligence process

Assist dealer attorney with asset purchase agreement (APA)

Negotiate final APA Client submits APA Buyer submits

application

Assist with APA schedules

Manage remaining due diligence process

Review closing statement

Manage closing process

Understanding Buyer’s Acquisition Criteria and GoalsKerrigan Advisors Buyer Database

Kerrigan Advisors Proprietary Buyer Database

Size/BudgetOwnership Structure

Return on Investment

Real EstateLocation/Markets

Franchise

Buyer Acquisition Criteria and Goals

Domestic Import Luxury

Market Size Market Type Region

Own Lease Image Non-Image

ROI Goal Calculation

Method

Revenue Earnings Budget Financing

Partnership Investors Management Family

Custom, Targeted Client Buyer List*

* Final list may include buyers who have contacted the client directly in the past and other client suggestions

Acquisition Upside Drives ValueKerrigan Advisors Dealership Analysis and Information Presentation

Sales Upside by Dept.Gross Profit Upside by Dept.Expense Reduction OpportunitiesCurrent Earnings Opportunities

Dealership Sale Presentation – Key Sections

Upside Analysis*

Three Year Pro-Forma*

Disclosures

Addback Personal ExpensesAdjust Management CompAddback Insurance PacksAdjust Market Floorplan RatesAdjust Market RentDeduct One Time Expenses

Additional Information

Sales Projections by Dept.Gross Profit Projections by Dept. Expense Projections by CategoryEarnings Projections

Facility RequirementsOutstanding Legal IssuesAssumed Contract DetailsManufacturer and City Issues

Manufacturer Product PipelineRegional Franchise CompetitionLocal Dealership CompetitionReview of Regional EconomyManagement Overview

Key Selling Points Business Case for BuyerSummary of Upside Potential

Executive Summary

Earnings Adjustments

* Data and metric driven

• Buyers know that if they do not perform, another buyer will step in with an offer

• Buyers move more quickly to make sure they do not lose the deal

Competition Increases the Odds of a Successful DealBenefits of Kerrigan Advisors Competitive Sales Process

Time EfficientHigher Prices

Provides a ContingencyGreater Seller Control

• When multiple buyers are bidding on a transaction, it drives up price

• In a seller’s market, buyers will reach even higher to win a deal when they know there is competition

• If a buyer is not performing as expected, a seller can terminate the LOI or APA and turn to a back up offer

• Decreases likelihood a buyer re-trades on price after LOI is signed

• Competition provides the seller with greater control of the process

• When a seller negotiates with just one party, the buyer knows there is no other competing bidder and exerts greater control of the sale process

Benefits of Competition

Competition CreatesGood Buyer Behavior

II. Today’s Auto Retail Market

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“The automotive sector and its record over the past few years is resilience defined. Out of crisis, a phoenix has arisen. The auto industry’s ability to reinvent itself is one of the most remarkable stories I’ve seen in my 27 years in business.”

Penny Pritzker, US Secretary of Commerce

Resilience Defined – Auto Retail’s Rebound Exceeds ExpectationsSurpassed a 17.5M SAAR in August!

Auto Retail Sales are Highly Sensitive to Interest RatesSAAR is Negatively Correlated with Interest Rates

Source: Automotive News and Yahoo Finance

SAAR Versus 10-Year Treasury Yield

14

Auto Asset Backed Securities Issuances

Source: Sifma – 2014 figures annualize first half issuances

Rebound in Industry FinancingDealers Benefit from Market Demand for Auto Credit

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Above pre-recession levels

New Units Retailed per Dealership at Peak Levels Industry Healthier than Ever

Source: JD Power & Associates and Kerrigan Advisors Analysis

Retail Sales Per Dealership Versus % Annual Change

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Cost of Capital Single Biggest Driver of Current ValuationsAuto Retail Risk Low and Consolidation Opportunity High

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$0

$10

$20

$30

$40

$50

$60

$70

AuotNation’s Stock Price Relative to Bond Yield

Autonation 6.75% bonds with 2018 Maturity. Fixed coupon paid semi-annually

Kerrigan Advisors Blue Sky Multiples

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Drivers of Franchise Multiple VariabilityFour Key Factors

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Average Blue Sky Multiple

AdjustedBlue Sky Multiple

Earnings Growth

Expectations

Buyer Demand Real Estate

Market Vehicle

Preference

Higher Multiple

Lower Multiple

LowGrowth

LowDemand

High Rent/Building Project

FranchiseUnsuitable

FranchiseHighly

Suitable

HighGrowth

HighDemand

Low Rent/Image

Kerrigan Advisors Blue Sky Multiples – Second Quarter 2014Top Franchises Commanding Higher Multiples

Arrow Indicates Change from Prior Kerrigan Quarterly

Kerrigan Advisors Blue Sky Multiples – Second Quarter 2014Top Luxury Multiples Have Few Limits

Arrow Indicates Change from Prior Kerrigan Quarterly

Limited Supply of Luxury Franchises Results in Incredible ValuesEconomics 101

Arrow Indicates Change from Prior Kerrigan Quarterly

% increase in Sales YTD

(July)

Number of Franchises

Lexus 17% 234 Land Rover 14% 167

Audi 13% 280 BMW 12% 338

Mercedes-Benz 8% 361 Porsche 8% 189

Today, there are only 1,569 of these luxury franchises in the US, as compared to 3,118 Ford franchises and 3,035 Chevrolet franchises.

LowUnit Sales

Per Dealership

Some

HighDealership

Profit

LowDealership

Profit

HighUnit Sales

Per Dealership

High Blue Sky Values Regardless

of Market

High Blue Sky Valuesin Certain Markets

High Blue Sky Values Regardless

of Market

Low Blue Sky Valuesin Most Markets

Average Blue Sky Valuesin Most Markets

Manufacturer’s Financial Strength – A Factor that Drives Blue Sky ValueThe Higher the Credit Rating, The Higher the Multiple

Source: Moody’s and Kerrigan Advisors 24

Source: SEC Filings and Kerrigan Advisors Analysis – apply 8% cap rate to real estate holdings

Estimated Public Company Blue Sky MultiplesQ1 2014 Versus 2013

Public Blue Sky Multiples Reflect Liquidity PremiumAverage Private Multiple 5.2 times (~50% of Public Multiples)

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AUTOMOTIVE Q2:FY2014 MULTIPLES AUTOMOTIVE Q1:FY2014 MULTIPLES

($ in millions) TotalMarket Cap (as of 6/30/14) $19,699Net Assets (1,648) Est. Blue Sky 18,051

Operating Income 2,352 Rent Adjustment (472) LTM Adjusted EBIT $1,881Blue Sky Multiple 9.6x

Many Acquisitions Accretive to

Earnings

Number of Buy/Sells by Manufacturer (First Half 2014) Import and Luxury Disproportionately Represented

Domestics are once again in demand by buyers and are commanding strong blue sky values; however, imports and luxury franchises continue to be disproportionately represented, relative to the number of franchises.

Number of Buy/Sells by Franchise (First Half 2014) Import and Luxury Disproportionately Represented

Market Share of Franchises Market Share of Transactions

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Buyers Well Positioned With Lots of Support

Public Companies Continue to Hit Record Earnings Tremendous Capital Available for Acquisitions

Source: Public Company SEC Filings, LTM 2014 Q2

Total Public Dealership Group Earnings Before Tax

Pubic companies pre-tax earnings continue to hit record levels.

Source: Automotive News & Kerrigan Estimates – Excludes Publics

Top 125 Dealership Groups Estimated Total Pre-Tax Profits in Billions

167% Increase

The Big Get BiggerThe Largest Dealership Groups Hit Peak Earnings

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Rebound in Business FinancingDealers Benefit from Increasing Accessibility and Low Terms

Source: Federal Reserve

Total U.S. Outstanding Commercial and Industrial Loans

Above Pre-Recession Levels

Dealership Returns Are Highly AttractiveLow Yield Investment Environment Drives Up Dealership Values

Source: Yahoo Finance and Kerrigan Advisors Analysis - analysis assumes average multiples and no improvement in earnings or leverage – working capital and assets represent 2 times earnings.

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Even at Higher MultiplesDealerships Are Attractive

Investments

1) Based on $1M of dealership pre-tax earnings in Year 0 prior to acquisition 2) Working capital and fixed assets at 2.0x dealership pre-tax earnings

Pre-Tax Return on Investment in Year 1

Blue Sky Growth in Pre-Tax Earnings Year 1Multiple # -3% 0% 3% 6% 12% 24% 100%

3.0x ## 19.4% 20.0% 20.6% 21.2% 22.4% 24.8% 40.0%4.0x ## 16.2% 16.7% 17.2% 17.7% 18.7% 20.7% 33.3%5.0x ## 13.9% 14.3% 14.7% 15.1% 16.0% 17.7% 28.6%6.0x ## 12.1% 12.5% 12.9% 13.3% 14.0% 15.5% 25.0%7.0x ## 10.8% 11.1% 11.4% 11.8% 12.4% 13.8% 22.2%8.0x ## 9.7% 10.0% 10.3% 10.6% 11.2% 12.4% 20.0%9.0x ## 8.8% 9.1% 9.4% 9.6% 10.2% 11.3% 18.2%

10.0x ## 8.1% 8.3% 8.6% 8.8% 9.3% 10.3% 16.7%

Blue Sky Multiple

Required Growth in Pre-Tax Earnings Year 1Pre-Tax ROI # -3% 0% 3% 6% 12% 24% 100%

5% ## 17.4x 18.0x 18.6x 19.2x 20.4x 22.8x 38.0x10% ## 7.7x 8.0x 8.3x 8.6x 9.2x 10.4x 18.0x15% ## 4.5x 4.7x 4.9x 5.1x 5.5x 6.3x 11.3x20% ## 2.9x 3.0x 3.2x 3.3x 3.6x 4.2x 8.0x25% ## 1.9x 2.0x 2.1x 2.2x 2.5x 3.0x 6.0x30% ## 1.2x 1.3x 1.4x 1.5x 1.7x 2.1x 4.7x35% ## 0.8x 0.9x 0.9x 1.0x 1.2x 1.5x 3.7x

Private Buyers are Much More Active TodayPrivate Buyers Have Access to Capital and Financing

Source: The Banks Report

Public versus Private Dealership Buyer Activity (# of Transactions) First Half 2014

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Number of Private Groups with Greater than $1 Billion in SalesMore than Tripled since 2009

35Source: Automotive News Top 125 Dealership Group List

Number of Private Dealership Groups with Greater than $1B in Revenue

Over 3 Times More

Number of Multi-Dealership Transactions Grew 40% Year over YearBuy/Sells are Getting Bigger

36Source: The Banks Report

Number of Multi-Dealership Transactions First Half 2013 versus 2014

Source: Public SEC Filings

Public Dealership Stock Index Compared to the S&P

Public Dealership Stocks Outperform the S&P 500 in First HalfWall Street Thinks Auto Retail is a Great Investment

Lithia announcesAcquisition of DCH

P/E Multiples Increased Most for the AcquisitiveLithia and Group 1 are Rewarded for their Growth

A Lot of Room for ConsolidationMany More Deals Will Come to Market

Revenue Market Share

Dealership Market Share

Many of the top 125 dealership groups will need their own exit within the next 10 years.

Disproportionate Share of Revenue

40

Sellers Are Enjoying a Great Winning Streak

Sellers are Starting to Come to Market in Larger NumbersBuyers are Willing and Able to Absorb Supply

Source: The Banks Report

Number of Completed Acquisitions First Half 2013 vs. First Half 2014

On Pace for More than

200+ Transactions

17 Million Peak Sales Means Slower Growth Sales Rebound Near Completion

Source: Automotive News and Kerrigan Advisors Analysis/Estimates42

Average Dealership Earnings Near Peak LevelsGrowth Slowing

Source: NADA and Kerrigan Advisors Analysis – 2014E based on First Half Results 43

Average Dealership Earnings Vs. Annual Earnings Growth Rate

Gross Profit Per Vehicle Begins to DeclineIncreasing Competition Puts Pressure on New Car Gross – 3.77% Average

Source: SEC Filings

Average New Vehicle Gross Margin

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"There is intense competition among the OEMs and just as intense competition among the dealers. For profits on new vehicles to go up, one of those two fundamentals has to change."

Steven Szakaly, NADA chief economist June 2, 2014 3.77%

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EXTERNAL FACTORS

Industry ConditionsOEM PerformanceFinancial Markets

Domestic Economy

INTERNAL FACTORS

Current ProfitsFuture Profits

Real EstateSales Effectiveness

Source: NADA

Biggest Driver of Buy/Sell Market – External FactorsInternal Factors Are Irrelevant, if External Factors Aren’t Strong

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Erin Kerrigan, Founder and Managing Director

Today’s Auto Retail MarketBuyers’ Considerations Sellers’ ConsiderationsThe Presidio Blue Sky MultiplesValuation MethodsQ&A

Today’s Auto Retail MarketBuyers’ Considerations Sellers’ ConsiderationsThe Presidio Blue Sky MultiplesValuation MethodsQ&A

Erin Kerrigan is Managing Director of Kerrigan Advisors, which she founded in 2014. Kerrigan Advisors is a national dealership brokerage firm focused on providing a limited number of sellers, a high level of client service. Prior to founding Kerrigan Advisors, Ms. Kerrigan headed Presidio Automotive. During her time at Presidio, the firm represented dealer clients in numerous multi-million dollar transactions. Prior to Presidio, she was a Senior Vice President at AutoStar, a subsidiary of iStar Financial (NYSE: SFI), where she led transaction origination. Ms. Kerrigan is a recognized industry expert on dealership valuation, real estate and buy/sells, and is a frequent speaker at leading auto retail events and conferences, including NADA (#1 speaker in 2012), American Institute of Certified Public Accountants (AICPA), National Association of Dealer Counsel (NADC), Auto Team America’s Buy/Sell Summit and DrivingSales’ President’s Club. She has also been a key note speaker for events hosted by American Honda Motor Company, Audi of America, Bank of America, US Trust, Ohio Automobile Dealer Association, Colorado Automobile Dealer Association, and SunTrust Bank. Ms. Kerrigan has also led webinars for NADA and Automotive News and she writes a monthly column for Dealer Magazine.

Ms. Kerrigan graduated from Northwestern University with a BA in History and International Studies and the UCLA Anderson School of Business with an MBA. She is a member of Northwestern University’s Council of One Hundred, a select group of leading female professional alumnae who mentor current students and alumnae. She lives in Newport Beach, California with her husband and three children.

Erin KerriganFounder and Managing PartnerKerrigan Advisors erin@kerriganadvisors.com949-202-2200 (office)949-439-6768 (cell)

Brokers

Do you need a broker?

Broker Agreements Exclusive Representation Transactional Broker Term Tail

Broker Compensation Retainer Percentage of Sale Price Bonus

Broker Compensation Real Estate Lease / Option

Confidentiality Financials

Broker Agreements

Termination Notice and Cure

Broker Agreements

Arbitration Venue

Broker Agreements

Letters of Intent Outline of Deal Term Sheet Nonbinding, except

Price Assets

Goodwill / Blue Sky

Letters of Intent

Timing Exclusivity Confidentiality Termination

Letters of Intent

Buy-Sell

• Stock Sale• Asset Purchase Agreement

Asset Purchase Agreement Controls the deal All terms and conditions Exhibits

APAPurchased Assets

Parts

Furniture, Fixtures, Equipment

Gas, Oil, Grease

Vehicles

Intellectual Property

Miscellaneous

Purchased Assetsa. Parts

OEMNon-OEMPackaging

b. Physical Inventory

Parts Price – Manufacturer Catalog

APA

Gas, Oil, Grease Miscellaneous Shop Supplies

APA

Furniture, Fixtures and EquipmentTypically agreed price

Book less depreciation

Book plus depreciation

APA

Vehicles: New What constitutes new?

Factory invoice less holdbacks, discounts, advertising credits, gas allowance plus accessories

APA

Vehicles: Used Agree on price or exclude

Demos and loaners

Demo for the seller?

APA

Intellectual Property

Blue Sky / Goodwill Name

Websites

Trademarks

Telephone Numbers

Covenant Not to Compete

Advertising

APA

■ Leased Equipment ■ Purchase Orders

■ Contracts ■ Warranties

■ Documents ■ Claims

■ Permits ■ WIP

■ Sublet Repairs ■ DMS?

■ We Owes

APA

Excluded Assets■ Cash ■ Stock in Subsidiaries

■ Accounts Receivable ■ Insurance Policies

■ Corporate Records ■ Personnel Records

■ Off-Shore Accounts ■ Personal Vehicles

APA

Liabilities If any are to be assumed, must be spelled out

APA

Purchase Price Cash Carry Back Stock Holdback

APA

Real Estate Prefer separate contract, but cross-

contingent on close of both

APA

Manufacturer Approval Start Early

Colorado Law

Right of First Refusal

APA

Buyer needs new license Again start early

APA

Holdback Account Charge-offs

Time Limit

APA

Warranties and Representation Seller’s Limit Buyer’s Expand Schedules Indemnity

APA

Timing

APA

Taxes Each party responsible for own taxes Indemnity Sales tax on personal property acquired

APA

Employees WARN Act Notice +200 Terminate and Rehire

APA

Non-Compete Non-Solicitation

APA

Keeping it in the Family

• 70% of families fail to successfully transfer wealth

• Short-Sleeves to Short-Sleeves in 3 generations

• Only 24 to 40% of family businesses succeed to 2nd generation

• Only 11 to 15% of family businesses succeed to 3rd generation

What is the problem?

• Typically not legal or tax structures

• Next generation was not properly prepared

• Internal family issues around trust, communication, and long-term planning

Child’s Values

• My child does not have the same values as I do.

Which of my children should have the family business?

• Competence, not blood-right

• Conflicts between active and passive owners (“cousin conservatism”)

• How should I treat my children’s spouses?– If spouses are not allowed ownership,

how does my child provide for his wife upon death?

Case study

Dealer had three children, but only one involved in the business

Dealer recognized that having other two children involved could result in conflict and would ultimately not be good for longevity of business

Structured plan so that child would succeed to dealership and two other children would receive other assets, including real estate

Business Continuity Plan

• Non-binding plan for continuation of business upon owner’s death or disability

• Owner’s desires regarding management and board members

• Owner’s desires regarding continuation or liquidation of business

Transferring ownership

• When should I start transferring shares to my children

• Can be done without losing control and as learning exercise

• Can be structure as either a gift or a sale, but watch the gift and income tax issues

Shareholder Agreements

• Legally binding agreement that controls ownership transition upon death, disability, divorce, and other trigger points

• Could also give family shareholders right to require redemption of their shares

• Can predetermine purchase price, either by agreement or formula, or require a formula approach

Shareholder Agreements

• Typically funded at least in part, with life insurance

• Key planning issue – structure should follow family goals and objectives

ADVERSE POSSESSIONColorado

Craig Joyce

Thank You!

1801 California Street , Suite 2600▪ Denver, CO 80202www.fwlaw.com