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
15
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
16
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
18
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
34
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
44
"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 [email protected] (office)949-439-6768 (cell)
Brokers
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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
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