From mid-March through May, the dealership buy-sell market came essentially to a standstill. Over the past few weeks, we have seen an ever-increasing pace of transactions, whether these were picking up where things left off in March or were simply buyers exploring new deals. While most of us are trying to restore as much pre-COVID-19 normalcy to our lives as possible, I would exercise caution as it relates to valuations of dealerships.
There are plenty of influencing factors that are working to compel us to believe that the economic outlook of dealerships today is the same as it was in February, before the pandemic. We do not have to look further than the stock markets to see this school of thought play out. This also includes dealership brokers who are working hard to hold the line on the optimistic recovery of the economy and the perceived scarcity of available dealerships while justifying high valuations.
Individuals are pointing to stronger-than-expected automotive recoveries in May and June as the sign that the economic impact of the pandemic is behind us. While I would love to subscribe to this optimistic school of thought, there are simply too many negative forces in the economy that I believe are yet to fully manifest themselves.
For dealers willing to listen, I recommend that unless it is a highly strategic or opportunistic acquisition, hold off on any purchases until 2021, until we see the full impact of the pandemic on the economic recovery. I consider the current economy to be in a state of suspended animation, where the Paycheck Protection Program and other federal stimulus packages have essentially punted the ball a few months on any significant downward economic consequences.
While I do believe the worst of the economic shutdown is behind us, I do not believe the outlook is as bright as it is being pitched, and we are going to see a slowing recovery in the months to come.
Our current position is that any franchise valuation multiples from before the COVID-19 outbreak are simply not viable in the current market, given all the uncertainty. Even with what might be considered a fair multiple, the multiplier (profitability) is highly in question. Any current transaction will likely use pre-COVID-19 earnings as a part of its valuation and would look to ignore or justify any performance afterward — this is where the risk to the buyer resides.
I believe a significant part of the May, June and even July sales is a combination of pent-up demand, highly attractive manufacturer incentives and federal stimulus impacts. Car sales essentially received a vitamin B12 shot in the arm, and things are feeling relatively amazing. My concerns primarily relate to what the industry is going to look like once the benefits of this boost wear off. With unemployment above 11 percent and a sputtering reopening for many states seeing surges in COVID-19 cases, I do not believe car sales will continue to see this same V-shaped recovery, particularly as we move into the end of the third quarter and the fourth quarter.
For dealers with an eye on expansion, unless it is a highly strategic or opportunistic acquisition, this is not the time to divert personnel or financial resources on ventures where the valuation variables only stand to move in a negative position. This is the time to keep your powder dry, focus on existing operations and wait for the election, market and virus uncertainties to be farther behind us in the rearview mirror.