Participants
Sal Albano, Vice President & Market Leader
Kimiko Comeau, Director Business Advisory & Transition Planning, BMO Private Wealth
Farid Ahmad, Chief Executive Officer, Dealer Solutions Mergers and Acquisitions (DSMA)
The third, and last, session of the automotive series was held on May 25. Sal Albano, Vice President and Market Leader moderated a conversation on transition planning with presenters Kimiko Comeau, Director Business Advisory & Transition Planning, BMO Private Wealth, and long-time automotive expert Farid Ahmad, Chief Executive Officer, Dealer Solutions Mergers and Acquisitions.
Transition of Business is Inevitable
With many clients overwhelmed during business transitions, Comeau began her presentation highlighting the importance of planning. A transition is inevitable, so it’s a question of how you approach it. You can either be proactive or be a passive bystander.
Involuntary transitions are generally driven by one of four precipitating events: disability, divorce, disenchantment or death, Comeau explained, adding that if your transition takes place at a time of crisis, the value of your business will be eroded. Planning ensures the transition is smooth and maximizes shareholder value.
What is Transition Planning?
Transition planning considers four things: what you have, where you want to go, who should get what, and your needs. Many owners address the strategic aspect of the transaction but don’t think about what comes next. How will you occupy your time? Are you ready to let someone else make decisions? What impact will your decision have on employees or family members? “Emotional change pieces are much harder to adjust to, so the earlier you plan the better,” suggested Comeau.
Transition Planning Roadmap
With a formal plan in place the complexities of transition feel less overwhelming. A roadmap – addressing goal setting, strategy and execution from business and personal perspectives – demystifies the process.
The first step is evaluating your and your business’ readiness – and establishing goals. Questions include: Is the business ready for transition? Or, can I take steps to strengthen it? It’s critical to consider who will be part of the discussions, added Comeau. “Think about those with a vote and those with a voice.” If you have shareholders, figure out how they fit with your goals.
At the strategy phase, you weigh the pros and cons and ensure proper structures are in place. Think about your business valuation and how its unique characteristics can drive value up and down. It’s also time to undertake estate and tax planning. As Comeau stated, “If you leave that too long, it may be too late to implement appropriate strategies.”
The executive phase is next (“where the rubber hits the road”). Many clients jump right into this phase but that’s like going on a trip without packing a suitcase, Comeau explained, risking business continuity and the maximization of after-tax proceeds.
In anticipation of a management transition, it’s critical to assess one’s personal goodwill versus corporate goodwill. If customers return to your dealership primarily because of you, that’s a problem; you should be replaceable to increase corporate goodwill which is something the marketplace will pay for versus personal goodwill. The best way to assess the situation is to leave for a while and see how the business manages in your absence. “If you groomed your successors well, you’ll be set up well when it’s time to sell.”
Farid Ahmad presented next. Chief Executive Officer of Dealer Solutions Mergers and Acquisitions, he explained that his automotive intelligence and Mergers and Aquisitions advisory service specializes in the sale of auto businesses, transitioning clients in and out of commercial real estate and leveraging data to provide industry information. In the last 10 years, his business was involved in 300 transactions, conducted 1,300 car dealer evaluations and generated billions in sales.
Transition Landscape
Ahmad offered a general overview of the automotive transitions in Canada. “It typically takes nine months to sell a business in Canada, outside of Quebec (which is very active),” he said, with the top selling brand being Chrysler. GM and Nissan are next, followed by Ford, Hyundai and Kia. Mazda and Honda have strong numbers too.
Whereas retirement was the primary reason for selling a dealership in the past, today it’s about realignment, Ahmad said. A dealer group may have assets in their portfolio that no longer fit their culture or business or are too far away to manage.
Interestingly, he added, 71 percent of sales in Central Canada are of assets, while in Eastern Canada 59 percent are share sales. Nationally, if you look at property value, net worth and goodwill, sales are approximately $12 million, with the numbers highest in Ontario.
Goodwill Trends
Hands-down, Porsche is the highest earner, according to Ahmad. Mercedes is next, while Subaru, Audi and BMW are extremely popular. Toyota and Honda are referred to as the S&P 500 because, even in the most turbulent times, the brands are steady as a rock. That said, a recent trend over the past couple of years is Honda multiples coming down slightly.
Transaction Value of Real Estate
In 2018, 81 percent of total transactions in Western Canada were generated from the value of real estate, Ahmad stated, adding it climbed higher in 2020, but then dropped to 41 percent in 2021. Meanwhile, in Eastern Canada, 91 percent of transactions include property. In Ontario the number is at 68 percent where more leases are generated.
Looking to the Future
With retail volume delivery dropping and interest rates rising, what will happen to the market? To answer that billion-dollar question, Ahmad is keeping his eyes on five areas: interest rates, supply chain shortages, inventory shortages, the agency sales model (BMW announced they’re looking into that model in the U.S.) and Electric Vehicles.
When it comes to Electric Vehicles, it’s important to note that Tesla was only 16th in unit sales in volume in 2020, but their cap value exceeds that of any major manufacturer. Tesla is also spending $20 million a year, while other brands are investing a lot less in electric. Is that a sign of trouble in the future? It could be, offered Ahmad.
With an agency model (requiring a $10 million minimum investment), a manufacturer gives a dealership the opportunity to deliver vehicles. “That’s going to change the landscape,” said Ahmad, explaining it will lead to slight increases in revenue, stabilization in transactional prices and higher operations costs.
Read Part 1 of the series: Economic Trends Affecting Automotive Business Value
Read Part 2 of the series: Tax and Insurance Planning Strategies for Automotive Business Transition
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