AS PROFITS RETURN TO “NORMAL” THE BUY SELL WORLD HAS A COVID HANGOVER
- COVID profits created a temporary valuation boost
- Elevated valuations may weigh on buyers’ books
- Profits are normalizing so sellers need to be realistic
While COVID may have taken its toll on many businesses and individuals including lost profits, lost connections, and loss of life, the years 2021 and 2022 were extraordinarily good for the retail automotive world.
A shortage of inventory and increased demand allowed dealers to boost prices, resulting in huge profits. Dealers, awash with cash, eagerly acquired franchises, often at valuations with little connection to a franchise’s former or future earning potential.
Now profits are returning to levels that, while higher than pre-COVID, are more sustainable. But dealers selling their franchises sometimes expect the valuation to be based on those halcyon years. Meanwhile, buyers are getting pickier.
In this complex scenario, buy sell professionals expect the ghosts of COVID to haunt some dealers about their COVID-times acquisitions.
“Covid created a temporary mountain in the valuation landscape of automobile dealerships. During that time, dealers recorded record years in terms of profitability, but did that really add value to the dealerships and their franchises?” Ken Rosenfield, founding partner of CPA firm Rosenfield and Co. tells Getting to Go!
Are profits normalized yet?
Dealership profits began to fall off their COVID-era levels in 2022. By 2024, however, the drop was slowing.
According to Presidio Perspectives, for the first nine months of 2024, earnings fell 30.4% according to the Presidio-NCM Average Dealership Performance Benchmark.
But for the entire year, earnings slipped by “only” 24.4% “notably better” than the first nine months, the report points out.
In the first quarter of 2025, dealership earnings dealership net pretax profit rose 3.7% compared to the same quarter the previous year, according to Presidio’s Q1 report. It seems a floor on the slide has been established. Indeed, in the second quarter of this year pre-tax profits surged 27.1% compared to the same period in 2027.
Not only were dealerships profitable, but the average store’s profit in the first half of 2025 was 2.0 times higher than pre-pandemic 2019 levels, according to Presidio-NCM data.
Still, those profits were not at COVID-times levels. Some dealers, nonetheless, cling to the hope their franchise can be valued based on the heady COVID levels, says the Q2 2025 Haig Report.
“This has increased friction between buyers and sellers especially,” the report says.
Furthermore, as The Haig Report points out, the 2025 numbers have benefited from a comparison with numbers impacted by the June 2024 shutdown of the CDK dealer management system, and by the sales levels from consumers’ rush to buy vehicles after President Trump’s April 2 tariff announcement.
For the remainder of the year, the Presidio report is cautiously optimistic that dealership profits “seem to be normalizing at numbers significantly higher than before the coronavirus epidemic” even considering the easy comparison base.
The Haig Report is more circumspect, saying “we don’t know yet what ‘normal’ looks like.”
The COVID hangover
Because of the flood of liquidity, “we’ve seen a lot of deals get done that you scratch your head on,” George Karolis, president of The Presidio Group, tells Getting to Go! “The buyers of those deals are having great remorse and wish they didn’t do them. But it was the high-flying time.”
Clients of Rosenfield and Co. took advantage of the COVID earnings boost to sell off nonperforming stores at all-time high prices, Adam Rosenfield, a firm partner, tells Getting to Go!
The stores “only looked like they were performing because of COVID,” he says. “These numbers are now, like, astronomical.”
As a CPA, Rosenfield can’t help but reflect on the lingering effect of those valuations, which included extremely high goodwill allocations, on the buyer’s bottom line. “I don’t know what people are going to do who have all those crazy goodwill numbers on their books,” he says.
Another potential bottom line hit: how much interest the buyer is paying since the amount financed to buy the store was double what it should have been due to the high bluesky value, Rosenfield says.
Ken Rosenfield, the firm’s founding partner, is seeing a pattern of larger dealership groups shedding dealerships that don’t fit the demographics of their operations, aren’t generating Return on Investment requirements, or are pushing the limits of their framework agreements.
“They are also selling these dealerships at a discount from what they originally paid or at similar pricing, even for high multiple and popular brands,” he says.
Is a meeting of minds possible?
The Dave Cantin Group, in its 2025 Market Report Mid-Year Update, identifies “significant cash on hand” as one factor driving what it sees as an accelerating M&A environment in the second half of 2025.
But it notes that buyers are looking less at traditional metrics such as trailing years of profit and earnings multiples and more at brand strength, market quality, performance enhancement potential, and external factors including local demographic and economic trends.
The question is, are sellers willing to do the same?