Pathways to dealer principal or majority owner for first-time buyers

• Minority to majority ownership is often a more realistic goal for first-time buyers
• Private equity firms can assist first-time buyers
• Sale leaseback can also provide capital

A fortunate few first-time buyers—such the one profiled in this issue—are able to front the cash needed to acquire a new car dealership and step straight into the role of dealer principal. For others, there are various pathways to majority ownership though they may not always lead to becoming dealer principal.

From minority to majority owner

For a successful general manager or very successful general sales manager, becoming a dealer principal is often easier if they become a minority owner in a dealership first, Willie Beck, co-managing partner at dealer advisory firm Bel Air Partners, tells Getting to Go!

That requires an owner willing to work with the minority partner on the transition to full ownership. For example, at one Florida-based dealership group with seven rooftops, each dealership has an operating partner who owns up to 25%, Beck says. Each year a portion of the operating partner’s bonus is allocated to acquiring a bigger percentage of the store.

Both sides love the arrangement, Beck says. The operating partner running the dealership on a daily basis is participating in the profit. Meanwhile, the group owner and his brother like the arrangement because they know they have an operating partner at the store every day that has the real skin in the game, Beck says.

That pathway is becoming more attractive because transaction costs are “going up and up and up with the Blue Sky values, the cost of the real estate, the working capital requirements that are involved, (and) the amount of floor plan debt,” Beck says. “And obviously, for a successful dealership, the overall price based on the earnings will be pretty high.”

Stuart McCallum, president of accounting and advisory firm McCallum & Company, says “I think the days of minority owner operators straight buying out their dealers are over.”

His firm has advised first-time “hopeful” dealers who approached underperforming stores with the pitch that they enter as a minority partner on a shareholder note at an agreed upon value. The goal is for the store’s performance to improve, allowing the first-time buyer to buy down the seller’s ownership,

For such an arrangement to work, the minority partner “needs to be flexible and opportunistic,” he says.

Operating partner

Some dealership groups prefer that their general managers also be operating partners with a stake in the dealership and will help them obtain financing to buy it.

That is his operating model, David Rosenberg, president and dealer principal of DSR Motor Group in New England, says.

When DSR was working on acquiring Atlantic Toyota in Lynn, MA, Rosenberg recruited Mike Brown, who had worked with Rosenberg before, from Brown’s job as a fixed operations director at a large dealership group to become general manager and operating partner of the Toyota store.

Rosenberg helped Brown obtain capital to acquire a stake in the dealership.

Private equity

Working with private equity is another pathway to ownership for a first-time buyer.

For example, Fairhurst Automotive partnered with two first-time buyers to acquire a Chrysler Dodge Jeep Ram dealership in Virginia using funds from the Ellenae Fairhurst Entrepreneurial Trust. The buyers are minority shareholders, but Fairhurst offers a pathway to becoming majority owners over time.

McCallum, who is also president of Fairhurst Automotive, was a long-timer advisor to Ellanae Fairhurst.

Some private equity groups partner with dealers with an eye to creating a dealership group.

Open Road Capital invests its own capital in partnerships with a buyer to acquire dealerships in which Open Road is the majority owner. Its model is to work with that strategic partner to then acquire more dealerships to create economies of scale.

Alas, few of those partners are first time buyers now, Tim Batchelor, co-founder and managing director of Open Road tells Getting to Go!

Part of Open Road’s foundation was built around helping “deserving” candidate such as general managers acquire their first dealership, he says. But due to the rising dealership valuations it hasn’t completed any first-time buyer deals yet, Batchelor says. “I’m sure we will,” he adds.

Factory support is the most important qualification for a first-time buyer that Open Road is considering working with, he says.

“If the factory likes them, they are probably good at their jobs,” Batchlor says. “If they are buying the brand they are running, they probably have strong factory support. Without that, there is some reason they don’t have it.”

Then comes financial resources. “We like to make sure they know how to make money,” Batchelor says.

He advises first-time buyers who want to work with Open Road or other private equity firms to start saving money that they can put towards the acquisition.

“We like to see some alignment, and the factories want to see some people owning a certain percentage,” Batchelor says.

Open Road will put up the majority of the acquisition cost, he says, “but we’re not gonna put up all of it.”

If a perspective buyer can’t put up a good chunk of money he or she either hasn’t been successful enough or they are not fiscally responsible, Batchelor says.

Sale Leaseback

A first-time buyer can use a sale leaseback to obtain capital to acquire a new car franchise, though it isn’t common, says Ned Hennessey, vice president, dealer investments at Surmount, a real estate advisory firm.

In a sale leaseback transaction, a company buys the dealership real estate, providing capital to the owner, who then leases it back.

For a first-time buyer, a sale-leaseback “can work,” Hennessey says, “But it works best when it is a performing dealership with good real estate.”

To apply the capital from a sale-leaseback to an acquisition in the two- to three-month period between the signing of the LOI and contract execution, a buyer must be found for the dealership real estate, Hennessey explains. That is not easy with a first-time buyer.

“The riskiest tenant to a real estate investor is going to be a first-time buyer,” he says.

Surmount does have a pool of investors it has utilized for first-time buyers, Hennessey says. But the structure works best with a well-capitalized buyer that can pledge collateral, or a very good operator with prime real estate.

“It’s hard to sell an investor on a store that isn’t doing that well,” Hennessey says.