There were 109 completed dealership transactions completed in the first quarter of 2024, representing 233 franchises sold, up 38% compared to the first quarter of 2023, according to the just-released First Quarter 2024 Blue Sky Report by Kerrigan Advisors.

This was driven by an increase in the number of sellers coming to market, without a concomitant rise in buyers, transitioning the 2024 buy/sell market in favor of buyers for the first time since the pandemic. At this pace, Kerrigan Advisors expects the 2024 buy/sell market to exceed 400 transactions.

“The 2024 buy/sell market remains robust, hitting new records despite high interest rates and declining industry profitability,” said Erin Kerrigan, founder and managing director of Kerrigan Advisors. “This burgeoning buyers’ market is putting additional downward pressure on blue sky values, particularly as dealership earnings retreat further from their pandemic-induced high.

As earnings trend downward, more private dealers are deciding to exit, particularly while their blue sky valuations remain above pre-pandemic levels.”

Through the first quarter of 2024, Kerrigan Advisors estimates average dealership earnings declined 7%, resulting in average industry net to sales of 4.5%, 2.2 percentage points below 2022’s peak. Much of the earnings decline is a result of softening new-vehicle margins, which ended the quarter 35% lower than 2022, due to increasing new vehicle inventories.

In order to track industry valuation fluctuations since 2019, Kerrigan Advisors has launched the Kerrigan Blue Sky Index, which reflects changes in average industry blue sky values each quarter. For the first quarter of 2024, the Kerrigan Blue Sky Index declined 7% from the fourth quarter of 2023; however, the index remains 80% higher than 2019.

For the first quarter of 2024, Kerrigan Advisors identified the following three trends that the firm expects will meaningfully impact the buy/sell market this year:

• Private dealers tap into outside equity partners to accelerate growth through acquisition
• Captive finance companies increasingly critical to franchise profits and value
• Fixed operations drives industry profits and blue sky

Kerrigan Advisors expects outside capital to continue to increase its investment in auto retail and to identify exceptional operators to financially support. Through 2023, the number of dealerships owned by private groups with outside capital is up 45% from 2021. When annualizing first quarter 2024 data, the average dealership achieved an impressive 23% return on equity, outperforming the S&P 500 by 110% and on average, auto retail returns have outperformed the overall S&P 500 by 92% on an annual basis since 2016. Clearly, auto retail has proven its case and will draw more capital from outside the industry as consolidation accelerates.