Preparing for Cross-Border Expansion
- Keywords:
As the strong pace of industry consolidation continues, Canadian auto dealerships are finding an attractive market south of the border. The U.S. offers the opportunity to diversify location and brands, and after more than 10 years of solid growth, the U.S. market outlook remains positive.
But like any major decision, dealer operators need to think about how a U.S. expansion fits into their overall strategy, especially as new technologies and consumer preferences promise to disrupt the industry.
We find there are three key reasons why Canadian dealerships consider an acquisition in the U.S.:
- Value. Purchase price multiples for dealerships are lower in the U.S. than in Canada. It’s important to note that every deal structure is unique, so the multiples will vary based on several factors including financial stability, brand and location.
- Familiarity. Many Canadian dealerships already have an existing relationship with their U.S. counterparts. Thanks to the huge export business between the two countries, several Canadian dealerships partner with U.S. dealers to ship vehicles from Canada into the U.S.
- Lifestyle considerations. We’ve spoken with many Canadian dealership owners who are looking at markets in Texas and Florida as potential buying opportunities, enabling them to live in a warmer climate part of the year while pursuing a business opportunity.
Mostly Similar
It’s also a fairly easy transition, as the business fundamentals for U.S. dealerships aren’t substantially different. The sales compensation is driven by owner preference. Nevertheless, there are some differences.
Farid Ahmad, CEO of DSMA, a Markham, Ontario-based M&A advisory firm for the automotive industry, says U.S. dealers tend to focus more on front-end sales than service, whereas the opposite is largely true for Canadian dealers. Ahmad also notes that U.S. dealers looking to make an acquisition are willing to get into a bidding war in the bigger markets. Dealerships in rural markets, however, will have a difficult time achieving a high multiple unless they offer an especially attractive brand. In Canada, on the other hand, dealers can demand a good price for a rural store regardless of brand.
Canadian dealerships may find the agreements with automakers in the U.S. to be more fluid than they’re accustomed to. “Manufacturers have more control over what Canadian dealers can or can’t do,” Ahmad says. “That’s because the Canadian Automobile Dealers Association (CADA) has not been as successful in lobbying the Canadian federal government as the National Automobile Dealers Association (NADA) has been in the U.S.”
Key Considerations
Before making an acquisition in the U.S., it’s important to think strategically about why you want to do it, and whether you’re prepared to hit the ground running. That includes making sure you have enough management capacity, especially for the first year or two to ensure a smooth integration. We’ve found that the most successful integrations occur when there’s an element of consistency between the Canadian and U.S. operations.
The size of the target dealership is often a guiding factor. Dealers are having a hard time finding competent general managers. We’ve found that the lack of management talent has restricted potential buyers, which is why dealerships are looking for larger acquisition targets—they want their general managers in a large store in or near a core market to make sure they’re maximizing profits.
That’s also why one of the key questions dealers should ask themselves is: Do you have the infrastructure in place to readily staff an acquisition target?
Also note that automakers have a checklist of what they want to see in their dealers, including:
- Experience selling their brands
- A solid capital base and strong financial indicators (valuation drivers, such liquidity, leverage and profitability, will vary by deal and market)
- A sound fixed operations model, along with a stable team to manage this side of the business
- A solid reputation in the market (i.e., customer satisfaction scores)
- A capable management team
- Image, branding and cap expenditure requirements
Preparing for the Future
Moving forward, technology investment is going to be as crucial as investment in a store’s physical assets. Dealers will need to adopt new technologies and strategies to satisfy both customer and OEM demands.
Trends such as electric vehicles, autonomous cars and virtual car shopping—along with rideshare programs and other alternatives to car ownership—will likely accelerate in the next few years. That’s one reason why dealerships are looking to achieve scale through acquisitions, but you’ll also need a strategy for navigating these disruptive technologies.
Meanwhile, automakers are demanding more data analytics and data monetization strategies to derive more meaningful insights to develop long-term customer relationships.
The Deal Team
Making a successful acquisition in the U.S. starts with having the right people in place. It pays to network with dealers, manufacturers, professional service firms and bankers in the U.S. to help make sure you find an acquisition target that fits your culture.
This network—your “deal team”—can also build your credibility with automakers, as well as help you navigate the differences in human resources, banking, payroll, regulations, insurance and other issues. It’s also important to understand which brands and styles perform well in a given market. Having a deal team in place can help you navigate the U.S.’s diverse market.
This team should be able to provide the intel and resources to build a sound valuation model in the near and long term. An acquisition may look attractive upfront, but it’s critical to evaluate the long-term performance of that store based on the market and economic outlook.
Ultimately, your deal team can help perform due diligence on opportunities that arise, helping you think through what makes sense both now and in the future.
Ghram Debes, BMO Commercial Bank Head of Dealer Finance (U.S.), Ryan Ricci, BMO VP Credit Structuring and Leveraged Finance, Automotive Finance (Canada), and Jamie Gordon, BMO Director, Strategic Initiatives, Automotive Finance (Canada), contributed to this article.
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Robert Sadokierski
Former Senior Vice President & Head, Automotive Finance, BMO
As the strong pace of industry consolidation continues, Canadian auto dealerships are finding an attractive market south of the border. The U.S. offers the opportunity to diversify location and brands, and after more than 10 years of solid growth, the U.S. market outlook remains positive.
But like any major decision, dealer operators need to think about how a U.S. expansion fits into their overall strategy, especially as new technologies and consumer preferences promise to disrupt the industry.
We find there are three key reasons why Canadian dealerships consider an acquisition in the U.S.:
- Value. Purchase price multiples for dealerships are lower in the U.S. than in Canada. It’s important to note that every deal structure is unique, so the multiples will vary based on several factors including financial stability, brand and location.
- Familiarity. Many Canadian dealerships already have an existing relationship with their U.S. counterparts. Thanks to the huge export business between the two countries, several Canadian dealerships partner with U.S. dealers to ship vehicles from Canada into the U.S.
- Lifestyle considerations. We’ve spoken with many Canadian dealership owners who are looking at markets in Texas and Florida as potential buying opportunities, enabling them to live in a warmer climate part of the year while pursuing a business opportunity.
Mostly Similar
It’s also a fairly easy transition, as the business fundamentals for U.S. dealerships aren’t substantially different. The sales compensation is driven by owner preference. Nevertheless, there are some differences.
Farid Ahmad, CEO of DSMA, a Markham, Ontario-based M&A advisory firm for the automotive industry, says U.S. dealers tend to focus more on front-end sales than service, whereas the opposite is largely true for Canadian dealers. Ahmad also notes that U.S. dealers looking to make an acquisition are willing to get into a bidding war in the bigger markets. Dealerships in rural markets, however, will have a difficult time achieving a high multiple unless they offer an especially attractive brand. In Canada, on the other hand, dealers can demand a good price for a rural store regardless of brand.
Canadian dealerships may find the agreements with automakers in the U.S. to be more fluid than they’re accustomed to. “Manufacturers have more control over what Canadian dealers can or can’t do,” Ahmad says. “That’s because the Canadian Automobile Dealers Association (CADA) has not been as successful in lobbying the Canadian federal government as the National Automobile Dealers Association (NADA) has been in the U.S.”
Key Considerations
Before making an acquisition in the U.S., it’s important to think strategically about why you want to do it, and whether you’re prepared to hit the ground running. That includes making sure you have enough management capacity, especially for the first year or two to ensure a smooth integration. We’ve found that the most successful integrations occur when there’s an element of consistency between the Canadian and U.S. operations.
The size of the target dealership is often a guiding factor. Dealers are having a hard time finding competent general managers. We’ve found that the lack of management talent has restricted potential buyers, which is why dealerships are looking for larger acquisition targets—they want their general managers in a large store in or near a core market to make sure they’re maximizing profits.
That’s also why one of the key questions dealers should ask themselves is: Do you have the infrastructure in place to readily staff an acquisition target?
Also note that automakers have a checklist of what they want to see in their dealers, including:
- Experience selling their brands
- A solid capital base and strong financial indicators (valuation drivers, such liquidity, leverage and profitability, will vary by deal and market)
- A sound fixed operations model, along with a stable team to manage this side of the business
- A solid reputation in the market (i.e., customer satisfaction scores)
- A capable management team
- Image, branding and cap expenditure requirements
Preparing for the Future
Moving forward, technology investment is going to be as crucial as investment in a store’s physical assets. Dealers will need to adopt new technologies and strategies to satisfy both customer and OEM demands.
Trends such as electric vehicles, autonomous cars and virtual car shopping—along with rideshare programs and other alternatives to car ownership—will likely accelerate in the next few years. That’s one reason why dealerships are looking to achieve scale through acquisitions, but you’ll also need a strategy for navigating these disruptive technologies.
Meanwhile, automakers are demanding more data analytics and data monetization strategies to derive more meaningful insights to develop long-term customer relationships.
The Deal Team
Making a successful acquisition in the U.S. starts with having the right people in place. It pays to network with dealers, manufacturers, professional service firms and bankers in the U.S. to help make sure you find an acquisition target that fits your culture.
This network—your “deal team”—can also build your credibility with automakers, as well as help you navigate the differences in human resources, banking, payroll, regulations, insurance and other issues. It’s also important to understand which brands and styles perform well in a given market. Having a deal team in place can help you navigate the U.S.’s diverse market.
This team should be able to provide the intel and resources to build a sound valuation model in the near and long term. An acquisition may look attractive upfront, but it’s critical to evaluate the long-term performance of that store based on the market and economic outlook.
Ultimately, your deal team can help perform due diligence on opportunities that arise, helping you think through what makes sense both now and in the future.
Ghram Debes, BMO Commercial Bank Head of Dealer Finance (U.S.), Ryan Ricci, BMO VP Credit Structuring and Leveraged Finance, Automotive Finance (Canada), and Jamie Gordon, BMO Director, Strategic Initiatives, Automotive Finance (Canada), contributed to this article.
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