Jim Fitzpatrick: 0:04

This is Driving Solutions exclusively on CBTNews. com. Hey everyone, how are you this morning, Jim Fitzpatrick from CBT News? Today we're diving into the current state of the buy-sell market, as the Kerrigan Advisors have just released their Q1 Blue Sky Report. Here now is Erin Kerrigan, who's the founder and managing director of Kerrigan Advisors. Thank you so much, Erin, for joining us on the show today.

Erin Kerrigan: 0:30

Thank you for having me, Jim, happy almost summer.

Jim Fitzpatrick: 0:33

That's right. That's right. We're all looking forward to a great summer, so talk to us. How is the buy-sell market faring so far this year?

Erin Kerrigan: 0:45

Well, we definitely saw a little bit of a slowdown in the first quarter. The transaction activity was down about 14% first quarter 2025 compared to 2024.

Jim Fitzpatrick: 0:55

Okay.

Erin Kerrigan: 0:56

And that's lower. If you look at it in a more broader standpoint, though, we had 300, we're annualizing about 375 transactions, which is 70 percent higher than where we were pre-pandemic, so we're still in a elevated pace of activity. Yeah, it did slow a bit, for sure, in the first quarter, and I do think 2025 will be a slower year than 2024. Ok, we're seeing now, you seeing now coming towards the end of the second quarter.

Jim Fitzpatrick: 1:27

Okay, and is that due in large part because of the tariff situation?

Erin Kerrigan: 1:32

I mean the tariffs definitely are contributing to this quote unquote uncertainty. I will say we're not seeing buyers hesitate as much. Quite honestly, I think sellers are a little more hesitant because they just don't want to sell in a market that isn't as strong. We still get buyers calling us all the time saying what we're looking to grow, and so that growth mentality is alive and well. What we see is that buyers are really saying I need to be one of the top 150. So if I'm not in the top 150 list, I need to get there, and so a lot of folks are doubling down on their plans to grow and those selling, I think, are just a little more hesitant to sell into the uncertainty of the market. I mean, how many times do we have to hear that term on the TV and the news wires? So I think as soon as the tariffs get ironed out which I'm quite confident they will we're going to see an uptick in activity.

Jim Fitzpatrick: 2:35

Sure, Now that's kind of a large drop. What do you attribute the lower level of multi-store deals to?

Erin Kerrigan: 2:43

So yeah, that's right. We had fewer multi-store deals and that was one of the drivers in terms of the slower, the fewer transactions. What we saw fewer franchises. I should say we actually saw, there were 134 franchises that transacted in the first quarter of 25, versus 234 last year.

Erin Kerrigan: 3:08

Now part of that was the Leith transaction, which was 30 plus stores that we represented in the first quarter of last year, so that was a big chunk of stores. That being said, what we're seeing interestingly is the activity is definitely leaning more towards single store sellers, and part of that's it's just harder and harder to just own one store, and so that has been a huge percentage. Almost 80% of the buy-sell market in the first quarter was single store transactions. Multi-dealership transactions were down about 39% and I think that's because, really, those kind of deals when you get into the leaf size deal with 30 plus stores that you need a financial market that's much more stable and if you look at the VIX, for instance, the volatility index of the stock market.

Erin Kerrigan: 4:07

It hit its 18th highest level on record in the first half of this year. You also have the Kerrigan index is down 20 percent. It hit a near term high in February, dropped 20 percent with the tariff announcements and what have you. So it's harder for those huge deals to get done in more volatile markets in our experience.

Jim Fitzpatrick: 4:31

Okay, okay.

Erin Kerrigan: 4:32

I expect, though, as we get clarity in the stock market and the public stocks improve, that we will see large transactions come to market. Again, we will see them get done. I mean, you're certainly seeing Asbury has said that they're going to close Herb Chambers deal in the second quarter. That'll be about the same size as the Koons deal that we sold, and so those are monumental transactions. I expect we'll continue to see those. But I do think those super large deals are definitely sensitive to the financial markets and the stock market.

Jim Fitzpatrick: 5:14

Yeah, yeah. So, given the slow starts of the year, how do you expect 2025 to Well?

Erin Kerrigan: 5:21

as I said, I think it will probably be a little lower than 2020, than 2024. And, and that being said, I think that what we're going to see is, I think valuations are going to remain pretty strong. I mean, the first quarter earnings for the industry. From what we've seen, on average in our analysis, that earnings were up 7 percent and that was the first time we've had a year over year, quarter over quarter increase, meaning first quarter versus first quarter last year.

Erin Kerrigan: 5:56

Sure, since the pandemic we've been, you know, since the peak of the pandemic, we've been, on this march, downward, so we're finally at a normalization. I think that's really important and what that means is what we're seeing is buyers are basing their valuations off of current earnings and the current earnings are earnings that they expect they can project future earnings to, meaning that they can project growth from today. I think that's a really I think that's a really important piece of the puzzle. And if you look at it and we were at a 17 million SAR for many, many years pre-pandemic the age of the cars are getting older and older. Obviously, affordability is a major, major issue with tariffs. However, there is demand for vehicles out there.

Erin Kerrigan: 6:48

And I do believe there's pent-up demand, as we saw with the surge in sales in March and April. So we think the industry's well-poised for a turnaround in earnings in 2025. And from there we'll see more activity.

Jim Fitzpatrick: 7:06

Yeah, and as you know the dealer, the business model is so adaptable and I guess that really plays into these expectations, right?

Erin Kerrigan: 7:15

Yeah, no, that's exactly right. I mean, everyone has to remember that about 50% of the gross is from fixed operations.

Erin Kerrigan: 7:22

And fixed operations just marches on upward and is an incredible, is a gift that keeps on giving. And that's why, with the tariffs you know it is what the many think the tariffs are we're going to be people that aren't in the industry think the tariffs would be terrible for it, for the retailer. You know, my view is that the retailers are going to be just fine. That we're going to, my guess is grosses go up for high demand vehicles because there's not as many, the inventory is down and that's always, as we saw during covid, a good place to be. So I'm I'm very optimistic for the rest of the year in terms of the business model and I expect, going into the second half and into 26, we're going to see a lot of buy-sell activity.

Jim Fitzpatrick: 8:07

That's great. So you feel as though the tariffs really won't have much of an impact on the deal environment, right.

Erin Kerrigan: 8:15

No, no, I really I don't think it will have much of an impact.

Erin Kerrigan: 8:21

If anything, when it gets resolved I think we could see a surge of transaction activity. And you know when you look at it, if you look at the grosses that the, the OEMs grosses I mean their grosses their gross margins have gone up considerably since COVID and there are more than double the new car. Gross margins have gone up considerably since COVID and they're more than double the new car gross margins. So what is the OEM going to do? They can talk about trying to raise prices, but for most this is a very competitive market. If they raise prices they're going to lose market share and the dealer's margin is much lower. I mean, they have a lot to work with these OEMs to effectively reduce their margin a bit and also become more efficient in their operations. So I do think the dealer will continue to do quite well, even with the tariff situation as it is, quite well even with the tariff situation as it is, and it could be one of those situations again where we're making really good money as an industry and that's always good for the buy-sell market.

Jim Fitzpatrick: 9:28

So, from your standpoint, really no change to Blue Sky Values.

Erin Kerrigan: 9:33

Yeah, no, the Blue Sky Values. What we've seen is and in our report we produced it a few weeks ago, so we had even less clarity on what was going on with tariffs we made no changes to multiples, because that's what we're seeing no changes to multiples. If there is a big tariff, like, for instance, mazda, which has almost no production in the US and doesn't have the kind of financial bench to build a big capacity in the US, they're in a trickier situation. They can't raise their prices because if their competitors don't, because they'll lose tremendous market share. They're in a super competitive segment. So Mazda's in a little bit of a sticky situation.

Erin Kerrigan: 10:21

But we chose not to adjust any of our multiples until we have clarity. There's no point in not seeing. Frankly, we see the dealer and the buyers quite confident that we're gonna, this is all gonna get figured out. So we're really not seeing dramatic changes in the multiples and earnings were relatively flat. So we aren't seeing a change in the blue sky. We have our Kerrigan Blue Sky Index which remains about 70% higher on average than pre-pandemic.

Jim Fitzpatrick: 10:54

Wow, that's still strong. That's incredible. What are the deals that are getting done today?

Erin Kerrigan: 11:01

Well, as I said, a lot of single point deals, so a lot more single dealers are selling off. We're seeing a lot of divestitures by the publics when they're doing these big deals.

Erin Kerrigan: 11:13

We do see them divest also of just markets that they don't feel they can grow to the level that they want to grow or it's not the right market for them. The publics and the privates are divesting of certain markets, which gives others a lot of opportunity. We are definitely seeing from a buy side. We are seeing buyers being more selective and what we see is that the name of the game right now is regional market share and owning your market and we think we're in the beginning innings of that consolidation trend and I think in the next 10 years the major regions and the major metros are going to be highly consolidated. You will have very few single point dealers in a major city like Tampa. We sold Tampa Toyota. It was the only store, only Toyota store not owned by a top 20 group.

Jim Fitzpatrick: 12:18

Wow.

Erin Kerrigan: 12:19

And that was just a single store. So the Tampa Toyotas of the world are going to be sold. In the next 10 years, I think major metros are going to be highly consolidated, and so what we're seeing is buyers are very much focused on filling out their platforms in whatever markets they're operating in, especially with the top franchises or those that they don't already own.

Jim Fitzpatrick: 12:43

Sure, how are things? What are you hearing about Nissan and Stellantis stores? Obviously, Nissan's got new leadership turning things around. I had the pleasure of interviewing the Vice President of Sales and Marketing, for Nissan came from Toyota, actually came back to Nissan after many years of being away, but he's got a lot of great plans for the future and he's feeling good about the Nissan brand making some changes in the lineup and making a little bit bigger commitment to EVs, or, I should say, hybrids as well. And then, of course, Stellantis again today we reported here at CBT News that that too has a new leader and a new leadership team, and the dealers the Stellantis dealers I'm talking with are feeling very good about the future of Stellantis. Are you hearing the same?

Erin Kerrigan: 13:31

I think Stellantis in particular is going to very much benefit from any tariffs that end up occurring, because they have a lot of domestic production. My guess is the UMCA situation gets ironed out as well. So I think we are hearing much, finally much more positive news coming out of Stellantis, and we're seeing it in the buy-sell market. There is definitely once again demand for Stellantis, especially in high-growth markets, especially in places where the population growth makes those franchises particularly attractive. Likewise Nissan. I would say we're not quite as robust yet on Nissan.

Jim Fitzpatrick: 14:19

The phone's not ringing off the hook for Nissan franchises yet, yeah, a little more of a wait and see.

Erin Kerrigan: 14:25

But I certainly don't see it going down. I think that it appears Nissan is going to turn the corner, and so both those franchises, I think, are definitely more positive than they've been in many, many quarters. And so that's really exciting for those dealers.

Jim Fitzpatrick: 14:48

What do you hear from OEM executives about their views on China? That seems to be a very hot topic today. Obviously, byd is making a lot of headlines, as are other China nameplates, and you know we've had the pleasure of speaking with Michael Dunn, actually along with Ryan Kerrigan, right here at CBT News, and he said you know I've said this before, but he's told me that we're on an island here in North America and that China vehicles are being sold all over the world in great numbers and they're putting the hurt on a lot of OEMs and a lot of manufacturers out there in these other countries, on a lot of OEMs and a lot of manufacturers out there in these other countries.

Erin Kerrigan: 15:27

This is a topic that we do think as an industry US industry we should keep an eye on, and so we actually. In our OEM survey we just published, we surveyed 100 plus OEM executives, executives and and we asked two important questions, one of which was do you believe that the Chinese OEMs will eventually enter the US market? And 76% said yes. Wow and, by the way, we're not serving any Chinese OEM.

Jim Fitzpatrick: 16:02

So these are all these are all right, they yeah, yeah yeah, so was no bias here, I don't think.

Erin Kerrigan: 16:10

Nor is Tesla in this either. So this is good, old fashioned OEMs and have a great dealer networks. And so 76% said yes, we think they are coming to the market. That was shocking to me.

Jim Fitzpatrick: 16:25

Yeah, that is a high number, wow that's a high number.

Erin Kerrigan: 16:28

And then and then 70 percent said they are concerned about the financial impact. China uh, Chinese automakers uh are having on their OEM, yeah, because of the loss of global market share and so you know, we are on this island Now, on the flip side, because we are an island.

Erin Kerrigan: 16:50

that's why I think that the US dealers are so well positioned, because what's happening in China is the Chinese market. Share of Chinese OEMs in the Chinese auto retail market, which is the largest in the world, is now about 64%, and the legacy OEMs, the ones that we all know and represent, is down to 36%. That's a complete reversal from where it was at its peak, where legacy OEMs had 64% of the Chinese auto market and.

Erin Kerrigan: 17:23

Chinese had 36%. So so if you're an OEM and you, you, you know you're losing market share like crazy in the largest auto retail market. What's the second largest auto retail market? It is the united states that's right and you can't afford to lose market share in this in this country, this is the best, I mean arguably the best auto retail market.

Erin Kerrigan: 17:46

It's certainly the freest right, and so I think the US is very well positioned, because these OEMs need to be, these import OEMs need to be selling cars in the United States and need to retain their market share because of just the size, especially when they're losing all this market share in the other markets. So I think we're very well positioned. But I was a little shocked that most think that eventually Chinese cars will be on our roads because that will be fascinating to see. They have used franchises in other countries so it could be an opportunity for the franchise dealer network. So we'll see.

Jim Fitzpatrick: 18:32

And their technology. I mean they've come out with a five-minute charging five minutes for charging a battery. I mean they're working on a lot of very exciting things in China on their vehicles and so I agree it is going to be interesting to see when they do enter. I say when, but when they do enter the US market. I know a number of dealers I've spoken to said they got their application ready for when they make that announcement right.

Erin Kerrigan: 19:00

Yeah, I mean, obviously they have some pretty incredible products and my guess is, you know, at some point they will probably come into our market.

Jim Fitzpatrick: 19:09

That's right. That's right. Erin Kerrigan, Founder and Managing Director of Kerrigan Advisors, thank you so much for joining us on the show today. Very much appreciate it. We'll make a link right below the video that you're watching to get your copy of their quarterly report. So thank you so much for joining us on the show. As I said, very much appreciate it. I know our dealer audience gets a lot out of your visits with us, so thank you.

Erin Kerrigan: 19:32

Thank you, Jim.

Jim Fitzpatrick: 19:33

Thanks. Thanks for watching Driving Solutions exclusively on cbtnewscom.