Author – DSMA | Interviewee – Gracielle Sills
Key Factors Potential Buyers Must Know About When Buying a Dealership
For many entrepreneurs, the dream of owning a dealership represents the pinnacle of business achievement. The allure of partaking in the automotive industry, overseeing the sale of vehicles, and managing a bustling operation can be a tempting prospect. However, the process of acquiring a dealership is far more intricate than simply securing the capital to close the deal. It requires a strategic blend of financial planning, industry experience, a solid reputation, and alignment with the expectations of both financial institutions and Original Equipment Manufacturers (OEMs).
At DSMA, we guide prospective buyers through every step of the acquisition process, making it easier and more efficient. Our goal is to ensure that prospective buyers are fully prepared for the distinct dynamics involved. This article explores the key factors beyond the price tag when acquiring a dealership, helping those considering this venture position themselves for success.
1. Financial Preparation: Leaving Room for Flexibility
Securing the necessary funds is an important step in the acquisition process, however, it is crucial to know that the full financial commitment extends beyond the dealership’s sticker price. Buyers must be prepared for upfront costs such as a significant down payment for both the real estate and goodwill. A common starting point is a 20% down payment on the real estate and at least 50% for the goodwill—though these figures can fluctuate depending on the nature of the deal.
However, what is often overlooked is the financial flexibility needed to weather the inevitable ups and downs that come with operating a dealership. Financial institutions will dig deeper into a buyer’s financial situation, evaluating their savings, personal guarantees, and whether they can sustain the business in the event of a downturn. It’s not just about having the initial capital but about demonstrating the capacity to manage potential risks and unforeseen challenges.
Gaining a clear understanding of the entire investment helps ensure a smooth and successful transaction—which is why DSMA is here to provide support and guidance throughout each step, helping potential buyers navigate the process with confidence.
2. The Importance and Intricacies of Location
The location of the dealership is a crucial element—not only for customer accessibility but also for OEM approval. A potential buyer must consider whether they are willing to relocate to manage the dealership or if they are prepared to commit to operating in a region where they do not currently reside. This is a key consideration for many manufacturers, who prefer hands-on, owner-operators embedded within their local communities.
In some cases, manufacturers will require evidence of residence within the dealership’s operating area, as absentee ownership is typically not favored. As you consider potential dealerships, weigh the lifestyle implications: Are you prepared to move your family or invest significant time in a different region? While smaller towns may offer lower entry costs, the location must align with your personal and professional goals.
3. Reputation Matters—Both Personal and Business
A strong reputation—both personal and professional—plays a pivotal role in securing a dealership. Manufacturers conduct thorough background checks, including police, court, and social media records. These checks are typically more in-depth than many buyers expect. Even the best financial package cannot override a history of criminal behavior, such as a DUI charge, or negative personal references.
Your reputation within the automotive community also carries significant weight. Being referred by an existing dealership owner or having established relationships within the industry can bolster your candidacy. Similarly, the reputation of your previous business ventures can help or hinder your progress. If you’ve had success in another industry, that’s great, but without the relevant experience and industry-specific expertise—such as at least five years as a General Manager in a new car dealership—OEMs are unlikely to consider your application favorably.
4. OEM Relationships: Building Trust
A dealership acquisition is not only a financial transaction but a partnership with the OEM. For buyers with little experience in the automotive sector, it is essential to establish a relationship with the manufacturer early on. Manufacturers prefer to work with applicants who have a proven track record within the industry or with a hands-on operational approach.
At DSMA, we have had the privilege of helping clients strengthen these relationships. As shared by Gracielle Sills, an M&A associate for DSMA in Quebec, one notable example includes a candidate, who was guided through his acquisition of a GM dealership, and another example includes Manon Messier’s client, looking to acquire a Volkswagen dealership. For these clients, our role was to help them understand the expectations of the OEM, structure their application, and provide the necessary support to build credibility in the eyes of manufacturers. Notably, DSMA guided Manon’s client seamlessly throughout the entire process, developing a dealer point package, assisting with the submission of documents to Volkswagen, and thoroughly preparing him for the meeting with Volkswagen executives, which culminated in success.
5. The Role of Industry Experience
Experience in the automotive industry is vital, with a minimum of 10 years in the field and at least five years as a General Manager being the standard expectation for many OEMs. The industry is dynamic, with cycles of growth and decline, and the OEMs need to be assured that buyers have the skill set and resilience to navigate these fluctuations.
For many, this experience doesn’t just come from time spent selling cars. OEMs value proven leadership, operational expertise, and an understanding of the intricacies involved in managing a high-stakes, large-scale business. If you lack experience in running a dealership, partnering with a skilled General Manager who has an in-depth understanding of dealership operations can be a game-changer. This partnership can make a significant difference when presenting your case to an OEM.
6. Common Mistakes and Misconceptions
One of the most common mistakes buyers make is choosing a brand and location based on personal preferences without fully understanding the financial and operational implications. For instance, a buyer might be attracted to the idea of purchasing a Kia or Toyota dealership in Montreal, thinking it’s an ideal market. However, the reality of real estate costs and the current multiple for those brands might quickly render the deal much more expensive than expected.
Buyers often underestimate the additional costs involved—such as legal fees, environmental inspections, permit requirements, management systems, and ongoing operational expenses. These expenses can quickly add up, so it’s essential to plan for them early in the process—a service that DSMA provides to ensure potential buyers are fully prepared and avoid any unexpected costs.
7. Long-Term Considerations: The Reality of Ownership
Owning a dealership is more than just a business opportunity—it’s a long-term commitment. Success in the automotive industry requires commitment, adaptability, and the ability to navigate industry challenges such as recalls, fluctuating demand, or shifts in the automotive landscape (such as the rise of electric vehicles).
The decision to buy a dealership should not be based on superficial factors like prestige or the desire for financial success. It’s important to reflect on why you want to enter this field. Are you driven by passion for the industry, or are you simply pursuing a profitable venture? The automotive industry is full of ups and downs, and managing a dealership requires courage, perseverance, and a deep understanding of the business. Those who excel are often the ones who are able to weather difficult years and make the necessary investments even when the road gets tough.
Conclusion: Navigating the Dealership Acquisition Process
Acquiring a dealership is a prestigious goal, and while the financial requirements are significant, the real challenges lie in the preparation, the relationships built, and the ongoing effort to maintain a successful operation. DSMA is here to help buyers navigate this complex journey, ensuring that they are not only prepared for the acquisition but also poised for long-term success.
We work closely with clients to assess their qualifications, identify potential challenges, and provide the tools and connections needed to present a strong case to the OEM. Whether you are a first-time buyer or a seasoned entrepreneur, our expertise can guide you every step of the way.
Ultimately, owning a dealership is a rewarding endeavor, but it requires more than just money to succeed. It requires a combination of experience, reputation, financial stability, and a clear vision for the future. Fortunately, with the right preparation and guidance, you can turn your dream of dealership ownership into a successful reality.
