Driving Solutions with Jim Fitzpatrick, powered by CBT News

Erin Kerrigan Breaks Down Dealership Valuations and Consolidation

• CBT News • Season 1 • Episode 19

Share episode

Erin Kerrigan, founder and managing director of Kerrigan Advisors, joins Driving Solutions to analyze why dealership buy-sell activity is on pace for a record-setting year in 2025. Drawing on the firm’s latest data and blue sky insights, she explains how strong buyer cash reserves, easing interest rates, and surging demand for luxury and ultra-luxury brands are reshaping the transaction landscape.

Kerrigan discusses regional consolidation trends, rising valuations, and why operator performance now plays a greater role in dealership profitability. She also outlines how tariff absorption by manufacturers, evolving EV policies, and AI adoption are influencing buyer strategy and long-term growth. As dealers focus on regional dominance and revenue expansion, Kerrigan offers a clear view of what to expect as the industry moves toward 2026.

Key discussion points:

  • Why 2025 is shaping up to be a record year for dealership transactions
  • Regional consolidation trends and the rise of tuck-in acquisitions
  • Valuation growth, brand performance, and operator-driven profitability
  • Luxury and ultra-luxury demand, including Ferrari, Lamborghini, and Rolls-Royce
  • How tariffs, EV policy shifts, and AI adoption impact dealer strategy

Driving Solutions is the go-to podcast for dealership professionals who want to stay sharp, informed, and ahead of the curve. Hosted by Jim Fitzpatrick and powered by CBT News, each episode brings you real strategies, smart tools, and expert insights to help you run a more profitable operation.

Subscribe on your favorite podcast platform and visit CBTNews.com for more.

Announcer:

This is Driving Solutions exclusively on CBTnews.com.

Jim Fitzpatrick:

Hey everyone, Jim Fitzpatrick. Welcome into another edition of Driving Solutions right here at cbtnews.com. As the year winds down, dealers are evaluating their strategies, eyeing market opportunities, and preparing for what 2026 may bring to help us uh look back and also look ahead. Erin Kerrigan, founder and managing director of Kerrigan Advisors. You've seen her here before many times on CBT News to share her insights into the market. So thank you so much for joining us.

Erin Kerrigan:

Thank you, Jim, for having me and happy holidays.

Jim Fitzpatrick:

Happy holidays to you as well. And how let's talk, let's talk shop now. How do you-

Erin Kerrigan:

Okay! Let's do it.

Jim Fitzpatrick:

This is why we brought you in.

Erin Kerrigan:

So I know, I love it.

Jim Fitzpatrick:

How do you think the buy-sell market will finish in 2025?

Erin Kerrigan:

You know, I think based on the closings we have had recently and what we are expecting for the rest of the year, I think it's gonna be a record year for transactions and closings. And actually, we're pleased to announce that our firm just hit a new record. We uh surpassed $10 billion of client proceeds from the sale of their dealerships in the last 11 years, yes. So leading the industry, which is such an honor. We certainly have very impressive competitors, so it is um very exciting. Uh since 2014 when we founded the firm, we have now raised over $10 billion, which is fantastic.

Jim Fitzpatrick:

Congratulations.

Erin Kerrigan:

It's thank you. Thank you. Very proud of our team. It's it's certainly not not just me. Yeah, no, I know.

Jim Fitzpatrick:

Now I who's civilians now. I know who to go to for a loan. So that's great. I appreciate I appreciate sharing that with us. No, that's really that really is quite a milestone. And congratulations to you and the entire team and Ryan on all of that. That's something to be proud of, that's for sure.

Erin Kerrigan:

So thank you.

Jim Fitzpatrick:

Would you say you owe it all to CBT News because you've been on or just like a-

Erin Kerrigan:

Definitely CBT News. You know, as soon as I came on CBT News, it just whoo skyrocketed.

Jim Fitzpatrick:

That's right. We're running at a billion and all of a sudden it went to 10 billion. No, it's that's we appreciate that.

Erin Kerrigan:

So I mean, yeah, lots of things had to go right. You know, it's it we we work really, really hard on behalf of our clients.

Jim Fitzpatrick:

I think I've got too much holiday cheer in my cup this morning. So what are your expectations for 2026? I mean, you you guys keep setting the mark, and then it's like, oh, we gotta we gotta go over that now, you know.

Erin Kerrigan:

Yes. Um I I you know, I really think 26 is gonna be another record year, which is is crazy to say. But as I look at our pipeline, I look at our discussions, I look at the buyers. I mean, if you look at the publics, for instance, you know, they've raised a billion dollars in cash in just 12 months. So they're and they're just the those are just the publics, which of course we know their data. The largest privates are equally flush with cash, and you have interest rates going down. So that means financing acquisitions is even more attractive. The the hurdle rate to make an acquisition uh goes down, meaning that your return, that that your cost of capital goes down, so you can justify frankly higher values, and which is what I'm in the business of of doing, right? Justifying higher values. Um, and so I I just think you're gonna have a really active market. My expectation is the SAAR improves is not gonna probably skyrocket, but I I do think it'll improve next year. And so I think it's an exciting, exciting year next year. Um one little insight. So when we we just released our Blue Sky report and we um we actually in this one, we surveyed OEMs in the process. So when we send out the report, we we we um also have a survey there for any OEM executive that receives it. Okay, and the early indications are that the OEMs, now these aren't dealers, these are the OEMs think that 70% of the tariff expense, which many are worried about, 70% will be incurred by the OEM. The dealer is like 10%. Really? The OEMs themselves are saying this is on us. Wow. I think that data, when it's finally tabulated, and again, we don't have the final numbers, but that was the early results. It just the dealer's in such a strong position that I do think we're gonna see a really robust 2026.

Jim Fitzpatrick:

Yeah, that's gotta be music to Trump's ears when he hears something like that. That uh, you know what I mean? That uh that the OEMs are gonna absorb that. That's something.

Erin Kerrigan:

Well, effectively they're gonna have, I mean, look, their margins really skyrocketed during during the pandemic years. Yeah. Um, so they you know, ours have come back down, the dealer side. Yeah. The OEMs, you know, they're gonna have to come down, they're gonna have to be more efficient, they're gonna have to do all the things you have to do when it's right tougher times, and they're moving production onshore, which is great for the US and that's right.

Jim Fitzpatrick:

So that's right. Yeah, where where do you see the most consolidation?

Erin Kerrigan:

Gosh, the South has been on fire. Uh so far through the third quarter, 56% of all buy sales were in the southern part of the U.S.

Jim Fitzpatrick:

Wow.

Erin Kerrigan:

Which is crazy. And um, we just closed on a big transaction. We think it's the second largest of the year in terms of franchise count. We sold 15 franchises in uh in Louisiana, the All-Star Automotive Group, to Hudson Automotive Group.

Jim Fitzpatrick:

Yeah.

Erin Kerrigan:

And just tremendous demand for anything in the southern US, especially the fastest growing markets, you know, the the Texas, the Florida, yeah, that whole southern smile belt, not as much so that part in particular is just really where buyers want to be. They want to be in in fast growing, unregulated, not as regulated states. And yeah, so um that's definitely one of the areas we're seeing the most consolidation. But the other thing that's interesting is we analyzed the transactions this year, and 65% uh were acquired by dealers who were already in the market. So that concept of tucking and growing your market share is a very big part of the consolidation. We're seeing real focus on local consolidation, not as much people saying, Oh, you know, in the pandemic, people are like, I'll go anywhere. And we're like, any? They're like, Yeah, anywhere to buy a store.

Jim Fitzpatrick:

Yeah.

Erin Kerrigan:

That's happening as much. We're seeing much more saying, I need to own my market. I want to have as much market share as possible where I exist. So I do think that trend will continue in 26.

Jim Fitzpatrick:

Sure, sure, sure. Um, I a friend of mine that is in the Northeast is a dealer, just bought a store in California and uh in Northern California, BMW store, and it's kind of like, what do you what are you thinking there? You know, what what's the deal there? The the market is just unbelievable. It's on fire. A lot of people are, you know, when you think about California, it's like, I don't know if I want to do business in California, but it's this still the number one state for auto sales and registrations, right? I mean...

Erin Kerrigan:

It's it's it's it's a huge state. I I mean when we sold the Keys Automotive Group to Lithia, I remember talking to the Lithia executive team, and they were like, you know, people are giving us a hard time. Why are you buying so much in California? And they're like, California, I think the stat at the time was 80% of the California is about the same size as the whole Canadian market. Yeah, a huge market. Wow. And and you know, it is it is a car culture, yeah and those stores are tend to be high volume. So that's right. So um, yeah, we we and especially since the car mandate got revoked. Yes, now that that you know, that guillotine that was ahead of us of like how are you gonna sell all these um EVs? I know they sell a lot of EVs, but still the the percentage that was gonna be required was still not where the California market was.

Jim Fitzpatrick:

No, no, not at all.

Erin Kerrigan:

Now that that that's gone, there's more demand in California for California dealerships, no, no doubt. So um, you know, your friends purchase in California is is not the norm, though. I will say folks are doing that, but more more so we're seeing we're seeing buyers really focus on building out platforms, even you know, groups as large as Penske will say we won't go to just a place we don't have any stores unless you have someone like Asbury who's saying, Okay, I'm gonna go to Boston by buying Herb Chambers, or Asbury in the case of buying Coons, our client, we're gonna go to the to the the Washington, DC market by buying one of the largest groups in that market.

Jim Fitzpatrick:

Right, right. Yeah.

Erin Kerrigan:

So I and I think that makes sense because if you think about it, if you want to be the future Coons or the future Herb Chambers, because someday, someday most organizations sell in one yeah, yeah, exactly.

Jim Fitzpatrick:

They get to a point and it's yeah, third generation, fourth generation, whatever it might be, right?

Erin Kerrigan:

And so you you want to build value, and that's where we see the most value is when you really have regional dominance. So that that that value that trend is alive and wealth.

Jim Fitzpatrick:

Okay, okay. So now for the 64,000, or because it's dealers, I should say 64 million dollar question. How are valuations looking? What talk to us about that?

Erin Kerrigan:

So valuations, now this is for the broad, this is an average. Okay. Valuations on average have have ticked up from uh earlier in the year. Okay. And they troughed in 24, so they're up. They're still down from the 22 peak. Yeah. Makes sense, of course. Yeah, but they're up, you know, they're up about 76% from before the pandemic. So numbers are good, really good.

Jim Fitzpatrick:

They're up 76% than than 2019.

Erin Kerrigan:

Yes, yes. And this is average. Yeah. And even on an inflation adjusted basis, because remember, we we were running at pretty high inflation, they're still up nicely. Now there is a huge- much greater divergence, though. I mean, we're talking big divergence where you have some franchises like Lexus and Toyota, they're hitting all time records. So they're surpassing 22's numbers.

Jim Fitzpatrick:

Yeah, wow.

Erin Kerrigan:

They're they're trading at numbers that you know they're at their highest level ever. And then you have folks like Nissan Infinity that are below 19. Right. So the the variance in that average is is quite wide. And and I think that, and even on an operator level, like we'll see domestic stores, for instance, that are doing 7% net to sales, and then we'll see some that are breaking even. And so I think because the market's getting more competitive, the the talent of the operator is definitely having a bigger impact on earnings than it than it certainly did when everything was just, you know, coming up roses. Yeah.

Jim Fitzpatrick:

Yeah, interesting. Uh-huh.

Erin Kerrigan:

Yeah. So that that's that's been pretty interesting as well. And then I guess the other thing I'll say is that luxury in many cases, the top luxury, are also hitting record valuations. We just sold, for instance, um four JLR stores on behalf of U.S. Auto Trust to Sonic Automotive, making them the largest JLR dealer in the in the country. Okay. And those valuations were extremely high. So I I I even with the whole JLR um um cyber attack, they're they're still doing fabulously. The margins are incredible.

Jim Fitzpatrick:

Wow, that isn't that something. And and the the the the buyers are out there wanting to buy these dealerships, even though these are very, very, very, very strong numbers still.

Erin Kerrigan:

They are, and I think in the case of luxury, and frankly, Lexus and Toyota, of course, also um, it's just the business model is a little more attractive, right? There are fewer points. Yeah. So there's higher UIO count per point, and so there's higher fixed operations. Fixed operations is inherently a recurring revenue business. It's just a more attractive, steady business. And so it's just a better business model. And then of course you have new, you have great margins on new, you have use. It it it all just works because again, when you have fewer points, you have less direct competition also. So you have higher margins typically. So I think that yeah, they're there, even with the big numbers, the the longtime players. I mean, to give you a sense, um, I think it was around 60%, if I remember exactly from my report, of the public's purchases in in 2025 were luxury.

Jim Fitzpatrick:

Really?

Erin Kerrigan:

Yeah, so they are they are leaning heavy into luxury.

Jim Fitzpatrick:

Yeah, wow.

Erin Kerrigan:

Yeah.

Jim Fitzpatrick:

And and what is driving dealers to buy? Is it just the the prospect of a much brighter, profitable future? And combined with the fact that dealers are sitting on a lot of cash, so they're you know, they buy what they know.

Erin Kerrigan:

Yeah, I think that is exactly right. I think there's a push to to be the consolidator. So, you know, if you look at the top 150, they represent a third of industry revenue. Yeah, so they don't have they don't represent a third of the rooftops, but they represent a third of the revenue, yeah, much smaller percentage of the rooftops. Sure. And so they're looking at driving revenue per rooftop to a higher, higher level. And they're also looking at growing that just total sales. So there's 150 dealers who represent a third of the industry at the current rate of growth of their consolidation, in 15 years, they'll be half.

Jim Fitzpatrick:

Wow.

Erin Kerrigan:

Which is a pretty meaningful change, right? Because then you represent the then you're tipping into the majority of revenue.

Jim Fitzpatrick:

Yeah.

Erin Kerrigan:

I see dealers that are growing in growth mode saying, I want to be, I want to be in in that 150 group. I want to be one of the largest in my market, in my region, because that's because that's gonna be really important, especially when AI becomes a bigger part of all of this. And I do think AI is a is gonna have a very meaningful impact on scaling and consolidation. Certainly your industry, my industry, yep, it's everywhere. I mean, I think the CEO of Walmart said, um, you know, there may be a job that is not gonna be impacted by by AI, but I haven't found it. And I think that's a really good quote because it does speak to we're all gonna be heavily influenced. And I do think it will change retailing. Uh now, does does it mean that I think the dealer's gonna be more important than ever, but I do think it's gonna be another one of those revolutionizing experiences for dealers to have to go through. And some will decide, you know, no, thank you. I I I'm not gonna I did the internet. I got and and I've made enough money and I can exit and take care of my family, and I don't have a clear secession plan, or I don't have the next gen who's who's ready to take on the world and transform my whole business with you know AI bots. I talked to a dealer recently, this was so funny, and they said, Oh, I my team is creating an AI bot of me so that on the sales floor, when uh when a customer asks a question, they can say, Well, I don't know what the what the answer is, but let's ask you know the dealer in form of AI bot to answer the question on this tablet. So, I mean that there's so much going on in the unbelievable thing. Yeah, my team's trying to create an AI bot of me, but I won't let them do it.

Jim Fitzpatrick:

Well, you've you've been watching an AI bot of Jim Fitzpatrick. So he's actually Jim's on vacation. This really isn't Jim. So, but one day that's gonna be the case, right?

Erin Kerrigan:

I mean, I know. I mean it makes me a little nervous.

Jim Fitzpatrick:

You know, it's funny is it's a year or two ago when I would ask a dealer, you know, will AI uh reduce headcount and replace people, you know, uh uh in the dealership, and I always go, no, no, I don't see it working like that. I see it more as a tool that my people use. Well, that song has kind of changed. You know, you ask that question now and they go, oh yeah, it's gonna reduce headcount, you know. And I and again, don't send me any emails on that. But it the reality is it's just going to reduce headcount. There's no question about it. Which, as you know, that you know, that that's our greatest expense, right? And uh in the industry. So if you can reduce headcount, you know, in today's headcount, you're talking almost $100,000 a clip, you know, for that for that average associate out there, you know, no matter what they're doing these days in the dealership. That's right. That's incredible.

Erin Kerrigan:

No, and you know, actually, again, a little sneak peek into our OEM survey. So we haven't um the the one of the questions we asked is of these OEM executives, what what do you think will be the impact of AI on the dealership business model? Will it be more profitable, same, or less profitable? And the majority said more profitable.

Jim Fitzpatrick:

More profitable. Yeah.

Erin Kerrigan:

So again, I think for you asked, you know, what's driving the buyers. I mean, I think that the those that are ready for this change and are excited, they're seeing like, whoa, I can I can do more sales through one rooftop. I can employ AI, so I don't need necessarily as much personnel. You know, AI bots don't, you know, take vacation, they don't, uh, they don't turn over, they don't, you know, they're just there. So it is uh it's a super exciting time. It's a different time, but it's super exciting, and I think it's gonna supercharge consolidation even more so than we've seen um it got supercharged by the pandemic earnings.

Jim Fitzpatrick:

That's right, that's right. And I was in the industry um as maybe you were uh back in uh 95 when when the internet just started really playing a bigger role um at the very beginning, and dealerships were getting websites and what have you, and some deals are like, uh, that's just a who's gonna buy a car online, who's gonna do anything online, you know, and that's obviously transformed the auto industry as we know it today. And I think uh, you know, AI is is right there. Some say it's bigger than the internet, you know, in terms of its impact, but uh it really it really is something. No question.

Erin Kerrigan:

So, Jim, Jim, I graduated from college in 1995, so I was not in the car business.

Jim Fitzpatrick:

Okay. So thanks so much. Yeah, thanks for sharing. I happen to be operating I was operating a store in '95. This tie I bought 95. But uh so that wraps up our time here with Erin. No, I'm kidding. So one last one last question, and that is Miss 1995. What what other trends are you seeing in out there? I mean, what what what are you following? What are you seeing?

Erin Kerrigan:

You know, one of the interesting, unforeseen trends of of this year was the number of ultra-luxury stores and exotics that's sold. Yeah, it's tracking, I think by the end of the year, we'll be between 15 and 20, which remember, there are not very many of these Ferrari and Lamborghini points out there.

Jim Fitzpatrick:

And usually they don't nobody wants to give them up because they're hard to get.

Erin Kerrigan:

Exactly. And so l to give you a sense in 24 or six sold. Wow this year we're tracking to between 15 and 20. So a huge increase. Yeah, huge interest. Uh big, big numbers. I think that's indicative of just the overall economy. If you look at the ultra wealthy, yeah, they're wealthier than ever. Right, right, right. The top 10% of earners represent 87% of the of the stock market investors. So and that number, as we all know, the stock market's gone crazy. So um, if you look at things like the you know home. In the top 10 most expensive markets that are valued at over $10 million, their sales have skyrocketed, whereas the overall real residential real estate markets have declined in terms of volume. So all of these things, these ultra luxury folks that are, you know, pr pretty price inelastic. Like they're not shopping price. They just want what they want. When they want that Ferrari, they're going to buy that Ferrari. That's right. Um, and so we are definitely seeing, or Lamborghini or Rolls-Royce, we're definitely seeing more interest in that side of the market, which frankly was we have sold Rolls-Royce and Lamborghini franchises, but um not a place that you saw a lot of activity in. And I I think it's it's really reflective of our economy that we that that segment is is still very flush.

Jim Fitzpatrick:

Yeah, I saw uh uh and again, um don't hold me to this, but I saw an article uh recently that said maybe it was on CBT, um, that said in 20 in 2022 Bentley sold just under 2,000 cars. And this year they're gonna sell 3,500 cars um nationwide. So, you know, and obviously that's like in that rolls category, but uh but boy, I I agree with you. The rich are getting richer, and the numbers, I think there's a billionaire created now every week or something like that, some crazy number. But uh, I mean it's it's it's just weird. It's it's unbelievable, really.

Erin Kerrigan:

Well, and and to that point, you know, I we all think Toyota is one of the smartest companies in our industry, and or maybe the smartest, and they are entering in this market, which I think is indicative of how strong it is, right? They're coming out with the century model, yeah. Which is is in that ultra-luxury Rolls-Royce segment. They have it in Japan, they don't have it in the U.S. And I again I I don't think that company, Toyota that is, does things without without thinking through through their strategy, and they're very effective in what they do. So another indication that that ultra-luxury segment of our industry, I think will be probably a pretty hot place to play in the buy-sell market in 2026.

Jim Fitzpatrick:

Yeah, we always appreciate you coming in with such great news, which this is really good news for the for the market, that's for sure. Whether you're whether you're buying dealerships or selling dealerships or just running stores right now, it is a good time to be a dealer, right?

Erin Kerrigan:

It is.

Jim Fitzpatrick:

Yeah, no question about it. Erin Kerrigan, the founder and managing director of Kerrigan Advisors, topping $10 billion out there in sales. So you know these these people are these people are doing it, they're doing it right. So thank you so much.

Erin Kerrigan:

Thank you.

Jim Fitzpatrick:

Thanks.

Announcer:

Thanks for watching Driving Solutions, exclusively on cbtnews.com.