What happens in the auto industry often finds its way into the farm equipment industry, and it’s no different with dealer consolidation. And while dealers have been merging and acquiring each other for years, recently there’s been a growing interest from private equity investors — both in the auto dealer world and our own.

On the auto side, dealers are saying they need to triple revenues in the next 5 years to offset shrinking margins and increasing competition that didn’t exist just a decade ago, according to a report in the Wall Street Journal. Tripling revenues is a challenge regardless of economic conditions, but considering annual auto sales have been stagnant at about 17 million for the last several years and aren’t expected to grow significantly any time soon, the challenge looks near impossible without some outside help. The paper reports that nearly 200 car dealerships changed hands in 2017, and a similar level of consolidation is expected this year.

Much like farm equipment manufacturers, auto makers can block a dealership sale. But according to WSJ, auto makers are warming up to transactions with private equity owners as the business has become more capital-intensive due to new technologies and offerings like subscription services. “They view this as a way to diversify their businesses,” Cliff Banks, founder of the Banks Report, which tracts the retail auto sector, told WSJ.

Farm equipment manufacturers appear to be open to the idea as well. Farm Equipment recently learned of one dealership group that is actively looking for investors for 35% of the dealership’s outstanding stock. In a memo to potential investors, the dealership outlines its revenue picture and market conditions. Investors who have a serious interest and can prove evidence of their capacity to invest, will be invited to on-site visits with the leadership team and interviews with the OEM’s dealer development specialists.

The interest in farm equipment dealerships from private equity firms is there. According to the 2018 Big Dealer Report, at least 8 dealerships are now owned by private equity firms. That list includes Atlantic Tractor (McCombie Group), Moody’s Equipment, Groupe JLD Lague (Champlain Financial Corp.), Booth Machinery (EverWatch Financial), Belkorp Ag, LandPro Equipment, Lakeland Equipment and Z&M Ag and Turf (Argonne Capital Group) and Agri-Service (The Terteling Co.). Other dealers are actively seeking private investors.

According to George Russell, who collaborates with Ag Equipment Intelligence on the Big Dealer Report, “If a dealer is looking to sell, they’ll need to be big enough to attract a private equity company. Most of the ones I’ve spoken with are looking for dealers with at least $100 million in annual revenues. Some may take a look at dealers with lower sales,” but this appears to be a starting point for them to even considering buying, he says.

It’s no secret that the major OEMs are pushing for their dealers to consolidate. As the capital required to acquire another dealership continues to grow, it’s getting harder for an individual dealer to take on that risk and to finance the deal. I wouldn’t be surprised if we continue to hear more stories about dealerships seeking out private equity in the near future to be able to grow and meet the demands of the OEM. 

Coming up in Farm Equipment’s September SOURCEBOOK issue, we’re going to dig deeper into industry consolidation trends looking at it from three different segments — dealers, farmers and manufacturers — because what one does ultimately impacts the others. Dealer consolidation isn’t taking place in a vacuum.

 

July 2018 Issue Contents