Although some in the automotive sector have concerns about the sustainability of the positive trends we’ve seen over the past two years, many still feel it’s the right time to look for growth opportunities.
For some this desire to expand is focused on organic growth, but many dealer groups are also looking to grow through acquisition.
In a sector that has traditionally been considered high risk, bank funding has generally not been easy to source and has typically been limited to lending against tangible/hard assets, such as stock and property – with lending against property often limited to a level of up to 65% loan-to-value.
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Perceived wisdom in the sector is that, since the recession, bank funding has become even more difficult to source. This, together with the current strength of goodwill payments for acquisitions – in what has arguably become a seller’s market, especially for the prestige brands – has caused scepticism among many dealers as to whether bank finance is really a viable funding solution for groups on the acquisition trail.
However, over the past few months we have found that bank appetite and terms for acquisition finance in the sector have both markedly improved.
Banks are now prepared to lend here not just against tangible/hard assets such as ‘bricks and mortar’ but also against ‘goodwill’ – with the so-called ‘cash flow loan’ or ‘debenture loan’.
This type of lending is by no means exclusive to the larger dealer groups – although it will require the lending bank to have real confidence in the borrower’s management team and usually a fairly extensive due diligence exercise on the dealership(s) to be acquired.
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By GlobalDataOther helpful factors in the increased levels of bank lending we have seen here include:
- Many dealers hold freehold property on the balance sheet of the group, which has usually benefited from recent rises in value;
- Banks may now have new funding structures (utilising stock or more complex solutions, such as trade finance) available which have enabled banks to lend more against the tangible/hard assets (of both the acquiring dealer group and the target dealer group) than may historically have been the case.
- Additional funding solutions to consider on the dealership acquisition trail include:
- Equity investor funding – as more investors (both overseas and UK) now see this as a promising sector in which to invest;
- ‘Vendor funding’ – where the seller of the dealership accepts deferred payment for part of the purchase price. Generally, this is more widely used and accepted than prior to the recession.
For those dealer groups which are now looking to grow by acquisition the time for obtaining bank (or other) finance may be right.
Mark Henry is a partner and head of the automotive group at Birketts
