A key plank to the recovery has been the surge in the automotive sector. Ian Gilbert, Managing Partner at law-firm Walker Morris, explains how private equity funding can help car dealers make the most of these buoyant market conditions.
The UK car industry is a leading light in the British economy right now, with consumer confidence escalating. Data from the Society of Motor Manufacturers and Traders (SMMT) revealed 403,136 cars were registered in September, the highest figure since March 2008. At the current level of growth the sector is set for a record year of 8.4 per cent expansion, and will produce two million cars a year by 2017, twice what was built in 2009.
This encouraging outlook is opening up opportunities for car dealers to ride the crest of an economic wave, with a number of dealerships looking to acquire new sites to help meet increased demand. But bank lending is still low. A Federation of Small Businesses (FSB) survey revealed that 42 per cent of business loans applied for in the last quarter were turned down – so raising finance for expansion remains a major challenge.
One way to overcome this obstacle is for dealership management to open up to the possibility of shared equity. Many are instinctively reluctant to go down this road as they equate it to relinquishing control, however, it has real benefits that should not be dismissed without careful consideration.
Apart from providing financial backing, angel investors can offer complimentary skills to assist dealers in diversifying services and enhancing market share. An experienced investor who has ‘been there, done that’ can also be helpful in formulating strategy and making key business decisions, and, crucially, instilling extra confidence in not just the management but also franchise partners and other funders.
As an example, I have worked with Mark Robinson, Managing Director of Vantage Motor Group, for the last ten years supporting his ambitious growth plans for the business. In 2007, Mark appointed Phil White, non-exec chair of Lookers amongst other positions, onto its board as Chairman, to work closely with him to provide external input into his ambitious but realistic vision for the business.
The partnership has been a fantastic success, and today the company is one of the fastest growing motor retailers in the UK. It is set to make 10 acquisitions this year alone, having already doubled turnover in 2013 to £150m and increased employee numbers to over 350 people.
Contrary to popular belief, minority equity stakes do not necessarily mean the ability of the owners to continue to operate their business without unnecessary controls is compromised. This is one of the classic perceived dilemmas for those who feature on Dragon’s Den, but can be avoided if at the outset it is thought through what is appropriate for the business and for the parties concerned. To facilitate this, it is therefore important to discuss essential issues with experienced advisers who can provide the necessary structuring and legal advice to ensure the interests of all the parties concerned are met.
Looking ahead, the signs for the industry look good and it is likely there will be further consolidation in the market. This ability to be a consolidator does not, however, need to be left entirely in the realm of the large corporates. Indeed, the smaller dealer groups have an advantage in being more agile, making them potentially more attractive partners to the manufacturers in acquiring other dealers.
Private equity could be the key for these smaller dealer groups, allowing them to achieve their real potential by helping them to enter new markets and make acquisitions, without giving up overall control. Plus, having a new person on the board can bring new contacts, knowledge and ideas. The pros of introducing a strategic private investor far outweigh the cons – and taking legal advice can help dealers devise a credible plan for growth.