Considering succession planning or selling your dealership?

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M&A spotlight: Driving for change Future outlook for the Canadian auto dealership industry Performance of dealerships has shown strong improvement as the market has recovered to pre-recession level. Damian Peluso Partner, PwC Automotive Leader 2 Achieving M&A success in Canada s auto dealership industry There s a lot of positivity within the Canadian auto dealership industry, which should come as no surprise given record sales that were almost unimaginable a few short years ago. According to the Canadian Automobile Dealers Association (CADA), April new vehicle sales were up 5.7 percent to record an all-time best April in the history of the Canadian industry. That s not to say dealerships in Canada don t have their challenges. The need to meet increasingly stringent OEM standards and guidelines is having a major impact, especially on smaller dealerships in Canada. With a large number of owners at the age where retirement is starting to factor into their decision making, there s also the challenge of figuring out their succession plan or sales strategy. We believe these issues are poised to significantly change the dynamic of the auto dealership industry over the next few years. While distinct, the issues of capitalization and succession will likely drive increased M&A activity as owners look to sell. And, with over 3,200 automotive dealers in Canada, there is little doubt that industry consolidation offers significant opportunities for investors. Growing sophistication of OEM standards When it comes to the requirements for doing business, dealership costs keep getting higher. The capital costs to be in the business keep increasing, explains Damian Peluso, Partner, PwC Automotive Leader. As OEMs grow more sophisticated, brand and other standards become tougher. Every few years, an OEM comes to you and tells you they want to restyle the face of the building, or resurface the parking lot, or change the showroom, explains Allen Baker, a PwC Partner specializing in Private Company Services, who has worked with a number of Canadian dealerships. Such costs might not be a major issue for larger dealerships or dealership groups but for smaller ones, the need to make significant capital investments to address OEM demands on a regular basis can be challenging. That s why, as OEM guidelines and standards grow more complex and sophisticated, they will likely drive further M&A in the industry. For dealers that don t have access to the capital needed to meet changing standards, selling the business to an investor or dealership group with more capital may be the most viable option. Owners have to invest in complying with OEM brand standards, adds Eric Castonguay, Leader of PwC s Transportation and Logistics group. Or, when they sell, the new owner will need to commit to making the investments.

Managing succession For some dealerships, the need to make capital investments to address OEM requirements adds a second layer of complexity to an already challenging issue: succession planning. For owners who have built their dealership or dealership group up over twenty, thirty, or forty years, it can be difficult to think about succession. But without a plan in place, owners may not be able to achieve the outcome they desire. A lot of people [owners] aren t ready. They don t have the appropriate tax planning in place, whether from a corporate perspective or even a personal one, such as having a will, Peluso says. That s where most need to start. At the same time, any successor needs to be able to give the OEM confidence that the dealership will continue to be effective and will be able to operate within the standards and guidelines including making any required capital investments, if needed, once they take ownership. But when it comes to the OEM, there s no guarantee they will approve him or her, says Baker. OEMs have rejected succession plans from dealers because those new dealer principal candidates weren t appropriate. That s one of the reasons advance planning is so critical. It gives the owner time to build OEM confidence in the succession plan and for any successor to begin developing the appropriate relationships. In cases where members of the owner s family are not interested in taking ownership of the dealership, owners need to be far more proactive about sales opportunities. The challenge is that most dealerships are not ready for sale, which makes it harder for owners to get the price they believe their dealership is worth. The way a buyer will look at a company may be different than how they [the dealership] currently reports things, explains Castonguay. The reconciliation between what is reported and what the buyer wants to see is very important. For example, buyers will typically want to examine different revenue streams (e.g. new car sales, used car sales, body shop, service, financing and insurance). With blue sky multiples near all-time highs, dealers may be more open to considering a sale if the price is right. Private dealerships have been observed to sell for as much as 9.0X EBITDA based on brand and overall dealer performance. 2015 PricewaterhouseCoopers LLP 3

Taking advantage of M&A opportunities Looking to the future, there s little doubt that M&A activity will continue to rise in the auto dealership industry presenting opportunities for both buyers and sellers. Larger groups will continue to be the most active, Peluso believes. They will grow in size. Groups that currently have 10 to 15 dealerships might grow to 20 or 25. There will also likely be growth in the number of public companies involved in the ownership of auto dealerships. The increasing prevalence of larger dealer groups is being driven by industry dynamics, states Castonguay. Many of these larger groups use M&A as a tool to strengthen their businesses, achieving back-office synergies, OEM diversification and geographic diversification. In fact, we believe that some of the consolidation will likely be driven by public companies. While Auto Canada is the only public company owner of multiple brand dealerships in Canada at present, it has been very successful paving the way for others. There s a lot of room and appetite from institutional investors in replicating Auto Canada s success, explains Castonguay. Moving ahead Given increasing investor interest and a relatively stable market outlook, there s no time like the present to consider possible M&A transactions whether as a buyer or a seller. The key is making sure that any transaction is well positioned to help you achieve your desired outcomes. As a dealer, this means avoiding surprises by doing your due diligence to prepare your business for sale, understanding who your potential buyers are, having a management succession plan, and doing the appropriate work needed to give the OEM confidence in your plan. This means doing your proper due diligence to identify the most attractive targets that can help you achieve your desired return, and making sure you have a plan in place that will drive OEM confidence so that you can move forward with their full support. 4 Achieving M&A success in Canada s auto dealership industry

Adding value in the M&A process We appreciate that running your dealership is your top priority. Count on our professionals to keep your M&A process moving forward, with minimal disruption. Our professional services can help you successfully sell your dealership by realizing full blue sky multiples, minimizing money left on the table, and maximizing your after-tax proceeds. We will work with you to provide a tailored solution that fits your direct needs. Below is a description of the specific actions we will take in each of the three key phases of your M&A transaction. Phase 1 (4-6 weeks) Phase 2 (12-16 weeks) Phase 3 (8-12 weeks) Transaction Preparation Work together with the company s management to execute the agreed transaction strategy Identify revenue enhancement opportunities to potentially increase valuation: Perform preliminary screening & profiling of potential buyers; Assess expected value ranges for all parties involved Provide preliminary tax planning and advice Identify optimal transaction options Apply our extensive specialized experience in dealing with OEMs, in preparation for a sale, including: Draft letters of approval to OEMs (prior to the transaction) Negotiate long-term leases with tenants; Work with you to prepare the Company in anticipation of a transaction that include: Financial preparation Organizational structuring Transaction Execution Develop marketing materials and provide other services that require minimal involvement on your part, so you can continue running your dealership at full capacity: Prepare a no-names teaser to show to potential buyers (this will preserve your confidentiality) Contact qualified potential purchasers on your behalf Solicit expressions of interest in your business Gauge potential market interest from confidential discussions with potential buyers Coordinate the due diligence process Develop a competitive bidding process to maximize opportunities and create tension amongst potential buyers. This will be achieved through our extensive relationships with: OEM manufacturers Prospective buyers Global networks of car specialists; and Through our strong experience with divestitures of car dealerships Act as the intermediary between the company and potential purchasers during the due diligence process, and will control all communication to potential transacting parties. Structuring This will reduce your time commitment to the transaction and Closing will allow you to run your dealership as usual Manage additional internal and external resources including lawyers, accountants and consultants Collaborate with you to negotiate the sales purchase agreement to maximize the dealership s value and your after tax proceeds Work alongside management until the close of the transaction to ensure all of your needs are met and there is no money left on the table 2015 PricewaterhouseCoopers LLP 5

How we can help Our experience helping privately held business owners develop and implement effective exit strategies has shown us that every situation is unique the optimal solution for you may be quite different from that of other owners. But there is one golden rule: a successful outcome always depends on a carefully planned and executed exit strategy. We re ready to help you achieve deal success, from concept to close, and beyond. PricewaterhouseCoopers Corporate Finance Inc. ( PwCCF ), a PwC subsidiary, specializes in divestitures, financing, mergers and acquisitions. Our professionals bring specialized knowledge and extensive experience in the automotive retail industry, throughout Canada and globally. We welcome your call. Our experience with PwC Corporate Finance has been positive. Their team brought structure, integrity and proven M&A experience to our transaction. We were impressed with their sale process, which created a competitive environment and clearly added value. Their hands-on approach throughout this complex process, industry expertise, and commitment to service and professionalism, proved invaluable in successfully completing our transaction. Russ Saladin Rick Hetherington and Melanie Doell, Ownership Group St. James Group of Companies 6 Achieving M&A success in Canada s auto dealership industry

Deep auto retail industry expertise Select recent transactions Canbec BMW Auto Canada Inc. Toyota Dealership in the GTA Ontario Based Honda Dealership St. James Group of Companies (Volkswagen and Audi Auto Dealership) Auto Canada Inc. Honda des Sources Dilawri Group Subaru des Sources Dilawri Group Markham Acura Dilawri Group Ford Dealership in the Praries Capital Automotive Group New Pacific Nissan Ltd. Applewood Auto Group Buy-Side Due Diligence Debt Advisory Services Nissan St. Leonard Quebec based Automotive Dealership Group Acura Metropolitan Quebec based Automotive Dealership Group Confidential Buyer in GTA for acquisition of Automotive Dealership and Significant Property in GTA Confidential Company in GTA to raise capital to Build multiple automotive dealerships Buyer advised Company advised Buy-Side Due Diligence Valuation Advisor Valuation Advisor Valuation Advisor Confidential Buyer in GTA for acquisition of Two Automotive Dealerships in GTA Confidential Dealership valuation for purposes of evaluating strategic alternatives Confidential Dealership valuation for purposes of a share purchase agreement in connection with a shareholder dispute Confidential Honda Dealership valuation for purposes of strategy formulation Buyer advised Company advised Company advised Company advised 2015 PricewaterhouseCoopers LLP 7

www.pwc.com/ca/deals Contacts For more information, please contact your local Deals team Damiano Peluso Partner 416 814 5776 damiano.peluso@ca.pwc.com Eric Castonguay Partner 416 815 5094 eric.castonguay@ca.pwc.com Allen Baker Partner 416 228 4206 allen.g.baker@ca.pwc.com 2015 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 3301-04 0515