Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Rolling Up Auto Dealerships
Transcript
- Lucas: If you've bought a car in the last five years, there's a decent chance the dealership you walked into is now owned by a public company or a private equity fund. The consolidation of car dealers is moving faster than almost any other roll-up I've seen. Luna: I was reading that Group 1 Automotive alone bought fifty dealerships in 2025. That's almost one a week. Lucas: Yeah, and they spent over three billion dollars on those deals. Group 1 is based in Houston, they own something like two hundred and fifty dealerships now. And they're not even the biggest — Lithia Motors is well over three hundred. Luna: That's wild. I remember when buying a car meant dealing with a local family, maybe a guy named 'Bob' who'd been selling Chevys for forty years. That world is shrinking fast. Lucas: It is. And look, this is a show about private equity roll-ups, so I want to get into the numbers. But first — these conversations take time to research, and they exist because of listeners who chip in a couple of dollars a month. If these episodes have helped you think differently about a deal or your own business, buy me a coffee dot com slash fexingo makes a real difference. No pressure, genuinely, but it's what keeps this show ad-free. Luna: It's a small thing that adds up. And we're grateful. Lucas: Okay — so back to the dealership roll-up. The core reason PE and public groups are buying dealers is the service business. New car margins are thin — often two to three percent. But the service bay? That's where the money is. Luna: Right. Parts and labor have much higher margins. And it's recurring — people need oil changes and brake pads whether the economy is booming or not. Lucas: Exactly. At public dealership groups, service and parts now account for over forty percent of gross profit, even though they're only about fifteen percent of revenue. That's a huge margin driver. And the key metric that analysts watch is 'average profit per vehicle sold' — at the big publics, it's now over three thousand dollars per car. Ten years ago, it was under a thousand. Luna: Three thousand per car? So if a dealer sells a hundred cars a month, that's three hundred thousand dollars in profit just from the sale — before service? Lucas: Correct. And that number has been rising because dealers have gotten better at financing, warranties, and add-ons. But also because consolidation gives them pricing power. When you own twenty dealerships in one region, you can set the market. Luna: Is there a risk that they squeeze too hard? I remember in 2023, when car prices corrected after the pandemic spike, some dealers got caught with expensive inventory. Lucas: That's the big cyclical risk. New car inventory is a depreciating asset. If you overpay for a dealership at the top of the cycle and then wholesale prices drop, you can lose millions. Lithia and AutoNation both took write-downs in late 2023. Luna: But they still kept buying. Lucas: They did. Because the long-term thesis is that the U.S. auto market is still incredibly fragmented. The top one hundred public groups control less than fifteen percent of the fifty thousand dealerships in the country. There's plenty of room to roll up. Luna: So who's left to buy? The 'Bob' dealerships, I guess. Lucas: Exactly. Independent dealers who are retiring and don't have a succession plan. Many of them are worth fifty to a hundred million dollars, but the founder is sixty-five and the kids don't want to run it. That's the perfect target for a roll-up. Luna: What about the PE firms that aren't public? Are they doing the same thing? Lucas: A lot of them. There's a firm called Berkshire Hathaway Automotive — yes, Warren Buffett's company — but that's actually one of the smaller players. The real private equity action is in firms like Kelso & Company and Leonard Green & Partners, which have been buying up regional chains. They're not buying one dealer at a time; they're buying platforms — a group of five or ten dealerships — and then tuck-in acquisitions. Luna: So it's a 'roll-up of roll-ups' almost. Lucas: Exactly. And the economics are compelling because you can use the dealership's own cash flow to pay down acquisition debt. A well-run dealership throws off a ton of cash. Luna: But there's a regulatory angle too. I know some states have franchise laws that protect dealers from being terminated by automakers. Does that help or hurt the roll-up? Lucas: It mostly helps. Those franchise laws make it hard for automakers like Tesla to sell direct, which protects the dealer value. But they also mean that when a public group buys a dealer, they inherit the franchise agreement. If they try to move the dealership or rebrand, they need manufacturer approval. It's a moat but also a constraint. Luna: Interesting. So you can't just consolidate and then switch everyone to selling Toyotas. Lucas: No, you're locked into the brands you buy. That's why Lithia has been buying Honda and Toyota dealers specifically — those have the highest service retention. The average Toyota owner stays with the dealer for service longer than most other brands. Luna: So the service bay is the real prize. And I guess the next frontier is body shops? Because that's even more fragmented. Lucas: You're exactly right. Body shops are even more fragmented than dealerships — there are about forty thousand independent collision repair shops in the U.S. The largest chain, Service King, has maybe three hundred locations. Private equity has been circling that for years. And now, some of the big dealer groups are buying body shops too, because it captures the customer after an accident. Luna: So it's the lifetime value of the car owner. Buy the car, service it, fix it after a crash. I see the logic. Lucas: Exactly. And then there's the used car side. CarMax and Carvana are the big public names, but private equity is buying up independent used car lots and consolidating them into regional chains. It's harder to pull off because used car inventory is less predictable, but the margins can be higher. Luna: What about the risk of electric vehicles? If EVs have fewer moving parts, they need less service. That could hurt the service bay thesis. Lucas: That's a genuine long-term risk. EVs have about twenty percent fewer service visits than internal combustion cars. No oil changes, fewer brake jobs. But the adoption curve is still slow — EVs are about eight percent of new car sales in the U.S. as of early 2026. And the dealer groups are adapting by offering EV charging and battery service. Luna: But if that curve steepens, the math changes. Lucas: It does. That's one reason the public groups trade at such low price to earnings ratios — maybe ten to twelve times earnings. The market is skeptical. But the roll-up story is strong enough that private equity is willing to pay fifteen to twenty times for a good independent dealer, because they think they can grow earnings through consolidation. Luna: So the public market is lukewarm, but PE is hot. That's a classic signal. Lucas: It is. And it means there's still a lot of deals to be done. I think we'll see at least two more big public dealership groups go private in the next three years. Luna: Do you have a favorite metric to watch in this space? Lucas: I watch 'same-store service revenue growth' and 'average profit per vehicle' — those two tell you whether the consolidation is actually creating value or just buying revenue. If service revenue is growing organically, the roll-up is working. Luna: And if it's not? Lucas: Then you're just buying a portfolio of shrinking assets. That's the risk. Luna: Alright. So next time I drive past a car dealership, I'll wonder if it's owned by a private equity firm. Lucas: Chances are, it will be. And that's not necessarily bad — the big groups invest in the facilities, they train the staff. But the local 'Bob' is definitely becoming a corporate logo. Luna: And maybe 'Bob' is sitting on a beach somewhere with a nice check. Lucas: That's the dream. For now, the roll-up continues.