Acquisitions Anonymous - #1 for business buying, selling and operating - Is a Harley-Davidson Dealership a Good Investment?

Episode Date: November 15, 2024

In this episode of Acquisitions Anonymous, hosts Heather Endresen, Bill D'Alessandro, Michael Girdley, Mills Snell, and special guest Chelsea Wood from Acquisition Lab take on a unique deal—a Harley-Davidson dealership listed at $8.6 million with $2.1 million in EBITDA. This episode is sponsored by Connor Groce – your go-to franchise consultant, helping prospective owners choose the right franchise and avoid common pitfalls. Connect with Connor’s team or attend his Gateway to Franchise Ownership workshop by visiting the link in the show notes. Visit https://www.connorgroce.com/ for more information.They dig into the complexities of owning a franchise dealership, Harley-Davidson’s brand challenges with shifting demographics, and whether this iconic brand can attract younger generations or if it’s a risky buy in a declining market.Key Highlights:- Generational Shift & Brand Image: The team explores Harley’s struggle to maintain its appeal as younger generations show less interest in motorcycles, affecting dealership sales and longevity.- Franchise Dealership Model: Michael explains the razor-and-blade model of franchise dealerships, where profits come more from service, parts, and financing rather than new bike sales.- Buyer Beware: Chelsea warns about the risks for inexperienced buyers, emphasizing the importance of thorough due diligence and questioning why existing franchise owners haven’t picked up this dealership.- Industry Dynamics: Bill highlights market shifts in power sports and discusses whether Harley-Davidson’s brand has long-term durability or is facing a “falling knife” situation as sales decline.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

What I've learned is those other lenders, they really like experienced buyers. The Harley kind of Polaris, kind of more power sports, I see these as a little bit more problematic for a handful of reasons. So these boomers grew up thinking Harley Davidson's were cool. And our generation and the younger generation is like people are not interested in that stuff. Honestly, it's like a persona, right? When somebody drives a Harley, it's like a lifestyle. It's a part of their identity. First of all, why doesn't the franchisee who already knows how to run a Harley dealership? and has economies of scale. Buy this one.

This is an Acquisition Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100% here. Welcome to another episode of Acquisitions Anonymous. I'm Heather Anderson, one of your co-host. Today, we've got Bill, Mills, Michael, myself, and Chelsea Wood of Acquisition Lab. So we looked at a really interesting deal, a Harley Davidson dealership. Lots to talk about the brand Harley Davidson, what it's like to be in a franchise system.

some unique elements to the financing of a dealership. Really, really interesting episode. Stay tuned and let us know what you think. Hey, everybody. If you've listened to the show, you've probably heard us talk about franchises. While franchises can be a great path to business ownership for the right person, like there's a lot of pitfalls. And it's important to be really careful,

as there are certainly good franchises to be in and bad franchises that you don't want to be in. Connor Gross is a friend of the pod and a resident expert on franchises. And Connor not only owns and operates his portfolio of multiple franchises, but he's also a franchise consultant and helps others work through while picking the right franchise for them. So as he's sponsoring today's episode, everyone should totally click in the show notes below

to join Conner's newsletter and attend one of his Gateway to Franchise Ownership workshops. If you're ready to move and move quickly, schedule a call with Connor and his team today. That's why I've finished fourth and host of the year awards 400 episodes running. All right, I'll shut up now. No, Michael, you got to lead us in.

You brought this to you. Oh, okay. This is your baby. You take it. Look, look, everybody thinks this is about bringing educational deals. It's about entertaining people. And nothing's going to be more entertaining than a Harley Davidson dealership. Because there are some crazy things happening in the Harley Davidson world.

Have you guys been familiar with this? That's a good thing. I can't. I don't even think about that. I can't wait for you guys to tell me. I have no idea. Oh, well, here's the big problem. Baby boomers are dying and they can't ride motorcycles anymore.

It's a big problem. But we'll get to that. Okay. So this is from Helen Guo's website. And she's friend of the pod. So she has listed here Harley Davidson dealership. We don't know when it was established or where it's located so far, but we'll figure that out. Maybe.

They're asking $8.6 million for it on $23 million worth of revenue. It cash flows slash EBITAs $2.1 million. And it is represented by a broker. And here's Helen's summary of about it. And it says, if you have any interest in motorcycles, you know that a deal to buy a business like this doesn't come along every day. This Harley Davidson dealership is a dominant player in its market territory, selling approximately 800 new and used motorcycles each year, along with associated parts, accessories, and apparel. They boast an iconic brand name, a loyal customer

base, a large and attractive facility well equipped with all necessary fixtures and equipment, and a comprehensive service department. Being a franchisee, they also come with significant support from the corporate entity. At the same time, franchises are a different animal as they come with less freedom and flexibility than a standalone company. I'd need to immediately understand the details of the franchise agreement here, but including sharing of revenues and costs, any requirements restrictions on the franchisee, yada, yada, yada, and get a handle on the revenue split between different sales and services, their inventory costs and stuff. But yeah, so she's got some more things she thinks about here. But she says, in closing with their iconic brand name, significant

cash flow and substantial FF&E and inventory, this business could be really interesting as an opportunity for the right buyer. So it's a Harley Davidson dealership. All right. So the other, the other element of this is that Harley's been in the news lately. because they like they had taken a DEI approach, diversity, equity, inclusion. And then- At Harley-Davidson? Yes. They had a huge backlash and they came out and they were like, all right, we're not

doing that anymore. In August, it was like, I feel like the most, you know, tone-deaf, like ignoring your customer, your core customer persona, but they came out and they were like, we're not doing that anymore. Okay. And I think their stock price is now up. since then, but it was a big hurrah back in August when they said, look, we're not doing any.

That's like Dr. Supply had the same thing. They were doing DDI and they had to walk it back. It was like, have you ever met your customers? Like, what are you doing? They're like, we can't sponsor parades anymore. Okay. All right. All right.

So let's step back just a little bit. So I don't know that everybody that's listening understands why franchise dealerships are potentially a good business. So does anybody want to talk about service versus new car sales or service versus new item sales, that kind of thing? Or should I go ahead and get a lecture? Bill. Do it. It seems like a beautiful bill. Okay. So basically if you go to like your local Ford or Mazda dealer or whatever, that's the kind of franchise dealers everybody's familiar with, they tend not to make their money off of the selling you of new cars. The margins are actually very low on some of those things. And sometimes they don't even make any money at all on those cars.

but it is a razor and razor blade type scenario where what they're really doing is selling you a car. So in the future, you will be coming back and buying service and parts and all of the crap that comes with it. And that doesn't mean they're not making money on the insurance and the financing and all that kind of stuff. But in reality, like the core business itself of selling you the new car, there's typically not very good margins on that. The real margins come when they get you in the service center and that car that they just sold you breaks and you have to go pay $3,000, $4,000 or $5,000 to get it fixed or have a car that just doesn't work. Same thing happens with motorcycles, which is why Helen here pointed out, hey, like, what's the split between new bike sales and maintenance and service?

Because those are two radically different businesses, though you want to be at both of those. But anyway, I just want to start with that as like if you're going to get into a franchise dealership business, that's how it works. And the financing is good business too. That's 100% margin business or originating finance car loans or motorcycle loans in that case. Yeah, like our most here in San Antonio are our most richest billionaire. car guys and for a while like america was just filled with with billionaire uh franchise car dealers right who had owned three or four four dealerships and and toyota dealerships and used that to buy NFL teams and stuff like the before they did that they made their real money by getting into

the financing for individuals selling insurance selling all those kind of recovery plans but then the other thing they would start to do is called planning right do you guys know what planning is no Okay. So, okay. So planning, planning is basically the idea when the dealership receives the cars, basically a third party will finance the purchase of those cars and loan them the money on those cars on the lot until they're sold. And the dealership just pays interest on those things while the manufacturer gets the money. So planning is just another finance vehicle that sells directly into your point, bill. But this time it lends to the dealerships based on what they have on the lots. I call it flooring,

flooring lines. And actually, that is the first thing that I get worried about when I see any kind of motorsports dealership like this. There are other boats as well, anything where there might be what we call flooring or floor plan financing. So I guess there's the crossover to your planning word. For a buyer to come along, they've got to get the financing for the acquisition of the business,

usually a term loan, either an SBA or something else. and they've got to qualify for a separate usually creditor to do the floor plan line of credit. What I've learned is those other lenders, they really like experienced buyers. They do not like a buyer coming from the outside and managing this inventory that's on their line of credit. They're far more picky about that than maybe like an SBA lender would be. SBA lender might naively think you could, yeah, you're fine. you don't have experience, but you'll figure it out. The floor plan lender probably won't feel that way.

So I've actually helped a few buyers kind of figure out that the deal was not for them by saying, hey, go try to get the floor plan creditor first and realize pretty quickly they couldn't do it. So they couldn't close. The question I have on one like this, so I think there are some dealers that are super exclusive, like Terminex or Caterpillar or John Deere. and they change hands maybe once every like 100 years. Like the family that controls them is always going to control them, barring some, you know, massive upheaval.

Then I think you kind of move down the spectrum and like Ford, Chevy, you know, Toyota dealers. And those have been consolidated a lot. And there's been a lot of kind of now multi asset owners in that category. I think in this space, in the Harley, kind of Polaris, you know, kind of more power sports. I see these as a little bit more problematic for a handful of reasons. I think they're more discretionary, you know, than a guy buying a tractor who has to buy a tractor.

You may have to do it next year. You may have to do it, you know, this year, but it's not just a total discretionary purchase like this. So I don't love that aspect of where they sit in the value chain. The other issue I have is that you are really marrying your, self to the parent brand. Michael's Googling, furiously. Harley, though, as a, as a, just not a brand specifically, but I think motorcycles in

general, like I googled some stats, Harley in 2014 sold like 340,000 motorcycles, 345,000. In 2020, they had sold half that. So in six years, they're just system-wide sales have been cut in half. that's not a reflection of hey i'm doing a poor job running my individual dealer location it's just a sign of maybe secular decline people aren't as interested in this category and it may swing back but you're is it a falling knife that's kind of my dilemma with this is is is it a falling knife uh well i watched a youtube video on harley davinson which makes me an expert

and the big problem is the big problem is i pulled up this picture because i typed in the phrase dentists writing Harley Davidson's right which was the generation before us the reason I pulled is up the generation before us these baby boomers well that's just you and me Heather the rest of these children they don't understand but the generation before us the baby boomers like they grew up watching like what was the name of the movie with Easy Rider right like that was cool to though that was a teenage movie to those guys and just like fast times at Ridgemont High is a teenage movie to us that you know hey you want to want to own because of that movie I want to own a Lambo I don't want to own Harley Davidson. And so these boomers grew up thinking Harley Davidson's were cool. It was a way to

show you were tough. You could spend your money and get out there and be hard and wear leather. And our generation and the younger generation is like people are not interested in that stuff. Like there's there's a big problem in terms of the baby boomer generation is huge. And the younger people like who can actually are starting to afford Harley Davidson's like Bill or what what level of desirability is a Harley Davidson for you in terms of the things you would own. Pretty low. There's a lot of things I'd buy before Harley. Yeah. And what, and what planet are you going to spend $40,000 for a chromed out poorly running super loud Harley that breaks all the time? I mean, motorcycle in general, like, I don't want to die. Like, I got, I got way of the things I'd

rather, many other things I'd rather buy. However, my father-in-law owns two Harleys. And he's a big mover. He just drove one of them. Yeah. He just drove one of them across the country. He's like so into it. Hi, Heather here. When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions. Because when you're buying a business, the best financing isn't one size fits all. There's the best rate, fastest to close, the specific loan structure that you need, or a little of all of those things. That's why my company, Vizzo Business Capital, works with over 30 different lenders to find you the best funding in less time and with less friction, so you can focus on the deal. Sign up for a free live

Q&A session on SBA loans at VisoCAP.net, then click Zoom sign up in the top right corner. That's V-I-S-O-C-A-P.net and click Zoom sign up. Yeah. So, case of point, right? So anyway, okay, I'll shut up now, but that was my look, Sean Harleys. I learned something about the age, the demographic with motorcycles through a deal I did a while ago. It was aftermarket accessories for motorcycles.

But what I really learned is the hot ticket was tricycles. I don't think that's what they call them. But, you know, the three-wheeler motorcycles that you see, it was like Honda. There was a few other brands. And this aging population of motorcycle buyers was gravitating towards that type of vehicle for safety. And just because they're getting older and it's harder to ride a motorcycle. So that is a trend that I think. I don't think Harley has these.

Oh, they do. Oh, you found them. Okay, so Harley does have a tricycle. All right. There it is. A used ones are $33,000 for a tricycle. Sorry. Keep going, Heather.

Yeah. So the aftermarket stuff is really interesting, too, because you buy one of these. See that little bags on the back and the different fenders and whatnot? That's a whole other business. maybe this dealership also offers those, but there are other businesses that just supply those parts. And they all had challenges after COVID, you know, so you look back at a business like this and you look back all the way to 2020 and 21. Supply chain hit this stuff really hard because all the chips that were in short supply, they were going to the cars first. The motorcycles took the longest to recover from that supply chain problem because they're low priority.

So they literally had two years of vehicles, of tricycles and motorcycles that they couldn't deliver. The bikes were built, but they couldn't put the chips in. So there was a huge disruption in the market during that time, which I think has since recovered. But, you know, it's only 2024 right now. And you look back four years and you're going to see two of them probably don't look real great. There's a good point there, Heather, though, that I like. so when people buy a motorcycle, that's the beginning of their spending, right? They are now pulling on the thread of, I got to have a jacket, I got to have saddlebags,

I'm going to get some gear, and now I got to have a Harley T-shirt and all this kind of stuff. Harley, I think, has done a pretty good job at protecting their intellectual property. You can't just go buy a Harley T-shirt anywhere, and Harley doesn't get paid for it. Now, does everybody buy the Harley T-shirt at the Harley-dealer? not necessarily, but if you write the markup on their products, like the Harley saddlebags are probably $1,500 from a couple of quick Googles. And the off-brand saddlebags are like $500. So you are getting people coming in to the dealership to continue to buy this stuff because

it's very kind of on-brand in a lot of ways. So Chelsea, how does your members tend to look at franchise dealerships like this? And how do you think about the fact that like, why is this listing of a Harley-David's a dealership, like out there. It's not, you know, it's one of things we never see is like four dealerships on biz by sale. And there's a reason for that. There's other places those things trade. Like, how do you, how do you remember saying about this stuff? And then secondarily, like, how do you think about the fact that we're finding a Harley Davidson dealership that's for sale out on a random posting public site? I think it's fascinating. I think I'm going to go with,

my brain keeps worrying that the idea of buying a business has become trendy, we'll say, right? There's so many people saying that you should buy businesses and take your own freedom back. And like there's my fear with this listing is that there's for the people that are not educated that are just listening to YouTube and social media posts will find security in the brand. They will find security in the franchise model because franchises are perceived to be lower risk. And I fear that they won't do. So we talk in the lab about how. how important it is to use the resources available to you to do due diligence before contracting with anyone. And they won't do the diligence to go in on, like I have one of my favorite

stories from transactions is finding out that a hospital is going to unionize by reading Reddit posts, right? And so like that they won't go and do the due diligence of like finding out what's happening in this, in this ecosystem for lack of better words, because it just sounds really good. because Michael, to your point, they'll be like, oh, my God, you never see Harley dealerships for sale, right? And the excitement of this being, honestly, it's like a persona, right? When somebody drives a Harley, it's like a lifestyle. It's a part of their identity. And there's a lot of things that you guys raised that they may not know about.

And so the concern for me is like, I don't love anyone getting into these spaces that they don't understand. and all of the complexities that come with dealerships, right, that many of you guys have already mentioned. I think that to any buyer, it's going to seem exciting at first, but hopefully they would uncover that there's a reason why you don't normally see them and suddenly you are seeing them, and that maybe that's a little too much risk to take on. I think it's important to recognize also is that this franchise should be very, very particular about who they sell to. hurdles with certain franchises to get through to even be selected as a potential buyer and then

have to pivot and start negotiating the deal finally can be really tiresome. I worry that because Harley might be, you know, experiencing some challenges that that may not happen, right? And then they're not going to be picking the right person. And that's just going to devalue your company overall, right? If they start letting franchises be run by Bob. Well, you know, this reminds me of we had Connor Gross on, who was a franchise consultant a couple episodes ago, and he talked about, you know, Michael's got the map up of San Antonio. You wonder, first of all, why doesn't the adjacent franchisee buy this one, right? To your point, Heather, who already knows how to run a Harley dealership and has economies of scale. So why isn't the guy right next to it buying this one?

And similarly, if you buy this one, how much territory do you have? What are the demographics and the trends in baby booners, basically in your territory. You can probably forecast the performance of your dealership pretty well based on the demographics of your area. The best advice that like I have lab members that are looking at franchises and I personally love franchises, not everybody does. It's a personal kind of fit with your value prop, but going and talking to other franchisee in different locations so that you can kind of uncover like one of our members was looking at a very well-known franchise and uncovered that there were massive changes about to come through with the franchisor agreement that would have completely taken control out of their hands,

and they were just trying to close before those came through. And so just reaching out and talking to other people that already own will give you some insight that you may not be able to uncover on Reddit. I have a funny story that I just remembered of someone buying a franchisee, and they were sent to the training. So there's always, you have to get approved by the franchise. or if you're going to buy a franchise. And sometimes they have extensive training where you have to go somewhere.

And this is one of those where they had to go for two or three weeks. And while they were training, they were in the systems. So they could actually pull up, you know, the different stores. And they pulled up the store that they were buying and they learned something about the deal. The seller hadn't been very honest about something. A particular customer was canceling. And he killed the deal based on being able to see that in the systems while he was in franchisee training. So I thought that was an interesting one.

You never know where you're going to get your diligence. Correct. All right. So, Bill, why would I want to do this deal? Sell me on this deal. If the price is right. You're okay to say, plead the fifth. If the price is right and it models out as a cigar butt, it could be great.

I mean, if there's a high, a high density of installed Harleys in whatever location this is, and, you know, it's a baby, boomer, deep area, and you got a large territory. and it's a lot of maintenance, a lot of accessories, and you're paying a reasonable price for it, I don't hate it, right? You can't pay a growth multiple for it, but you're going to pay two to three times even, duh, and you feel like the demographic trends are there, and there's a lot of maintenance.

You could do quite well. I think it was a four. I'm not sure I would pay four. I was like a 4.3 or 4.5. Yeah, they were asking like 4x, which I don't know that they were yet. Asking price is $8.6 million and 2.1 million. cash flow slash ebidah. Yeah, so even higher than a four.

So, all right, Googling around a little bit, I see two Harley dealerships for sale, and this is probably built to your point. One of them is in Las Vegas. One of them is in Tennessee. Two totally different markets, right, for this type of customer. The one in Tennessee is ten times bigger than the one in Las Vegas. So I think the end market matters in a lot of this. And, you know, Bill, I think you already made this point.

But Michael pulls it up in San Antonio. One guy already controls multiple of them. So if it's in Tennessee, who are the other franchisees in Tennessee and why aren't they buying it? You know, this is a bigger one, I think, just based on looking at it. So that's the biggest road flag. Potentially interesting. I think it all depends on the territory, the stability. and the price.

I mean, the thing I would love to figure out how to do, and maybe this is the billion-dollar question for Harley-Davidson, like, how can we make Harley-Davidson cool again? Like, it's just so not cool. Like, if you, and some of these Harley-Davidson dealerships, I looked at the map of the ones here in San Antonio, like one of them is actually downtown at the Riverwalk. And if you guys know the Riverwalk,

like there's no place to put motorcycles down at the Riverwalk. Like, it's like, you know, T-shirt shops. But there it is, like, right in the middle of down, San Antonio. And I remember walking past this because it's in like a run-down mall downtown called the River Center. And like they just sell Harley Davidson T-shirts and crap and leather jackets and all the kind of stuff that's just not cool anymore. And I think it would be a really interesting challenge if I was a CEO of Harley-Davidson. I'm like, how could I make it so young people are actually interested in what we're selling? Because nobody, my kids wouldn't be caught dead near

a Harley-Davidson T-shirt. Like they have no interest whatsoever. And maybe the ship has sailed for Harley Davidson, but man, that would be such a cool thing to figure out how to make it so young people actually cared about the brand or wanted to deal with it. It's not DEI for the record. They tried that. It didn't work. That's why they tried that, though. Like Gen Z, Gen Z cares about, like, authenticity, like more than anything.

And then you as Harley Davidson, who is pretty much a decent chance somebody with your bike is going to have a Confederate flag on it, you know, depending upon what, I mean, let's just be real. Like there's there are those people and they gravitate towards Harley Davidson's. And like in so you go do like the least brand authentic thing possible. Like congratulations, guys. Like do the opposite of whatever you're planning in the future and maybe it'll work better than these moves. But anyway. I think they're going to have to rebrand honestly or come up with a separate brand.

Yeah. Because of the reputation and of Harley is just not going to appeal probably to exactly why you just said. Yeah. I don't know. I mean, I, the counterpoint to that. is I employ a bunch of guys who are under the age of 40 who this is super cool with them. And they ride these bikes and they wear leather jackets. And it's very cool to them, right?

And to their segment of the population, which is different than our segment of the population. So I think that even though it may be on secular decline, I don't think it goes to zero, right? No. I think that there's a lot of durability. And like, Michael, to your point, you know, hello. Kitty, like, doesn't need to appeal to everybody either, right? Like, and if they try to appeal and be everything to everybody, if Harley tries to be everything to everybody, they completely alienate their core and the brand really think could

theoretically go to zero. So the difference is there, I think. There's a never-ending supply of young girls that are interested in Hello Kitty. There is a finite supply of baby boomers who are able to stand up on top of a motorcycle and spend $50,000 for one. So, like, we're running out of them. I don't think it's all baby boomer, though. I mean, you look at like sons of anarchy.

No, I think it's, right. I think it's generation. So baby boomers and truck dealers. Okay, Jack. No, I think it's almost like a religion. Like, I almost feel it is your father or grandfather rode Harleys, then you likely aspire to also do that, right? It's kind of like a tradition or what your family.

It's like, I don't want to tie this back to the, because you guys tied it to Confederate flags, but it's almost like the family values thing, right? Like, I think that if it's the way of the way they were raised, then this is what they're going to value. To make it will be to buy a Harley, right? As opposed to in some ones, it's going to be to buy a Nucati, right? Or buy a Ferrari or whatever.

And so I don't, to your point, Mills, I don't think it's going to zero. I do think that they've got some challenges going on right now. Yeah. All right. So I don't think it should be a 4x. So if we get this for a good price, we're into it. it with with some questions. Every deal is a good deal for the right structure. That's right. You tell me the right price. You pay me and I will take over this business. Yeah.

Sometimes the price of zero is not compelling enough. Sometimes it's you pay me and I'll take it that is a totally legit answer. I've had people offer me stuff and I'm like, look, I'm sorry. Like you're going to have to pay me to take this business just because it's the wrong something, right? Yeah. So it's not an insult. It's just like I'm the wrong buyer for this. Like don't send it. All right. Well, thanks for doing the Harley Davidson dealership. I'm glad everybody hated it. Congratulations, guys. You put you haters. It's why this is just kidding. But thanks, thanks everybody for listening to this episode. We had a ton of fun making it. So tell your friends, especially you know of a baby boomer who wants to buy a business and writes Harley Davidson's,

send him this episode. All right. Thanks a bunch.