The Downstream Effect of F&I Administrator Buyouts

In the last few decades, private equity firms throughout the US have been buying up businesses across industries with the intention of turning ailing brands around that have hit hard times. They bring their deep pockets to the table under the assumption that the extra cash/credit and effort to restructure debt will give a company critical daylight to thrive for the future.

Ask Toys R Us how well that worked for them. A beloved brand for generations and shuttered due to a bad deal with a private equity firm. Over the last three years, the automotive aftermarket has also been shaken up by not one but 10 major acquisitions of F&I administrators by private equity firms. In the last 3 years alone, Portfolio, American Auto Guardian, and Vanguard Dealer Services all fell into the hands of private equity firms. That’s not to say ALL private equity acquisitions are bad. There is a place for that level of financial rescue but it’s not without its significant downsides when it comes to the downstream impact to F&I.

‍Why Are F&I Administrators a Favorable Target for Private Equity?

‍There are a couple of reasons why private equity firms would be looking to invest in this channel.

Established distribution channels are a prime reason. Agents already have a direct sales reach into dealerships in their market so little has to be changed to continue that. Another key reason is that the relationships with dealers are already well-established with agencies/administrators who have been operating for a period of time. This level of ‘stickiness’ extends to reinsurance, private label programs, compliance training, etc that are in place and functioning. Everything is already there.

‍What Could Go Wrong?

‍If an administrator is struggling with profitability or reach within their target market, an infusion of cash/credit plus partnering with a larger brand can help. It begs the question, though...what could go wrong? Wouldn’t this be a ‘win-win’ for a smaller company to be able to expand? Not exactly.

F&I agents and smaller administrators rely on being able to hold a certain cost for their products and services. If you have a private equity firm come in with their promises of increased sales reach and back-end support, it can come at a price. A big one.What we’re seeing now in the market is increased pressure put on these acquired companies to turn a profit sooner and the way they force that initially is to have the costs to the dealer increase. Now the VSC, GAP, and other ancillaries ALL increase in cost. It gets passed on through the agents and now the dealer has to compensate for the higher cost with higher prices passed on to the customer. That’s what goes wrong. Prices go up. Margins get slim. Dealers lose profits.

‍Consolidation is Bad for the Industry

‍Acquisitions can also result in fewer agents in the F&I channel. Those agents who have built their business through years of cultivating relationships with local dealers could be looking at either selling their book to a larger company as a result of private equity deals. Consolidating the F&I administrator channel into a handful of players is likely not good for the industry. Think about what is happening in the cellular space...you had many national and regional options for your cell phone plans. Now? We have 3 major nationwide providers, T-Mobile. AT&T, and Verizon. That’s it. Does this mean F&I providers will be whittled down to 2 or 3 nationally? Not now but at the rate these private equity deals are happening now, there could be an even bigger shift in the years ahead.

‍What’s the Answer?

‍For dealerships, the answer is simple. Make the conscious decision to work with an F&I administrator that is NOT for sale to private equity. A company that values the relationships established with agents across the country and has the full service support your F&I department needs to be as successful as possible.

But more importantly, work with a company that doesn’t have to increase back-end costs of products and services to satisfy private equity requirements. It’s not about being the cheapest solution in the market for your F&I products...it’s about being committed to doing business the old fashioned way. Growing relationships with dealers big and small. Stable back-end pricing that helps your dealership profits grow year after year.

Click here to learn more about how truWarranty and ExoGloss can be that steady partner for your store in uncertain times. We’re not going anywhere and we’re not for sale. We’re here for you.