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In Age of CarSharing, Uber and Tesla, Local Dealerships Face Conundrum

Americans who have been buying cars from the same mom-and-pop dealership for generations could be greeted by a different kind of for-sale sign the next time they visit.

Small to mid-size dealer groups are selling their businesses to auto-retail giants or investment firms at a robust clip even as auto sales remain strong. The trend—highlighted by Warren Buffett’s entry into the dealership business in 2014—has gathered momentum as electric, shared and autonomous vehicles threaten to reshape the car business.

Enessa Carbone, for instance, recently sold the family’s New York-based stores to Lithia Motors Inc., a publicly traded company with a $2.5 billion market capitalization. Her stores are among the approximately 1,000 dealerships expected to have changed hands between 2014 and 2018, according to California-based dealer sell-side adviser Kerrigan Advisors.

“It is not your father’s dealership,” Ms. Carbone said after selling a business founded by her grandfather in the 1920s. “Given the changes in the industry we were not sure that was a challenge we wanted to have one of our children take on.”

Dealers say they need to as much as triple revenue in the next half-decade to offset shrinking margins and increasing competition from companies that didn’t exist a decade ago.

The internet has made car prices more transparent for customers and given them the ability to shop around. It has also enabled online purchases of used cars. Electric-car maker Tesla Inc. is using online ordering to circumvent dealerships entirely. And Uber Technologies Inc. envisions a world where more people will rely on ride-hailing apps instead of owning a car.

These developments have helped fuel consolidation of the 16,800 U.S. dealerships into the hands of fewer owners. The top 50 dealer groups are poised to book more than $175 billion in revenue this year, compared to $144 billion when Mr. Buffett’s Berkshire Hathaway Inc. entered the sector four years ago, according to industry publication Automotive News.

Erin Kerrigan, founder of the Kerrigan advisory, said about 200 dealerships changed hands in 2017, near an all-time high with a similar level of transactions to take place this year. Sellers are scrambling to cash in while commercial real estate prices are high, or partner with a deep-pocketed investor, she said.

Car makers, which can block a sale, historically resisted transactions with private-equity owners or family offices. But they have warmed to the idea as the business has become more capital intensive, thanks to the need to invest in new technologies and offerings, such as subscription services, as a way to diversify their businesses, according to Cliff Banks, founder of The Banks Report, which tracks automotive retail.