Automobile Dealer Magazine

How to "Survive" in Today's Market

by Auto Team America

The past decade has seen many changes for Automobile Dealers. Some dealers have become mega dealers while others have downsized back to their flagship dealership for simplicity. During the next three years some of the manufacturers will help dealers decide which stores to keep and which ones need to be eliminated. During these times some of the major issues and questions confronting the dealers are:

1. Is it time to sell your dealership to other stockholders or outsiders?
2. Is it the time to buy additional franchises?
3. Has the time come to semi-retire or even retire? If so, are key personnel and/or your children ready to assume the role?
4. How do you maximize sales, cut expenses, improve customer retention and increase cash flow to protect your dealership from being "phased out" by the factory?

1.SELLING YOUR DEALERSHIP

1. Timing is the key to getting your price. Do you really want to sell for the right reasons or are you just panicking?
2. Can you obtain enough cash as a down payment for your debts (including taxes), and will the balance remaining give you the security you need? Optimally, try to obtain the full purchase price up front. If not, do you have the confidence that the buyer will pay the balance? Make sure you get security on the balance.
3. If the dealership is an "S" corporation, a number of tax situations must be addressed. If the corporation elected "S" status after 1986, a built-in gains tax can be applicable and, thus, double taxation. You will be taxed at the corporate level and also on the individual level. Also, be advised that your life reserve will be recaptured.
4. If possible, maintain confidentiality, because employees panic when hearing about an impending sale. Thus, if the deal falls through, you may lose valued employees.
5. An important factor today is the EPA Regulations referring to underground tanks, etc. A few deals have gone sour when the seller had EPA-related problems.

2.BUYING A DEALERSHIP

1. Make sure you really want this franchise for the right reasons.
2. If the real estate is not part of the deal, ask for the lease and review the lease, including its options.
3. Have your accountant review the financial data.
4. Make inquiries as to the reputation of the dealership.
5. Work up a conservative projection to see if the deal is sound. Do not buy a dealership unless you are certain it can work without hurting your existing dealership(s).
6. Consider your management team for this dealership. Many expansion situations have gone sour because competent help is not available.
7. One of the most important factors that must be addressed before signing anything is the allocation of the purchase price. Allocation factors are franchise costs, goodwill, covenant not to compete, leasehold costs, real estate, consultant agreements, and various other considerations.

3.SUCCESSORSHIP

The time will someday come for everyone when they semi-retire, retire or die. Each situation requires advance planning.

1. 1. Every owner of a dealership should enter into a buy-sell agreement. The terms, procedures, etc. must be detailed. Life insurance must also be considered.
2. 2. It is imperative that personal financial planning be done. This would incorporate estate planning, including the reviewing or drawing up of a Will, trusts, life insurance, etc. as needed. Often there is little or no planning which could result in enormous estate taxes being needlessly paid.
3. 3. If you intend to turn the business over to your children, planning must be done well in advance, not as the turning over is about to happen. There must be in-depth training, possibly at a dealership school, along with on-the-job training in all departments. It is advisable to check your franchise agreement(s) for special requirements. Some franchisors require a minimum percentage of ownership in order to be approved. This could be a problem in the event of an untimely death.

4.SURVIVAL

If you decide to maintain the status quo, now is the time to make a three- to-five year plan to maximize sales, cut expenses, improve customer retention and increase cash flow to protect your dealership from being "phased out" by the factory. It's time to take a serious look at each department and decide if it needs improvement or possibly elimination. For example, if your body shop is not profitable and causes poor customer satisfaction, now is the time to improve it or make other arrangements, perhaps going into a separate partnership with your body shop manager at a separate location. Make sure your employees know how to order the vehicles and parts that sell to prevent overage inventory and obsolescence. Offer bonuses to employees to find ways to cut expenses and increase cash flow. Establish a customer retention plan that includes regular follow-up and promotions to customers.

Regardless of what you decide is your best course of action, selling, buying, or just surviving, decide now, plan your course of action and follow your plan. You've worked too hard to get where you are. Make sure that you get all the professional help you need from your accountant, attorney, and factory representative. They are all there to help.

Auto Team America is a consortium of leading CPA firms serving over 1,200 dealerships nationwide.