Planet Automotive is a consolidator of franchised automobile dealerships based in Coral Gables, Florida. Planet's brain trust of Alan Potamkin, Robert Potamkin, Joe Herman, George McCabe and David Yusko give Planet a top management team with knowledge, experience and expertise as dealers, mega-dealers, big box retailers, consolidators, and manufacturers. This is their story.
Q: How did the Potamkins get in the car business?
Alan: My father, Victor Potamkin, began in the mid-50's as a Chevrolet dealer. He expanded and had three dealerships in low to middle-class neighborhoods, South Philadelphia, Newark, New Jersey, and the southern tip of Miami Beach. All three neighborhoods were good neighborhoods in the 50's. By the time my brother Robert and I went to work for him in 1970 they had all fallen economically. We worked for my father for approximately ten years within his Chevrolet organization. During that ten-year period, Victor decided to retire. He was in his sixties at that time. That retirement lasted about six months. He then, being friendly with Ed Cole, who was the president of General Motors, took the opportunity to move to New York to take over operation of two previously factory-owned Cadillac dealerships on the east and west side of Manhattan. Victor operated those, Robert and I operated the Chevrolet dealerships. That is how it stayed until 1979, at which time Robert and I decided to begin our expansion outside of the General Motor's family because of certain restrictions that existed within the G.M. guidelines; mainly one dealer, one dealership. Our first expansion deal was a Dodge dealership that was approaching bankruptcy in Hialeah, Florida. We did that transaction in July of 1979, just about two weeks before Mr. Iacocca went before Congress begging for money. We still have that dealership and it has been successful.
Q: That was good timing.
Alan: Well it was good and bad, it depends how you look at it. The Miami Herald newspaper asked me to personally guarantee Chrysler Corporation's ads, so you tell me.
As we expanded we developed a nice chain, totally de-centralized with each location having a general manager/equity participant of that store with Robert and Alan Potamkin being the participants to the equity degree not held by the operator. That takes us up to about two years ago when the world began to change.
Q: Joe, How did you get involved with Planet?
Joe: I have been in the automotive business my whole life. I was in both retail and wholesale early in my career, was an owner in dealerships, a chain, and was recruited to be the first Chief Operating Officer for United Auto GroupEMCO thenin 1992. At the end of 1995 I went to work with a New York investment group that wanted to back me, and I brought a concept to Robert and Alan in early 1996. I had known both of them previously, and they had been thinking along the same lines, and we started Planet in the summer of 1996.
Q: How about you, George?
George: By way of background, I too have been in this business for over thirty years. I've been primarily on the manufacturer side although I ran a successful dealership for three years back in the early 1970's. My career officially started after college when I joined Chrysler International. After a few years I moved to the Dodge Division. In 1974 I went to Mazda and began a wonderful journey that lasted twenty-four years that took me from district manager in charge of Metro New York, to the top of the company as senior vice president, general manager of U.S. operations. That is the position I held until I left Mazda at the end of '97. Shortly after that Ford took over Mazda. During my final years at Mazda, I was paying close attention to the structural changes that were taking place on the retail side of the business. I saw consolidation as a positive influence in the industry. But many of the so-called visionaries really didn't understand the nature of our business. In my view, the future of retailing belonged to consolidators who could provide real value to dealers while improving those critical areas of the business in line with manufacturers' expectations for their brands. Just about the time I was leaving Mazda, I was approached by Joe and the Potamkins. They had been developing what is now Planet's model and strategy for the future. What really appealed to me was the fact that here were three very successful car people who understood our business and who had a program that could meaningfully benefit dealers while providing manufacturers with a comfort level for the future. I knew instinctively that this was a model that would be very successful and I wanted to be part of the team.
Q: How is the Planet executive team structured?
Alan: George McCabe is Executive Vice President. He is in mergers, acquisitions, and manufacturer relationships. Joe Herman is our Chief Operating Officer and President. Robert and Alan Potamkin are joint Chairmen. Let me take you back to give you a flavor of how we got where we are from where we were. About three years ago the world changed for auto dealers. Public offerings were available, mergers, roll-ups, acquisitions, sell-outs, more dealerships available etc., etc. It was a different level. Robert and I are relatively transparent and relatively open. We went to the NADA Convention and openly asked, "Are we interested in selling, buying, merging, rolling up, do we want to go public? Tell us what is going on." Rob and I had a little bit different vision than the average dealer. Robert had gone to Wharton Business School and University of Pennsylvania School of Law. I had been a principle and I'm still on the board of a public company on the New York Stock Exchange that is a consolidator. We are the largest air conditioning distributors in the nation. Robert and I also own "big boxes," we are Office Depot in Poland, Hungary and Czech Republic. We knew the way public companies run. And we knew the way consolidators run. And we knew the way the public market place looked at consolidators. How they envision growth in consolidation versus growth on a same store basis. For all of those reasons we were more scared and more conservative than the average persons. Wall Street loves the industry's trillion dollar sales. But we were concerned about risking our reputation, capital and our time.
Q: Because you knew more.
Alan: Yes. We said if it is 2% or less margin business, yes it is eight hundred million or trillion dollars but there are a lot of reasons it may not hit the public model. And before we risk our reputation and our capital and our time, before we go and follow some Harvard philosopher's text book studies, let's sit on the sidelines and watch it grow. Let somebody else prove it right or wrong. So we sat back and analyzed. During that time period, Joe Herman approached us. He was working with an investment banker group that consisted of ten of the largest corporations and pension funds in the nation. They met with us and we negotiated for months so that they could understand our business and we could understand their philosophy. They were going to buy a majority interest in our business, and at the last minute, when the deal was ready to close, after it had gone through the factory approval process, the Potamkins decided to go on our own. Although the Potamkins spend the vast majority of their time in the car business, we have other investments outside the car business. We could afford to grow our car business since we were not risking 100% of our own personal capital. If it is 100% of your net worth, it can be a scary thing to let it continue to ride all on the line. Because we have other assets, we don't have to be overly conservative in the car business. We decided it was worth our while and it was a great investment for us to grow the car business ourselves without taking cash off the table. We had, until that time, a totally decentralized model with each location being operated by the dealer operator and Robert and I being its unofficial board of directors. During the negotiations with the investment banking community, Joe Herman and George McCabe joined us. We began talking to dealers across the nation about our model. It was well received. We have good relationships with banks and other finance sources and we were able to grow our business on our own. Joe established a small central office. Our chief financial officer, David Yusko, gravitated from being CFO of the Florida dealership to working in a central office environment. David Yusko, George McCabe, and Joe Herman run our management company and work with our general manager "co-owners." And that is what brought us to where we are now. We have now established a central organization called Planet Automotive. It is not called the Potamkin Companies because it is not meant to be the Potamkin Companies. It will someday most likely become a public company.
Joe: We are running Planet as a public company today, even down to quarterly GAAP financials. Although we're highly decentralized, we've established specific financial and operational core functions. All of us at Planet have experience running both small and very large companies, and these learned perspectives have given us an opportunity to start with a clean sheet of paper, capitalizing on what we've done in the past, and observing what others are doingright and wrong. We have an internal finance function, a dealership audit functionwhich we believe is criticalother consolidators have been embarrassed because they have not had proper controls in place. We recruited an analyst from UAG, a compliance officer who also coordinates our 20 Group and sharing of best practices, and a person who used to run a finance company who coordinates our financial services. With George who heads up M&A, our CFO Dave Yusko, and the Internet position we're recruiting for, that's it. You obviously need a central office function in order to implement this strategy, but we feel strongly that too much centralization hurts the business by creating excessive costs that dealership operations eventually have to carry in some way. But, more critically, centralization always dilutes or curtails the ability of the dealer operatorthe most important person in the equationto run his business. In this area I think that all the other consolidation models are flawed. They are flawed because the dealer operator or general manager doesn't have the right kind of equity opportunity, and at the end of the day, doesn't have a meaningful stake in the success of the business they operate. He/She may have some miniscule piece of the larger enterprise which, in my past experiences, led to a belief that his individual performance has no meaningful impactthere is always someone else, somewhere else, who will pick up the slack. When times become difficultas they always do, he "checks out" for a while. Every Planet dealer operator has meaningful personal equity in his location. This ownership policy of ours will continue in the future, even after Planet becomes a public company. When the inevitable slowdown in the economy occurs, my dealer operators won't be waiting for a conference call or memo with instructions of what to do nextthey will have already initiated their own plans to curtail costs, because their own ownership capital is at risk.
Q: That is one question I have always had. When public companies stop growing by acquisition, how are they going to grow internally? Where is that person that's going to make it happen at that store?
Joe: Too frequently he's tied up in internal meetings or dealing with company politicshe's not just focused on running his dealership. Big central office staffs suck productive time and initiative out of an organization.
George: Another thing that is significant about our model is that we recognize the importance of individuality in dealer management styles. Good dealers naturally reject a cookie cutter or national approach to running operations. In our view, the worse thing you can do to a well-run business is impose a central management office or corporate operating style on an organization that has consistently demonstrated superior performance in the key dealership profit centers. First of all, it will stifle individual incentive, demoralize the staff, and most importantly jeopardize the earnings based upon which the business has been valued.
Alan: If you run a successful Cadillac dealership on Sutton Place don't tell me you also know how to sell Dodges to blue collars and Hispanics in Hialeah, Florida. They are totally different markets. The Midwest is certainly different than the coasts. We want to establish a relationship, like most intelligent consolidators do, with well-run successful dealerships. What makes us a little bit different is we do not want that person to sell out entirely. We want to buy ourselves in. We want to buy a majority interest in his operation that hopefully will run tomorrow as well as it did yesterday. To do that we have to give him as many incentives tomorrow as well as he had yesterday. So we will purchase, for example, 51%, 60% or 65% of his operation, with him maintaining ownership in the balance. He continues to run his place within the same basic model he always had but with our financial assistance he can aggressively grow and expand his business without risking too much leverage. There will be certain common standards because he is now a part of what soon may be a public company. We have to have good CSI scores and a common chart of accounts from an accounting viewpoint. We have to live by the standards of a public company. But we will not tell him to change his method of merchandising. As long as he is a good, successful, moral operator who is not mortgaging his future, we want to establish a relationship with him that continues the operation the way it has been.
Q: So as opposed to a dealer with Republic buying into their program, you are actually buying into the dealer's program?
Alan: That's right. And if we don't like the way he is running his store, we don't want to buy him at all. Our philosophy is flexible depending on the product and the model. There is no particular one right way to do it. If someday the world becomes one-price maybe we will become one-price. But we won't do it all at the same time. We will do it as each market and each operator dictates it. We are looking to have that dealer continue to run his business as well tomorrow as he did yesterday. Yet there are several things that can be changed that are easy. We can establish better financial service contracts. We can establish better advertising rates on a local or a regional basis. We can establish better discounts from suppliers and vendors. Those are easy things that are done on a corporate level without changing in any way how he merchandises and operates the day-to-day operations of his dealership. The second thing we can do is to provide additional cash for him to grow within his market. We help him purchase the neighboring dealer that he'd like to. If we buy 60% of his dealership for cash, we may then agree to buy other dealerships under his domain at the same 60-40 spread. Third, we have relationships with manufacturers that he may not have to help him get that additional point and so on.
Plus, we want to give the dealer some cash out. He may be concerned about his future. He can take cash off the table to sleep nights. But we don't want to give him all cash because then he'll start sleeping daytime, too. And that has happened to many of our competitors. We think that it's foolish to give someone millions and millions of dollars and then give him no equity interest in his controllable environment, but give him a contract for $300,000 a year and hope that he still works just as hard.
George: I don't know too many successful dealers who are going to be enthusiastic about taking almost daily direction from V.P.'s at a central office for a salary of $300,000 to $500,000 a year with no equity stake hold in the dealership. It just isn't in their nature. Let's look at our model. We agree with the dealer on a 100% value for his operation. We purchase 51% for cash and he continues to own 49%. He continues to run his operation within the parameters of Planet's morally high standard, which is what he was doing before or we would not have been partnered with him. He is the dealer operator of that business and receives a salary, bonus, and his share (49%) of the cash flow. Planet's central office is not there to tell him how to run the business. It's there to function as a public company central office, to ensure compliance with all accounting standards and requirements as well as monitoring performance in the critical areas of the business. All of our partner operators will meet on a regular basis to share best practices and participate in discussions on future company policies. We will help you when you need help. But we are not there to run your business. As far as your customers and your community in general are concerned, our transaction is invisible and seamless. It's still your name over the door. If you want to acquire other dealerships in your market and grow your business, we will grow with you on the same 51% to 49% basis of investment. Now let's fast forward. We are not public at present. We intend on going public sometime in the relatively near future. When we do go public, we want you to have the opportunity, but not an obligation to share in our public offering. How do we do that to keep you incetivised? The concept is that you, Mr. Dealer/Operator, must always keep at least 20% of your child company. Your child company will not go public. Only Planet eventually will go public, making your company a subsidiary of Planet owned partially by you and Planet. When we go public, you can convert all of your equity in your company above 20% into Planet stock at the public multiple. You must keep a minimum of 20% equity for as long as you remain our partner operator.
Q: For $300,000 why would he put up with that? He already has the tens of millions in stock what is the $300,000 per year?
Alan: What will happen is, in bad times, and that is when you really need the son of a gun, when all of a sudden things are down, the guy has no incentive to stick around. Except that you are going to yell at him. Well, that doesn't work. So we want to keep that dealer tied in. Let's take the example of 51/49, we want him to get 51% in cash at the agreed evaluation, and he still owns 49%. He still runs his dealership as he did before. Now he gets a salary and a bonus as a dealer operator. He is staying the dealer operator with all the benefits of being the dealer operator. Our central office is not there to run his business. It is there to be a public company central office. Not a "700 people will run your business and show you a better way" central office. We will show you other partners of ours who are doing it differently, we will have our own internal dealer twenty group, we will help you when you need to be helped. But we are not there to run your dealership. You get a salary and you get a bonus operating the dealership. We distribute the profits of the dealership. You take your share, and we take our share unless money is needed from both of us to stay within the company for growth. If you want to grow within your marketplace, we grow with you that same 51-49 investment within your territory. Now let's fast forward. We are not public at present. We intend on going public sometime in the relatively near future. This gets a little complicated. When we go public, we want you to have the opportunity, but not the obligations to share in our public offering. How do we do that to keep you incentivised? The concept is: You Mr. Dealer/Operator must always keep at least 20% of your child company, privately held in your hands. So Planet owns 51% of your child, you own 49%. At some time in the future Planet may go public. Your child will not go public. When we go public you can convert any equity in your child over 20%. You must always keep that 20% so you will always have a reason to nurture that child. But anything over 20% of that child you can convert and go public with us at our same public multiple. So in effect, our concept is part cashing out now, at an agreed private figure, and part going public on a roll-up basis in the future, but still maintaining that 20% even after we go public and you roll up. Let's say you roll up 29% for this arguments sake. You would still at that time have 20% of your child. You would have gotten 51% in cash and you would have gotten 29% at the public multiple of the public company and still own 20% of the child that you continue to run. At some time in the distant future you may want to retire. We have a formula that allows you to someday retire based on the formula of the profitability of your child and the 20% interest you have and the public multiple.
Q: Another incentive for continued involvement for your dealer/partner?
Alan: Another incentive to grow your company, which we hope you stay with for thirty years; we hope your son takes over for you. But should you want to cash out at some time we have to provide a way for you to get out at the public multiple with a formula based upon the profitability of your dealership. So the idea is to allow you to cash out now to some conservative degree and later allow you to go public with us at our public multiple based on your profitability at the time we go public, but still incentivise you to run your dealership, to come to work on Saturdays, just like you always did. To fight the hard fight and the good battle because you still get a salary and a bonus, and have your name on the building, your employees working there and your relationship in your local community.
Q: That is your formula for growing internally after going public? That same person who has grown the business to that point is going to keep growing it?
Joe: Correct. We want our partner to grow his platform in his local market.
Alan: Yet we do want to take a dealership and have it grow organically. That is difficult in a mature business such as the car business. But we can provide certain benefits in a larger organization than he has had. We can grow his organization organically with our help and with additional cash.
Q: So a dealer that becomes a partner of yours does not have to change his way of life. The numbers change and the money changes but they don't have to take their name off the store, they don't have to worry what their son is going to do that has been in the business. They are still involved in the community because it is their store and they are running it?
George: We've had a number of dealers in the negotiation process say, "When you become my partner I'll have to cancel the employee picnic or the Christmas party." We say no! We want you to continue that. We don't want anything to change what has contributed to a well-run, successful operation. Again, our deal is almost an invisible transaction to employees, customers and the local market.
Alan: As a large organization we can provide resources that may be not available otherwise, whether it be floor plans, financial services, insurance. But still that dealer is running his business. The big change to him is going to be that now there are certain accounting standards he has to live with, and those are no brainers. His comptroller must make sure he sticks to the model of a public company. His merchandising department, his service manager, his sales department, none of those things are changing.
Q: George, what are you looking for when you are looking at a dealer as a potential partner?
George: The model that Alan just described is a person who likes being in the car business and is not ready to get out. There are a lot of dealers out there not ready to cash out 100% just yet. Also, there are a lot of dealers who would like to have a well defined plan for an exit strategy in the future, as opposed to operating day to day not knowing what's going to happen five or ten years from now. Everybody at some point wants to exit the business and take their equity out. Our model is targeted to those dealers and their needs.
Alan: Ours is a marriage and it is an adoption process. We are a confederation as much as we are a union. We believe in the entrepreneurial spirit staying within that entrepreneur. We don't want to cut that by any means. You asked where we are finding our dealer candidates. We are finding them through brokers, through referrals, cold calls, also through people we know. We are finding a tremendous variety of good quality successful dealers. Our candidate is somebody who is young in mind set, who has the vitality; he likes running his own business, he would love to grow his business, he just wishes he had enough capital to grow his business and have the same power to weather any storm and still not change his lifestyle. There are many dealers who are in that position and there are also many who are not in that position. The right dealer is one who says he'd like to grow his business and he would like to take advantage of being part of a bigger company. But at $50,000,000 or $150,000,000 or even $300,000,000 in sales he knows that he cannot be a public company on his own. But he wishes he could. We can provide him a way to be part of that growth organization while at the same time having cash in his pocket and be able to grow his business while weathering any storm.
Q: You had mentioned future plans and future growth. One hurdle that I see in this plan is, what happens when this first generation of dealers starts retiring, starts moving on? How do you fill those shoes?
Joe: There is an amazing inventory today of very talented people who no longer have the financial ability to get equity in a dealership because the price of entry has gone up so much. One of the things the Potamkins always did well was to provide mechanisms to finance talented operators into an equity opportunity. I am in regular contact with a number of top retail managers and entrepreneurs who are looking for equity. We are going to find ways to finance many of these people into businesses we own when the dealer eventually decides to retire.
George: Our model specifically provides that when our operator/dealer wants to finally retire. He gives us a one year notice, together we pick his successor who will work under him during that last year. This gives the new operator the opportunity to fully understand the operations, gain the support of the organization and most importantly, insure a seamless transition of leadership.
Alan: General Motors had this same basic philosophy that the dealer operator has to have, in those days, a 25% interest. Ours is not dissimilar to that. We still feel the dealer operator must maintain that interest. Several years down the road the dealer operator that we sign up may want to retire and we do have a methodology for him to get out. At that time, with that year's notice, we have a shadow to live with him for one year. The shadow may be successful but not have the capital to buy in at 20% of a large company at that particular time. It is up to us to find a creative way, several years now the road, to insentivise him. He takes whatever cash he may have and he puts it in to the operation. The money he puts in may not be important to the deal, it may not even be significant to Planet Automotive. What is important is that it is his commitment and it is very significant to him because it may be every penny he has. If he is willing to put every penny he has into that deal, we will leverage and support him so that he continues to run that deal. We don't want him to have some insignificant portion of some huge public company where the sweat of his brow doesn't affect the public stock, and doesn't affect his pocketbook.
Q: Do you have situations where you are competing for a dealer or dealership with some of the other consolidators?
George: I think that within the broad context of dealers looking for an exit strategy, we do compete somewhat with other consolidators. But our model is very unique and differentiated from other consolidators. First of all, most consolidators are only interested in buying 100% of the operations. Others are somewhat interested in partnerships but their models have fractures that dealers find onerous. For example, some companies require that the dealers implement specific business operating plans and processes that conform to their central office standards. The central office also takes an active role in the day-to-day operations at the dealership. At Planet, we value the individuality of our partners and their ability to decide what is right and appropriate for their particular operation. So, in answer to your question, we may start off competing with other consolidators but at the end of the day, all other things being equal, successful dealers who want to stay in their business and operate a little longer will prefer Planet's model because it gives them the freedom and opportunity to be themselves.
Robert: (A late arrival to the interview)
I want to go back to where you asked about competition in acquisitions. It becomes like a self-fulfilling prophecy in terms of us getting the right dealer because there are a lot of people out there who want to exit and who want to exit 100%. Dealers would prefer a buyer who wants to buy 100%. That is fine with us. One of the first things George wants to know about someone is, does he really want to stay. We want to find out about him, what he wants to do with his life, what are his goals. If his goals are "I can't wait to be on my fishing boat, I hate the car business and I don't want to work anymore," that is not the person for us and he should go sell 100%. What we need to identify is that someone really wants to work.
Q: We have talked about Planet going public. What has to happen for that to happen and what could delay that happening?
Alan: We have met with the investment banking community and they are willing to take us public today. Our game plan is to delay it approximately a year. We are now running Planet as a public company and we feel that we can provide the highest value to our shareholders by selling performance rather than promise. By selling performance instead of promises, we can maintain a higher multiple when we do go public. We have the capital to grow this business ourselves, we have the funding if we want to draw on it from various financial sources.
What will prevent us from going public? It could be any of a number of factors. There is the long shot of our non-performance. We don't think that will happen. The largest problem could just be a change in the market place: Greenspan dies, war breaks out, a gas crisis, a Chernobyl exploding, if something like that happens and the market is not receptive to us going public, at that time we cannot force it.
Q: What have been some of the biggest hurdles?
Robert: I wouldn't call it a hurdle but we were dealing with an investment banking group that wanted to take a 75% interest in us to go public and we refined our unique model. It was really a great educational process and the more we went through that process the better our model looked. I really wouldn't call it a hurdle though as much as a realization of how we could very effectively structure ourselves to be a public company and a consolidator. The hurdles to going public are the problems that UAG, Cross Continent, Republic and CarMax have had. Half who went public have done badly and half have done well. We see our model much closer to the ones that did well.
Q: What do you see as the biggest challenges ahead?
Alan: The unexpected. If we knew what it was it wouldn't be a challenge.
Q: But there have got to be some things that you have thought, "Boy, this is going to be tough" and "We are going to have to be aware of and watch for this."
Alan: We move very, very slowly, evidenced by the fact that we could have gone public, but we waited. Wall Street knows the Potamkin name, my dad was their local dealer. Robert and I know a number of people in that world also. We could have gone public two years ago. We were approached by a lot of people to do so. We move very slowly so that we can hopefully find the mistakes and cure them before they hit us.
Robert: When we talk about potential problems we talk about the macro level of problems and the micro level of problems. The macro level is that the whole world economy sours somehow, interest rates push up, and it is harder for anybody to go public. That is the big picture. Then there is the industry itself. If Republic crashes and burns it will take everybody with it. Anything in the world can happen.
Q: Or anything on the planet.
All: Yes.