Whether you're feeling pressured to sell - or whether you have the optimism, energy and financial wherewithal to hunt for buying opportunities - there's a lot you need to understand and negotiate before you begin the buy-sell process.
Even if buying or selling isn't in your near-term plans, you still owe it to yourself to be ready for the unexpected. "The factories can destroy everything families have built. Simple, easy to understand planning can avoid all this
You've gotta start right from Day 1 with a well-thought-out exit plan or succession plan," says Mark Johnson, president of MD Johnson Inc., a national mergers, acquisitions, and financial advisory firm based in Seattle whose clients include dealerships of all sizes.
"It's very relevant, especially given today's market. You could be in for a rude awakening when it's your turn to buy or sell. A manufacturer could let a guy go out of business and won't let you sell the property," Mr. Johnson tells Car Dealer Insider.
Dealers need to resolve very early in the process any issues with their site control agreements, which restrict who they can sell their real estate to, he says. Half of all dealership properties have site control agreements with their manufacturers, he adds.
"Manufacturers are being tougher than ever on site control issues," says Mr. Johnson, a former dealer who has done merger and acquisition work since 1990 and has dealt with every auto manufacturer. In Tier 1 markets (the top 64 metro markets in the country), many manufacturers' site control agreements are demanding that dealers sell to someone else with the same franchise.
If you're a domestic dealer looking to unload your real estate, "you could face a million to multi-million dollar penalty" versus what you could get if you were able to resign your franchise and sell your land to a profitable, expanding import franchise - such as Lexus, Toyota, or BMW - or even the developer of a Walgreen's or Rite Aid strip mall, he says.
Dealers in minority dealer development programs could find themselves in a particularly difficult position because of how their operating agreements are frequently worded, adds Mr. Johnson. The factories have often included an option that enables them to repurchase a minority dealer's real estate for the same amount they sold it to the dealer for, plus improvements - a big blow to those minority dealers who scrimped to purchase their real estate and have watched its market value greatly appreciate.
The factory may be able to exercise this option if minority dealers sell to anyone except another dealer of their brand vehicle. Dealers should also be aware of what could happen if they violate other option "triggers" - such as being out of trust or insolvent. "Very few dealers have ever read the option documents," says Mr. Johnson.
All dealers who have captive finance mortgages should also think through the implications if they sell their operations and have to get a replacement mortgage to hold on to their property, says Mr. Johnson. An investment grade mortgage with a bank could be more difficult to obtain than an owner/operator mortgage, there may be lien releases involved, and a dealer can ultimately be forced to sell the real estate.
Just as sellers need to be thinking about the road ahead, so do buyers. To help avoid the execution risk - time and money lost because a deal is not executed right - buyers should ask to see all the documents in an initial due diligence package, says Mr. Johnson. He emphasizes the need for dealers to talk to a lawyer or someone very knowledgeable before getting involved in either end of a buy-sell because it is very technical.
"The problem with most auto dealers is they think this is just another car deal, but it's a very complicated business transaction
Dealers are good at buying and selling iron," he says, but tackling buy-sell issues without help, "is like saving 10 grand and operating on one of your kids." He notes that 50 percent of deals between buyers and sellers fail when there are no professionals involved. Dealers need to put together a plan on the business side as well as legal side, he says.
Some other things to consider when doing a buy-sell are blue sky, planning volume, capital requirements, whether or not you have to build more service capacity, special parts return, and floor plan assistance, says Mr. Johnson, who unsuccessfully talked to Ford about putting together a unified exit agreement to help dealers through the process.
"They sent me down the chain through 22 layers of management. I think they're going to negotiate each deal individually and they said dealers should call their regional sales managers." But that doesn't mean you should give up trying to communicate with your factory about succession planning issues. "Factories can be conciliatory," he says.
Mr. Johnson will be presenting a DealersEdge teleseminar on Thursday, June 7 from 1-2:30 EST on what dealers must know before engaging in a buy-sell in today's tough market. To register, call 1-800-321-5312 or visit www.dealersedge.com. Mr. Johnson can be reached by cell phone at 702-497-5480 or by e-mail email@example.com.
Deal making must-haves
Dealership buy-sell specialist Mark Johnson of M.D. Johnson Inc. walks each of his clients through a checklist of items they should be familiar with. Some of these things, which he suggests you become intimate with long before you're ready to engage in a buy-sell: your mortgage documents, site control agreements, and floor plan agreements. He also suggests trying to get an update on what each manufacturer you work with is trying to accomplish in the market.