June 2009, Auto Dealer Today - WebXclusive
Dealer Exit Strategy
If, for whatever reason, you have decided that the time has come for you to exit the industry as a franchised new car dealer, the following is a very brief synopsis of things to consider. Space confines make it impossible to explain these subjects in any great detail; therefore, it’s important that you get competent legal advice from an attorney well-versed in automotive retail law. The following is a checklist I have given to some clients considering exiting.
1. Employment Issues – If you have fewer than 100 employees, go on to number two. If you have over 100 employees, the Federal Worker Adjustment and Retraining Notice (WARN) Act applies to you. A 60-day notice of closure is required if you are subject to the Act. There are also mass lay-off provisions of the Act, but that’s beyond the scope of this article. It will be necessary for you to retain some key individuals in order to wind down your business affairs. Those individuals should probably be given bonuses for staying with you during the wind-down period. Their fringe benefits, salaries and overtime, if applicable, should continue as usual. A good way to retain key people in this situation is to do an individual severance package with them if they stay through the end of the wind-down period.
2. Continuing COBRA Obligations – As a result of the Obama porkulus bill, employers are now subject to rather draconian Consolidated Omnibus Budget Reconciliation Act (COBRA) requirements. Check with your insurance company or contact our office for a special article on the topic.
3. Franchise Agreement – It’s very important before you do anything else to get a copy of your franchise agreement and become familiar with its terms. Domestics, by franchise contract, are required to buy back certain new car inventory. Each one has slightly different qualifications for the buy-back in terms of miles, accessories, model year, time of purchase, etc. It’s important that you are familiar with those. Also, the parts return policy for the terminating dealer can be found in the franchise agreement. Likewise, accessories, signs and other financially beneficial information will be in the franchise agreement.
NOTE: Many of the imports do not have a mandatory buy-back but most do repurchase; however, depending upon model year considerations, an exiting dealer may find himself saddled with substantial inventory that will not be purchased by the manufacturer. Note also that for any franchise having facilities assistance, that assistance will only be triggered in the event the factory terminates the franchise. If a dealer voluntarily terminates, there will be no facilities assistance. Some state franchise laws are in existence that protect dealer inventory return rights. You need to be familiar with any applicable provisions of your state franchise statute.
4. Site Control Agreement – If you have entered into any site control agreement, your lawyer needs to review that agreement to determine the best way for you to proceed. There may not be an absolute release in your agreement if you cease doing business. Some of these agreements are laden with heavy penalties if they are violated. I have some doubt about the legality of the agreements, particularly if they were granted on the basis of a manufacturer supplying a dealer with different line makes. For example, if Jeep would depart Chrysler or Buick depart GM, would that excuse a dealer reliant on having those brands from any site control? Each situation would have to be reviewed individually after an examination of the site control agreement.
5. Chargebacks – Carefully review all of your agreements with retail finance companies, warranty companies and providers of other insurance products sold to consumers. You need to attempt to determine any chargeback liability with these companies.
6. Shareholder Agreements – Are there agreements you have with top management or other shareholders that would inhibit your ability to exit?
7. Cash Management Account – Check the terms of your cash management account to see if there are any factory charges that could be levied against the account. Chrysler is infamous for this sort of treatment. Chrysler Credit and Ford Motor Credit have tie-ins with the factory that would provide for recapture of reserves by the lending arm and put a hold on your factory account. This is separate and distinct from the reserve issues that might exist with the factory.
8. Review Contracts You Have in Force with Vendors – Unfortunately, many dealers have not paid attention to these agreements in the past and find themselves subject to “evergreen provisions” that restrict their ability to terminate the contracts if they go out of business. There may be significant liability on these agreements, particularly if they exist with your computer vendor or uniform supplier.
9. Factory Accounts – Make sure you have a good handle on your factory account balances. It is important that you get a current read on your accounts and also what monies are due you from the factory. Also be aware, once you have terminated your franchise, your ability to get information on your factory account will be severely restricted. You will no longer have access to the factory computer. Therefore, you are at the mercy of the factory in determining when credits are applied, etc. Most manufacturers will not release dealership funds from the factory accounts until the chargebacks are satisfied. Most will calculate by actuarial means a one-time buy-out of chargeback liability.
Get an agreement with the factory before you send in a letter of termination. Most have standard form agreements that may be tweaked here and there, but the agreement will more clearly define what the factory is going to do and when they are going to do it.
10. LIFO – If you are on LIFO (although under the Obama plan, that will be terminated), get accounting help to determine what the tax liability will be for the year in which you terminate and if any of that liability can be deferred in accordance with current LIFO regulations.
11. Develop a Plan of Liquidation – The preference of creditors is as follows: payment of (i) taxes, (ii) secured creditors, (iii) unsecured creditors and (iv) shareholders. You can have a non-court liquidation, but that should be handled with the priorities as I’ve stated. Failure to follow those priorities can result in an involuntary bankruptcy or creditors chasing shareholders if the shareholders have been paid any monies before the creditors. If there is not enough money to go around, you should still follow the claim priority set out above; most unsecured creditors, with evidence that the priority chain has been followed, will accept less than 100 cents on the dollar. If they won’t, there is always Chapter 7 Liquidating Bankruptcy, which would establish the priority, apply the proceeds and discharge the corporate debtor.
12. Formal Dissolution – You should file formal dissolution of the corporation or limited liability company (LLC) with the appropriate state agency. Many times this will require a clearance from state taxing authorities or other state agencies, but if you follow the formal dissolution procedures set out in your state statutes, any possibility of creditors chasing shareholders later is extinguished. That piece of mind is well worth the rather minimal cost of statutory entity dissolution. The wind-down period will generally take several months. Consult with your tax advisors to see if there is any benefit to being totally wound down and dissolved during the current taxable year or if there is some benefit to accomplishing the wind-down and dissolution over more than the current taxable year.
13. Liens – It’s worth running a Uniform Commercial Code (UCC) check with the Secretary of State or other appropriate state agency. Sometimes you will find liens that have not been released even though the creditors have been paid. You should find out if any of those exist and make sure that all liens are extinguished when the creditors are paid or if the creditor has been paid in the past.
14. Real Estate Leases – Most dealers have a separate company that owns the real estate, so terminating those leases should be no issue. It’s worthwhile, however, to check your zoning to make sure, for example, that a variance does not exist where your zoning will revert to some other classification if it was personal to your use of the property. In most cases, that will not be the case, but it’s worth checking anyway. If you were leasing from an independent third party, you’ll need to determine the liability for exiting the lease.
15. Affiliates – If you have multiple lines or dealerships and you are continuing operations in some areas, check to see if partial cessation of operations will impact loan agreements that are cross-collateralized or otherwise subject to terms that would be disadvantageous to the continuing business operations.
16. Factory Consolidations – All of the domestics are involved in some sort of consolidation effort. If they survive, these efforts will be intensified. It may be that you can strike a deal with a competitor to consolidate utilizing part of your assets or real estate and providing some shareholder or employment opportunities for you or members of your family.
17. Manufacturer Bankruptcy – Depending upon the ability of the dealer to maintain operations for a while, it might be prudent to see if one or more of the domestics file Chapter 11 Bankruptcy. A dealer that terminates pre-petition would have unsecured claims against the manufacturer for warranty payments, factory account incentives, etc. However, in the context of the Chapter 11, there may be arrangements worked out that could be more advantageous to the dealer body than what a dealer might individually realize if that dealer terminated the franchise pre-petition. While it would be difficult to give legal advice as to whether or not it would be more advantageous to wait to see if the manufacturer takes Chapter 11, this at least is an area that should be discussed with your legal advisor.
If you have any questions regarding this areas feel free to contact me or antoher qualified attorney.
Vol.6, Issue 4