Article

Winding Down Your New Car Dealership

August 2009, Auto Dealer Today - WebXclusive

by David Keller, CPA, CFE - Also by this author


What a month it has been! For the past three to four weeks, we have been busy assisting our GM dealers who received a “non-renewal agreement” letter to effectively close their new GM franchises down by October 2010. It seems GM has used various guidelines to rate each dealer, along with other factors, to judge which dealerships should stay and which ones needed to go.
We assisted with filing appeals for GM dealers who had their entire franchise lineups non-renewed. We explained the scores they were being judged by may not tell the entire story. The store may have been on the LIFO method of inventory, which created for most dealers a large expense in December 2008 for the estimated LIFO deduction for the tax return. They may have paid large bonuses at year-end only, which could have been structured differently to avoid creating a loss for the store for the year. Some of these dealerships had adequate operating capital and the dealers could have easily invested more capital if GM requested it.

Sadly, none of the appeals were successful. Some of these dealerships have been there for many years and are the only GM dealerships in a rural area within 30 miles. I don’t quite understand GM’s reasoning for this, but I am sure they can justify it somehow based on the dealerships’ scores and other factors.

What does a dealer do who is not receiving a renewal agreement on October 2010? Some of the GM and Chrysler dealers are just going away permanently due to lack of capital to operate the dealership, location issues, etc. Others have announced they are going to continue as used car operations.

To succeed as a stand-alone used car dealer, you will have to substantially reduce your overhead. The largest expense you may not be able to decrease is your rent expense, along with other fixed expenses tied to the premises. The easiest to decrease is the number of employees you will need. You will have to decide what kind of vehicles to stock, as you will probably no longer have access to the program car market.

You will need to decide if you are going to keep your service department alive and how many technicians you will need once the warranty work disappears. You will need to differentiate yourself in the service business, as you are definitely in competition now with all of the other local non-franchise repair facilities. Hopefully, with the good reputation you have in your community, most of your customers will continue to visit your dealership for their non-warranty repairs and maintenance needs.

The parts department is another concern. What do you stock once you are no longer a warranty repair center? Take a look at your maintenance and non-warranty operation codes and research what parts were needed for those repairs. You will also need to find alternative sources to purchase the parts you may need to continue to stock. Decide now what you will carry and what you won’t continue to stock. Work towards that goal starting now. Don’t wait until the last minute.

Now, how are you going to market yourself to the public? You don’t necessarily have to reinvent the wheel. Your dealership has been in the community for a long time with a very established presence in a viable location. You have a wealth of past customers who have always bought their vehicles from you. You just need to change the focus to used vehicles and service business only. Review your competitor’s ads and decide if you want to do something similar or try something new that lets the public know you are still there, in business and ready to take care of their needs for used cars and service.

Your signage will also be changed as your new car sign and logos will disappear. You might need to file for a new DBA name with the state, such as Dave’s Certified Used Cars. Start rebranding yourself now so when the franchise sign comes down your new sign goes up. Your advertising will need to be branded with the same signage and name. Come up with a new logo that is “catchy” and will be remembered by the public. Incorporate the logo and branding in all your advertising going forward, so the public is used to seeing it now and there is not a big change when the franchises go away.

You may also want to start negotiations with your computer software vendor to change your monthly fees and applications needed. The bad part of this is you have signed contracts with the vendors for more years than you will be a new car franchise. GM and Chrysler have not taken any of this into consideration when they decided not to renew your franchise agreement. You are left holding the bag on this.

Review any contracts you have signed for the expiration dates to see how many will still be in existence after the non-renewal date. Contact these vendors and tell them the contract will need to be modified or dissolved upon the date you are no longer a new car dealer. You don’t have a choice in this matter. You need to survive as a used dealer with the least overhead possible if you are going to compete with the guy down the street who doesn’t have the overhead factor you do.

You may have already thought of another franchise to apply for. I say go for it. You already have the facility, the personnel, the reputation, experience, etc. Apply to all of them now. You may also approach another dealer in town to buy their franchises if they don’t have successors to continue it on. If not, then look into the buy here pay here (BHPH) industry as an alternative. If you have adequate capital it can be a very good business to own.

If you are a GM dealer, you will be receiving a “settlement” from GM. It appears it will be paid to the dealership and not to the dealer directly. This can cause some tax problems, as it could be construed to be ordinary income rather than capital gains as the Oldsmobile franchise was.

Also, start discussions now with your CPA if you are on the LIFO method of inventory valuation for new vehicles. The recapture of this reserve can be very painful at a time when you don’t have a lot of cash sitting around to give the IRS. See what options you may have.

It saddens me greatly to see what has happened to our automotive industry in such a short period of time. I grew up in the used car business, and then my dad bought GM and Chrysler franchises approximately 17 years ago. I love this industry. I know changes will always come, but these changes with GM and Chrysler have moved at such a rapid pace most dealers feel a huge storm came through their area and nothing will ever be the same. There will probably be many more changes in the next few years, as I don’t think we are done yet. I do know we need some calmness in the new and used industry, so the rest of the dealerships can survive and prosper.

Good luck and may you survive the future and whatever it holds.

 Vol. 6 Issue 8

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