October 2009, Auto Dealer Today - WebXclusive
The Store Front Doesn’t Always Tell the Story
Today’s dealership climate differs drastically from that of several years ago. We have seen the resurgence in the popularity of BHPH across the spectrum. Although the special finance market is gaining some traction again after it was just about decimated over the past year, I have seen many dealers take an active approach in learning more about BHPH and what it really entails.
BHPH allows a customer who cannot get financing from a traditional finance company to make payments on a vehicle at the dealership because the dealer actually finances the vehicle. Actually, BHPH is quite a simple concept if done correctly. It is, however, not for everyone, and once again, it must be done correctly. One of the major pitfalls is the image of selling low-end cars to less-than-wealthy people.
Recently, I was in a really nice, decked-out franchise store talking with the dealer principal. During our conversation, I mentioned I was heading over to a BHPH lot for my next stop. This dealer then remarked with obvious disdain, “That pig lot with the trailer on it?” He proceeded to ask me why I would waste my time working with a lot like that.
Being in the know on both operations, let me tell you the behind-the-scenes scenario. The franchise dealer had what I call “Big Hat, No Cattle” syndrome—meaning he looked good, had a nice facility, ironed company shirts, hired a pretty girl at the receptionist desk, etc. (pretty much the works); however, he is not profitable. In fact, he has sustained a loss for over two years and is constantly struggling to try to right the dealership problems.
On the other hand, the BHPH “pig lot” does indeed have a gravel lot with a trailer on it. They also are extremely profitable, and have accounts receivable worth over $7 million and growing. Every item on their lot has been paid for … you probably see my point.
So, is BHPH for you? Before anyone jumps into this arena, they must understand exactly what they are in for. Some of you know that over the past year I have opened a BHPH lot. I have been in the car business almost 20 years and have owned numerous franchise stores and used car operations, some of which were the most successful special finance operations in the West. I am in and out of different stores on a constant basis with my agency. With this background and knowledge I choose to opened a BHPH “pig”lot. Actually, to be honest, my lot is paved and I have an old gas station building instead of a trailer for an office.
What in the world would possess me to open up a lot like this when I have the resume/experience to run just about any type of operation in the country? Profitability! When a BHPH lot is run correctly, it should turn close to a 70 percent return on the investment. A good friend of mine told me it is the best way to make money he has ever seen … legally!
There are some real barriers to entry in this segment of the car business, not the least of which is cash. A BHPH store can swallow a lot of cash in a hurry and you can actually sell yourself out of business. It’s pretty hard to pay your rent and bills with accounts receivable instead of cash money. I have seen dealers open BHPH lots with as little as $80,000, although I wouldn’t recommend this. To get a dealership running and be able to sustain it, you need to have a cash flow model in place. Basically, this is a process that tells you how many sales you can sustain without running out of cash.
Service is another critical component of successful BHPH lots. The cars have to run, or customers will not pay for them. There are different schools of thought on the best way to handle repair orders. To those of you in 20 groups, you have been taught to charge retail pricing for service work similar to what you would do in a typical retail car lot. I disagree with this. I encourage BHPH lots to keep cash–in-deal (CID) to a minimum, as these lots are running on a cash-flow basis.
I recommend covering costs for repair orders and not much else. I know some will disagree with me on this, but I am sticking to my guns. When CID is kept in check, you are able to place more deals and turn an even greater profit. After the sale, a policy must be in place to fix broken-down cars. Who pays for it? In my BHPH dealership, we cover repairs for customers. This must be done in order to be able to collect the payments.
BHPH is a consistent business that can perform at peak levels when it is done correctly and the commitment levels are in place. Please don’t think it is an easy business though, as the risks are high. I have spent a good deal of time traveling the last few months, setting up new BHPH stores and fixing broken BHPH stores for dealers. The stores that are on their way to success have taken the time to set up the correct policies/processes and have the discipline necessary to follow their cash flow model.
The next time you pass the “pig” lot with a gravel lot and trailer on it, you may be looking at a multi-million dollar operation. Who knows? Just like all segments in the car business, you can’t judge a book by its cover.