February 2014, Auto Dealer Today - Feature
Some of the most frequently asked questions I hear from dealers involve succession planning. “Will my kids be able to run and maintain the business I built? How will they survive the bad times when I’m no longer around?”
These questions are not easy to answer. Sure, we can run projections to see if there will be enough revenue and profits to continue your business as a going concern. But adequate financing is only the first item on the list. Your successors will also need an in-depth understanding of cash flow, and they must demonstrate common sense, good business sense and a solid work ethic. Let’s take a closer look at all five requirements.
Any business would struggle without access to a credit line of some kind. For dealers, financing is most often furnished by a bank, the dealer’s personal reserves or friends, family and other outside investors. Succession planning ups the ante by forcing you to present your business and personal financial information in some semblance of order. Your successors must be aware of their financial condition at all times and be able to react in advance. That’s true whether they’re seeking startup capital, additional financing or better loan terms.
2. Cash Flow
No dealership can succeed without adequate cash flow. Your successors will, at some point, find themselves unable to pay their bills, payroll, taxes or loan payments on time. Most vendors understand this. They will often make concessions to help you through your financial difficulty, but they can’t afford to finance your business forever.
This is one aspect of dealership operations from which dealers tend to shield their kids. It’s time for them — and you — to grow up. If they are not prepared, the first shortfall they encounter could result in the demise of the business.
3. Common Sense
The highest level of education my dad completed was grade school, but you never would have known it. He had a lot of common sense and always seemed to know what to do next. He built a successful used-car lot, and then a new-car dealership, by making smart decisions every day — and he’s not the only one. During the 1940s and ’50s, when so many of today’s dealerships were founded, most people had no choice but to go to work to help support their families.
Yes, a good education comes in handy, but you can be a successful dealer without earning an MBA. The smartest person in the world would be daunted by the daily operations of a thriving dealership and the decisions that come with it. Your successors will be eager to use their computer expertise and finance degree to take your operation to the next level, and rightly so. Just be sure they have the common sense to back it up.
4. Business Sense
Good business sense requires a combination of day-to-day operational expertise and the ability to plan for the future. Again, an advanced education can help, but most colleges don’t offer courses in dealership operations. Your successors must understand how your business operates and know everything there is to know about the products you sell.
They also must know their competition. You know how to learn from rival dealers and take advantage of their miscues. You also know better than to cross ethical lines or be dishonest or deceitful with customers. Finally, you know to react quickly when things don’t go as planned. Do your kids know?
Start by mapping out contingency plans for all the difficult situations you have faced which may arise again. Don’t be afraid to discuss the times you made bad decisions. Even the most successful businessperson stumbles from time to time, and every dealer has dealt with personnel issues and the occasional, unexpected natural or man-made disaster. You survived because you had the will to persevere and the business sense to react before it was too late.
5. Solid Work Ethic
In the early stages of a new business, individual initiative and ambition often make the difference between success and failure. Many dealers have learned that the same is true in the long term. Dealerships with absentee owners have a much higher failure rate. Which course will your successors take?
If the person who will inherit your business has plans to be an owner in name only, they will need a team of very good managers. Putting the store on “autopilot” can work, but only for a short time. Someone needs to be able to deal with the day-to-day happenings at the dealership so they don’t become major problems.
Finally, I realize that many of you were successors yourselves once. If that’s the case, try to apply the good advice your predecessors imparted to you. And don’t forget how left out you felt when they were still in charge and they didn’t take your ideas seriously. Maybe they had a good reason. Or maybe it was difficult for them to surrender the leadership of something they put in all those hard years and long hours to build.
Take those memories to heart as you undertake your own succession planning. Understand that your kids will make good decisions as well as bad ones, just like you did. Coach them and lead them, but don’t undermine their desire to continue the family business and make it their own.
One often overlooked aspect of succession planning involves income taxes. Did you know you can gift $14,000 per year of cash or value (stock interest) to your kids without incurring additional taxes? The total estate tax and gift exemption currently stands at $5,120,000, which means a substantial amount of stock value can be transferred to your successors tax-free.
Gifting while you are alive transfers your tax basis in the stock to your kids. Inheriting the stock after your demise will give the kids a “step up” in value to the fair market value at the time of death. This can drastically reduce any future income taxes upon their final sale of the stock to someone else or the sale of the majority of the assets and dissolution of the company.
Each dealer’s situation is different. Your plan for transferring stock to your kids depends partly upon your estate value and the other assets in your portfolio, so consult your accountant. It’s not pleasant, but planning for what would happen if you died today is a good place to start. You can always make additional estate planning changes in the future as time goes on and circumstances change.
Nowhere on the list of qualifications for the job of running a dealership do the words “dealer’s kid” appear. If you are a dealer’s kid and you are preparing to take over the operation, you’re in a better position to succeed than the average citizen. But your pedigree will only take you so far.
To take your family’s business to the next level, you must arm yourself with a good, solid work ethic, adequate financing, good managers and employees who care about the business as much as you do. Your primary goal is to be prepared for the hassles and problems that will invariably arise — possibly in the very near future.
There are no guarantees in this business, save one: If you aren’t excited about taking over the business and focused on succeeding, you will fail. But your future is up to you. If you don’t want to be a dealer, make your feelings known. Don’t hold up this major decision until it is too late for your family to find another successor. I can think of nothing worse than running a solid family business into the ground. This is not the legacy that was left in your hands.
If you choose to embrace this opportunity, you have an excellent chance of succeeding. Many dealerships have survived, grown and prospered beyond their founders’ dreams, all thanks to the education, ambition and hard work of their descendants.
David Keller is a partner with CliftonLarsonAllen, a leading accounting firm with expertise in serving franchised, independent and BHPH dealers and heavy truck and utility trailer outlets.