How do you record this advertising expense? Do you record and expense it when you pay it or in the month of the sale? The correct answer is to expense this in the same month as the sale occurs, so associated expenses are matched with the revenue generated. If the sale carries over into the next month, then this expense should be prorated based upon the number of days in each month. This assumes you will not hold your month open for a few extra days to push all the deals from the sale into the month when the sale started (a very common practice in the industry). For future analysis, you should add an additional general ledger expense account to segregate the sale advertising expense from your own advertising expense.
The contracts normally specify the commission percentage of front and back end gross profit that will be paid to the third party vendor. Most contracts I have reviewed require approximately 28 percent of the total gross as a commission. There may or may not be a vehicle “pack” included and agreed upon. How do you record the commissions paid to the vendor? I would consider this fee to be separate from the normal commission expense paid to sales people. It seems to make more sense to post it as a reduction of the gross profit with each car deal. This fee is similar to what you pay some finance companies to purchase various contracts, which are usually deducted from the gross profit when recording the car deal in accounting. Or you may want to add an additional cost of sales account for these commissions so they are segregated from your normal cost of sales general ledger accounts for future analysis.
In addition to the above costs paid to the vendor, you must also pay the normal commission percentage of the gross profit generated from sales by the sales people the vendor has provided. These people are normally indicated in the contracts as independent contractors by the vendor and paid by the vendor. You will usually pay the vendor for this commission. These commissions are normally the same percentages you would pay your own sales staff. If so, they would be expensed as normal commissions are for your regular car deals. Again, you may want to segregate this expense in a separate general ledger account for future payroll expense analysis.
The dealer also agrees to have a minimum number, and type, of used vehicles in inventory within certain criteria of mileage and year of the vehicle. These guidelines are normally geared to lenders which the third party vendor will want to utilize in providing financing during the sale. Be sure you have the available lines of credit, floor plan lines and/or adequate cash to purchase the volume of vehicles you agree to have on hand for the sale.
Most of these contracts include terms stating you may not hire or retain, in any way, any person employed or contracted by the vendor utilized during the sale for a set period of time. Some include a fine up to $100,000 for doing so. They also state this fine is deemed to be fair and reasonable. This may or may not be the case based upon how well the sale went, how well the third party vendor did its job and the level of expertise of the independent contractors furnished by the vendor. Make sure the vendor completes all the terms they have agreed to, including the training and other aids they have promised in the agreement before, during and after the sale.
You may want to consult with your finance sources to ask them about the vendor’s reputation and the type of car deals generated from their sales. Inquire about any problems they have incurred from the vendor’s deals, and consider their answers before signing any contract. You may also want to ask for references from other dealers that have held sales with the vendor in the past one to three months.
It appears the quality of the car deals generated from these sales relies solely on the personnel provided by the vendor. As the dealer, you should review and sign off on all deals to ensure correct and complete customer information has been provided to the finance company and that on finance terms approved have been adhered to before submission to the the finance company. Failure to do so will normally result a delay in obtaining funding for the car deal and potential problems with the deal being rejected for failure to provide correct and adequate information.
Again, I have found that contracts and all terms are negotiable. Do not sign contracts unless you feel comfortable with all the terms in the contract. Call other dealers who have held these sales and find out what problems they have had, or any terms they negotiated in their contracts. Remember, this is a formal contract between you and the third party vendor. You and this third party vendor should initial any changes made to the standard contract terms. If you have doubts or concerns regarding the terms, you should consult your legal counsel to review the agreement, and make any necessary changes to protect you and your dealership.
Vol 5, Issue 6