Inadequate capitalization is a problem that can sink a dealer no matter how long they have been in business, but those that are newly entering the business are especially vulnerable. When you start out, you don’t have that account base generating weekly payments to help offset the negative cash-in-deal (CID) going out the door on every deal. When you are selling $3,500 ACV vehicles and only getting $500 for a down payment, then every sale you make costs you $3,000 in cash plus any taxes or other fees. You can see why it is so easy for new BHPH dealers to “sell themselves right out of business” in no time flat. Most models I have seen recommend that in order to fund a successful startup in BHPH, you need at least $500,000 to $1 million in capital before you reach the point where your cash flow is at a breakeven point.
The extreme negative cash drain from normal operations in the BHPH business makes it absolutely critical for dealers to instantly know exactly how much cash on hand is available in real time data. Cash levels change quickly in BHPH and having a Dealer Management System that provides you immediate access to your current account balances, will allow you to have the control you need to keep this area in constant focus.
Q: What is your best advice to franchised dealers looking to get into BHPH?
A: Well, this is an area we are pretty familiar with, since we held Ford and General Motors franchises before becoming BHPH dealers. We know what works well and what to avoid. Actually, this topic could be a whole article by itself, but there is one overriding principle to consider when deciding to start a BHPH operation.
The main principle is to approach any BHPH operation with the mindset that it is a separate business entity, not just a program or even a department within your new car operation. Too often dealers will stick a guy in the office in the back corner of the building with a few problem trade-ins parked outside his door, and tell him, “You’re the BHPH department. If this works well, then we’ll get you a better location and nicer cars.” In most cases, dealers are soon scrapping the “BHPH department” and wondering what went wrong.
Akin to the familiar expression, “There is no such thing as being a little bit pregnant,” it is similarly hard to be successful “dabbling a little bit” at BHPH. There really needs to be a firm level of commitment from the owner, down. In order to have a proper foundation needed for a successful BHPH operation, there must be a solid commitment to the organizational structure, the personnel, the facilities and the inventory.
Q: I’m in an area that has a lot of BHPH competition. How can I compete?
A: One of the few areas I remember from business school that translates well into the real world is the term Unique Selling Proposition (USP). Essentially, it is focusing on what makes your dealership different than the dealership across the street. It used to be that just having liberal financing options was our USP, but as more and more competition has entered the BHPH industry, that changed. Probably all BHPH dealers in your area now offer some variation of “Bad Credit? No Credit? NO PROBLEM!” So, you need to find something (or even better, several “somethings”) that sets you apart from the rest.
There are a number of features and benefits that have worked well for dealers as their USP. One example is to include a warranty with every vehicle. For example, “12 Months or 12,000 Miles” is common, but you can make it as short or long as you are comfortable with. You might also consider offering a “3-Day Money Back Guarantee,” providing home delivery or not requiring full coverage insurance. Though all of those ideas are currently being used successfully by dealers, they may seem too radical for your taste. If so, your USP may be as simple as having nicer facilities than your competitors, having salespeople with a nicer appearance (though I’d suggest skipping the coats and ties), or requiring lower down payments. A dealer friend in one of our twenty groups even gave us the idea to list and promote the “Top 10” reasons to buy at our dealership.
Well, it looks like it’s time to close up the ol’ BHPH Mailbag for now, but keep those calls, letters and e-mails coming! If you have any specific questions or other topics you would like to see covered in future issues, feel free to contact me at the e-mail address above.
Vol 4, Issue 3