Operating a dealership places numerous demands on a dealer, whether addressing issues requiring immediate attention or reviewing the annual operations to improve efficiency. The constant requirements placed on owner/operators can make it difficult for any dealer to take the time to engage in long-term strategic planning regarding the inevitable transfer of operational or ownership control of his or her dealership.
The decision of when to sell your dealership or to step back from running the day-to-day dealership operations is a deeply personal decision. A decision every dealer would like to make on his or her own terms and in his or her own time. By taking the time now to consider the (1) existing dealership operations and investments, (2) your desired level of involvement, (3) your desired transfer structure (family, internal, or external), and (4) existing ownership agreements, you will be better prepared to make the decision of when and how to transfer operational or ownership control of your dealership.
Existing Operations, Investments, and Goals
Do your existing dealership operations, investments, and goals suggest that you should sell the dealership within the next year? Will you obtain the highest return on your investment by continuing to own and operate the dealership? The following are a few questions that can help you determine when the time is right to sell:
- What is the current state of dealership operations?
- How have operations changed over the last 3 to 5 years?
- Are real on-statement and off-statement dealership net profits increasing or decreasing?
- Does the dealership provide the desired return on investment? Are there alternative investments that would provide the desired return on investment?
- What is your relationship with the OEM? Has it changed over the last 5 years? Do you see it changing in the future?
- What operational opportunities do you see in the next 3 to 5 years?
- What are your 3-year, 5-year, and 10-year targets?
- Do you need to make a large facility renovation or relocation that will require many years to recover the investment?
The answers to these questions will help you begin to determine whether the dealership will better help you to obtain your personal goals if you continue to operate the dealership or if you sell the dealership.
Level of Involvement
When deciding when to step back from your involvement in day-to-day operations, consider the following:
- Do you have the passion, energy, drive, and time to manage the dealership?
- Is that passion, energy, and drive decreasing?
- Are there other ways you would rather spend your time?
- Are there other interests (travel, family, hobbies) that you want to pursue?
In our experience, absentee dealers tend to see declining profits and dealership asset values. Lost revenues and developing operational issues due to inattention tend to reduce the purchase price buyers are willing to pay for the business. The answers to these questions will help you determine if you may already be disengaging from the business and reducing the potential purchase price for blue sky and operational assets of the dealership in a potential sale transaction.
Structure of the Transfer
There are three main types of dealership transfers—the (A) family transfer, (B) internal transfer, and (C) external transfer. Each type of transfer provides its own advantages and disadvantages. Which structure is right for you requires a detailed analysis of your individual situation.
A. Family Transfer. A family transfer can be accomplished by gift, inheritance, a structured buy-in, or single purchase by a family member. Family transfers can be beneficial for tax purposes, especially when your total estate value does not exceed the federal estate tax exemption ($10 million individual in 2018 indexed for inflation; $20 million effective for spouses) and you built the dealership from a low initial basis/investment (e.g. in many cases the heir may take a stepped-up basis for calculating taxes). It is important to consider the goals of the transfer to determine the “right” valuation of the dealership in a family transfer. For example:
- Are there family members that will not have an ownership interest in the dealership after the transfer?
- Is the intent to have all family members realize the true value of the dealership (e.g. blue sky) or purely depreciated book value? Something between?
- Do you need a life insurance policy to ensure the family members will have adequate funds to buy-out minority owners in the dealership? Who will pay the premiums on the policy?
- Do existing manufacturer or finance agreements terminate by their terms upon an ownership transfer?
- Does your state law protect the family member from termination of its third party contracts, or is it possible the family member(s) will have a diminished asset that they may have to sell at a depreciated value later?
It is important to consider family transfers from business, succession planning, and estate planning points of view, as it can take years to define your goals and the best ways to accomplish those goals with a family transfer.
B. Internal Transfer. An internal transfer has its own benefits and risks. Such a transfer may be accomplished slowly over time (e.g. though an employee stock ownership plan or restricted buy-in by general manager or co-owners) or on a single day (e.g. through the sale of ownership interest to co-owners or to a general manager). The best structure for you depends on many factors. Consider the following:
- What is the state of the current buy-sell environment in my area (e.g. is it a seller or buyer’s market)? Is my best potential buyer already involved with the dealership operations?
- What is the state of the current economy in my area (e.g. is it growing or shrinking, did a new employer come to town or an old employer leave)? Is my area not desirable to outside investors?
- How long do I desire to maintain control of the dealership operations?
- Am I willing to accept payments over time and from whom would I accept payments over time?
- What manufacturer and/or financer restrictions on my right to transfer ownership and/or operational control of my dealership have I agreed to (which are not void as a matter of law)?
- Will I lose key employees of the dealership if I do allow a buy-in?
- Am I unable to retain good employees without a buy-in?
- What tax savings will I realize through an internal transfer?
These questions will help you to answer whether an internal transfer will obtain the highest net value of the dealership, whether operationally or through a sale.
C. External Transfer. In many situations, family members and co-owners/employees are incapable or unwilling to purchase, operate, and/or serve as the dealer-principal. Life insurance policies and other payment options may be able to provide the financial capital to purchase the dealership; however, the person may still not have the knowledge, ability, and interest to operate the dealership. In such cases it is important to prepare to sell the dealership to a third party. There are many ways to structure an external transfer, each of which may influence your ability to realize the greatest return on your investment. Consider the following:
- Will you receive the greatest price if you sell some parts of the dealership (e.g. franchises or physical assets such as real estate) to multiple buyers, or to sell it as a single operation?
- Are there tax benefits for you to sell your ownership interest in the business (e.g. stock sale) instead of the physical and intangible assets (e.g. asset sale)?
- Do you want to remain involved for a period of time while decreasing the day-to-day demands on your time by bringing in an outside general manager to operate the dealership and buy-in over time?
- Is there high or low demand for your new car franchises?
The questions included above are only a starting point in considering whether to transfer your ownership to a family member, employee, co-owner, or third party. The structure of the transaction may impact the net value you receive for your dealership and non-economic considerations unique to your particular situation.
Consider how existing ownership agreements (e.g. shareholder agreement and operating agreement) may impact your right to sell and operate your dealership. Ownership agreements can significantly impact whether you may sell your interest in the dealership, the price you may obtain for your interest in the dealership, and whether you can sell the dealership without the approval of other owners. It is important to understand all existing agreements before attempting to make any changes in ownership or operational control.
If you are not the sole owner of the dealership and the owners have not entered into an ownership agreement, you may want to explore how ownership agreements may help the ownership group plan for the future. An operating agreement is essential whenever there is a structured buy-in or buy-out. Well-drafted ownership agreements will lay the important ground work for a smooth transfer of ownership and/or operational control so that the owners can realize the full value of their investment in the dealership.
There is no one correct answer on when and how to sell your dealership. Even if you plan to continue owning and operating your dealership for years to come, it is important to consider your exit strategy in advance of the time you are ready to transfer ownership or operational control of your dealership. Proper planning can help you realize the value of your hard work by empowering you to choose when, how, and at what price you will sell. We recommend speaking with a professional knowledgeable in dealership buy-sell agreements (stock purchase agreements and asset purchase agreements), ownership transfers, and employee buy-ins and operations to develop a plan with you for the ultimate transfer of your dealership.