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Buy-In: Adding an Investor—Pros, Cons, and Pointers

Allowing an investor to buy into your corporation or LLC can be a complicated process. While it may be a great idea for some dealerships, it may be unsuitable for others. Every case is unique, and whether to add an investor involves a series of important personal and business decisions that you should only make after careful thought and consultation with professional advisors.

This article provides a brief outline of some of the issues that you may want to consider; it is not comprehensive. Every case is different. Consult experienced dealer counsel for further information.

The Pros:

Bringing in an investor is typically done for many reasons, including (1) raising additional capital; (2) estate planning (you do have a succession plan, don’t you?); (3) management assistance; (4) golden handcuffs; and/or (5) a potential exit strategy.

The Cons:

Adding an investor may lead to personal conflicts. If your co-investor owns 50% of the business or a majority of the business then management disagreements and deadlocks may arise. You will have to share profits with the investor and decisions about write downs, owner benefits, distribution of earnings, and “business as usual” may become a thing of the past. Even if your co-investor is a minority owner, he or she may possess certain rights, such as the right to examine records and possibly, a reasonable right to a return on investment, under Iowa law.

Things to Consider Before You Make Promises About or Enter Into A Buy-In Agreement:

  1. Your Own Motivations.Think about this and then continue to reflect about it before you move forward with any buy-in: “What is my real motivation for doing this?” Is this the best way to achieve your goals? Talk this over with your family and professional advisors. This is critical!
  2. What About the Investor?Really knowing a potential investor may prevent a future disaster. In our practice, we have seen the consequences of a seller failing to consider the following: How long have you known the potential investor? Are you really compatible with him/her and how do you know that? Are you comfortable with his/her spouse and how do you know that? Does he/she possess skills that complement your own skills and how do you know that? Slow down here and make a logical and not an emotional decision.
  3. To Control or Not to Control? Most sellers will want to maintain control in a buy-in scenario. To maintain control, you must retain over 50% of the ownership interests. Your professional team should review your bylaws, articles of incorporation, and/or operating agreement and articles of organization to be certain that there are no adverse provisions involving control issues.
  4. How to Establish a Value for Your Company.If you decide to move forward, then seek guidance in valuing your business before you enter into any oral or written agreements, including letters of intent. If you want to maximize the value that you receive for the ownership interest that you are selling, then your attorney and accountant must be familiar with auto dealership transactions and especially current goodwill and blue-sky multiples. They must also understand the best techniques for fixed and other asset valuations.
  5. How Will You be Paid? Before you enter into any agreements you need to be comfortable with the method of payment. Is it cash? Payment from future bonuses? Will there be a promissory note involved? If there is a payment plan, when will the ownership interest transfer—at the closing or as paid? Is there security?
  6. Enter into an Employment Agreement Concurrently with the Buy-In Agreement. You should strongly consider having counsel draft an employment agreement for the potential investor if the investor is to be a working investor. You should carefully consider the termination provisions and the effect of termination on ownership. In other words, in the event that the investor fails to perform do you want the right to buy back the investor’s ownership interest? This must be coordinated with a shareholders’ or members’ agreement.
  7. Shareholders’ and/or Members’ Agreements.Shareholder and/or member agreements should be entered into concurrently with the buy-in agreement and the employment agreement. The essential purpose of the shareholders’ or members’ agreement is to ensure that if there is a future dispute between seller and buyer, there is an agreed workout, including, for example a provision whereby the seller can reacquire the buyer’s interest in the business at a predetermined price or formula with specified payment methods.
  8. Beware of Securities Laws! Generally, small one-time transactions fall within an exception to the necessity to registering shares or ownership interests under the Securities Act. Proper disclosures will protect sellers! Build this in to your buy-in agreement. See your attorney.

The decision and the process for allowing an investor to buy into your dealership business may seem deceptively simple at first glance. In our experience, it requires a great deal of planning and execution.   Knowing the benefits, drawbacks, and overall process can help your decision-making process. However, nothing substitutes for the knowledge of an experienced auto dealer attorney who can walk you through this complicated process.

 

 


Classic Puffery or Illegal Misrepresentation?

Puffery: advertising copy that indulges in subjective exaggeration in its descriptions of a product or service, such as “an outstanding piece of luggage.” Puffery is always a matter of opinion on the part of the advertiser and often will use words such as “the best” or “the greatest” in describing the good qualities of a product or services. Sometimes puffery is extended into an exaggeration that is obviously untrue and becomes and outright parody, such as, “This perfume will bring out the beast in every man!”

– Jane Imbler & Betsy-Ann Toffler, Dictionary of Marketing Terms 458 (2000).

As Judge Learned Hand aptly explained, puffery is the “kind[] of talk which no sensible [person] takes seriously.” Puffery is not a foreign concept to the average automotive dealer. However, there is occasionally a fine line between puffery and fraud or misrepresentation. Of course, a customer likely cannot effectively bring a successful action against a dealership for puffery, but they can bring an action against a dealership for fraud, deception, or misrepresentation.

Iowa, like many other states, has enacted legislation to deter businesses from misleading consumers in contract terms, financing agreements, or advertisements. Under the Iowa Consumer Fraud Act, the Attorney General can bring a case on behalf of a citizen who feels they have been subjected to deceptive or misleading business practices. Further, in 2009, Iowa enacted the Consumer Fraud – Private Right of Action, which grants consumers the ability to bring a suit on their own behalf should they feel that a company has misrepresented information or deceived them in any way. Of course, this legislation only covers misrepresentation or fraud and does not extend to actions for puffery. As such, dealerships should beware of the line between puffery and misrepresentation.

Like Iowa, Indiana has similar legislation designed to protect consumers from deception in relationships with businesses—the Indiana Deceptive Consumer Sales Act. A recent case involving this act may help you find the line between puffery and deception. The Indiana Supreme Court addressed an issue where a dealership advertised a vehicle as a “Sporty Car at a Great Value Price.”

In evaluating the advertisement, the court determined that it was a statement of opinion, rather than a statement of fact. The court gave a counter-example: using the phrase that a truck is “road ready” is an affirmation of fact that the truck will actually drive on the road. Further, the court noted the significant difference between flatly stating that the car has cruise control when in fact, the cruise control does not work. While the cruise control statement is not technically false, it still misleads the customer into implying that the cruise control is functioning.

It is possible that a statement be part puffery and part statement of fact. As such, the court in this case took pains to evaluate each word in the advertisement before determining that the phrase was simply puffery. The court determined that in order for a term to be deceptive, and fall under Indiana’s Deceptive Consumer Sales Act, it must first be a representation of a fact, and not a mere opinion.

The court also noted the devastating effects that may plague the automobile industry if the court did not determine that this statement was puffery. If dealerships were so concerned that they may be sued for puffery, then they may be more inclined to list only the actual features of the car. That is, there may be no advertisement involved at all, just a list of the vehicle’s features. This would greatly reduce the dealerships ability to advertise generally.

Since the court took an in-depth look at each word in the advertisement, it is important that dealerships take a lesson and do the same. Does the describing word give a customer a promise or an opinion? If you are unsure, experienced dealer counsel should step in to help evaluate your advertising.


License To Sell – Quick Facts about Licensure in Iowa

Every automotive dealership in Iowa is required to be licensed by the Iowa Department of Transportation (DOT). Anyone that sells more than six (6) motor vehicles within twelve (12) months may be presumed to be engaged in the business and should be licensed. See Iowa Code § 322.4(1) and § 322.2(8). Further, anyone that is buying cars for the sole purpose of reselling them should also have a dealer’s license. Id.

Acquiring a motor vehicle dealer’s license involves meeting the statutory requirements, completing paying the licensing fees, and, in the case of operating a used motor vehicle dealership, additional required training. Dealers must have an office with a landline telephone where regular business hours are maintained, a repair facility with minimum space and equipment to repair at least one vehicle of at least 14 feet by 24 feet, and adequate outdoor display facility. Display facilities for new motor vehicle dealers must also include an indoor display space that is at least 18 feet by 30 feet. See 761 IAC 425.12. Automotive dealerships also have specific insurance requirements, including a $75,000 surety bond that must be filed with the Iowa DOT and minimum liability requirements of $100,000. Iowa Code § 322.4(g) and § 322.4(h).

Dealers also must renew registration and pay licensing fees every two years, with the license expiring on December 31 of even-numbered years. Currently, licensing fees are $70 for each registration, $70 for each license, and $20 for every extension lot within the same city. See Iowa Code § 322.5(1) and § 322.29. The Iowa DOT does not prorate the amount of this fee, which means that a license purchased on January 1, 2017 and December 20, 2018 will cost the same and both expire on December 31, 2018. Additionally, if a dealership is registered it can obtain dealer plates for operation of certain vehicles on the roadways. Each dealer requires an additional fee of $40.

Finally, if a used-vehicle dealer does not qualify for an exception, it is also required to attend a dealer licensure-training program. The pre-licensing class is a minimum of eight (8) hours, with a five (5) hour continuing education class required every two years to renew the dealer license. At least one person from the dealership such as an owner, officer, member, or partner must attend the training. The training is offered through the Iowa Independent Automobile Dealers Association, with classes generally offered monthly.

Many new motor vehicle dealerships also participate in leasing programs for new motor vehicles. Any motor vehicle dealership that will lease a motor vehicle for use for a period of more than sixty (60) days must obtain a separate leasing license from the Iowa DOT. Currently, the fee for a motor vehicle leasing license is $30.

Once you have jumped through all of the hoops to get your license, the State of Iowa allows you to sell vehicles at your main dealership and registered extension lots. Dealers can also obtain temporary permits, for an additional $10 fee, to display vehicles at fairs, shows, and exhibitions. Although dealers are allowed to offer vehicles for sale at such events, the final sale must take place at the dealer’s registered principle place of business. Additionally, certain motor vehicle dealers can sell vehicles at certain events (e.g fairs, show, exhibition) that are located within its area of responsibility for new vehicles, see Iowa Code § 322.5(2)(a) and 761 IAC 425.26, or the same county as its principal place of business for classic vehicles, see 761 IAC 425.29.

The aforementioned summary is a quick overview of the licensure requirements in Iowa; it is not meant to be an exhaustive list of requirements or to address every situation or exception. If you have questions about licensure requirements, fees, or what your license permits in Iowa, contact the knowledgeable professionals at Arenson Law Group, PC. Arenson Law Group, PC, is here to assist you with any of your dealership’s legal questions. Call us today at (319) 363-8199.


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