By Champ Rawls, The Rawls Group
The automobile industry’s general upward trajectory, with increased car sales and dealer profits, has led the finance world to recognize the industry as a solid investment. Retail auto dealerships have become more intriguing as investors seek to diversify their holdings.
Meanwhile, the transportation industry is evolving as new players create direct-to-consumer products and advanced technologies change the way we interact with our vehicles. Many fear the industry as we know it will change drastically in the next ten to twenty years.
As I work with dealers across the country as a succession planner, it is essential for them to understand the past and acknowledge the present so they can strategically take control of the future. Because of the lucrative investment opportunity retail auto dealerships represent, private equity firms are becoming more actively involved in the automotive buy-sell environment – touting their money as a strategy for growth or to exit the business.
Private equity (PE) does provide options, however if you are considering PE as a strategy, make sure you understand some of the unintended consequences in relation to your purpose and your future business vision.
For example, are you a one-point operator who has a burning desire to grow no matter the cost? With the right connections, track record, and results private equity can be attractive as a partner with the financial resources for growth. The most important things to consider are the rules of engagement. Never forget these two simple premises: How did you form your partnership with these investors and how do you get out? Having an air-tight agreement is important with private equity groups who are simply seeking one thing: return on investment. They can be your pathway to growth and can also be your worst nightmare.
Private equity can also be an exit strategy. Let’s be honest, automotive retail sales are not getting any easier. Challenges include emerging business models, shrinking margins, changing goal lines, and general frustrations associated with the various manufacturers. Advanced technology continues to infiltrate each department, often outpacing our ability to understand it. Consumers are more educated and less loyal.
We have not even discussed the challenges associated with owning a family enterprise. Sibling rivalries, multiple shareholders, mismatched expectations and commitment levels are simply a few of the challenges associated with operating and succeeding through multiple generations of ownership.
If all methods of seeking a successor have failed, private equity can offer a viable exit strategy. However, keep in mind, in general, the ancillary benefits associated with ownership are often much greater than the after-tax proceeds of a sale.
If you decide to work with PE investors, while you work through the deal in your head, consider these questions:
- Will the investors maintain the work culture for your employees and the core values you have worked hard to establish over time?
- How will key partners or management be treated in the sale?
Sale of the business is a valid succession option, but only if the buyers are compatible with your business culture and long-term goals for your employees. Private equity investors are often mainly concerned with return on investment. They are seeking their own exit strategy and expect to bolster the return on sale, not maintain a business culture or look after employees.
Unfortunately, as a succession planner, I cannot challenge the reasonable nature of questions associated with a sale, such as: “Why should I put up with crap from my siblings, my partners, my franchiser, my bank when I can cash that check?” Your family legacy may be threatened by private equity looking to make big splashes into the industry.
So, what are you to do, while “Seeking Succession” and facing what appears to be an extraordinary temptation from private equity investors? Regarding temptation, take your business vision seriously and listen both to your personal instincts and the objective assessment of your succession planners.
If it is growth you seek, assess your situation and “team” and decide if you have the players (family or non- family) needed for the kind of commitment you are seeking from these investors. Go for business growth dreams, but accept that if you don’t have capable, competent and most important committed successors, then growth can be a fleeting dream. And remember, how did you form your partnership and how can you get out? If it is an exit strategy you seek, remain focused on ensuring your culture can be maintained.
Fundamentally be aware of the succession challenges created by private equity. It can offer an excellent alternative source of liquidity that provides you options if you know the rules of engagement. Remember, in building sustainable business legacies, we are dealing with the marathon, not the sprint. Think long term.
Being a part of his own family’s business, Champ has a unique insight into the difficulties, challenges and triumphs families face when combining family and business. Champ Rawls has been officially associated with The Rawls Group since 2012, although it could be said he become a part of the team in 1984, when he was born into the family business.
For more information visit www.rawlsgroup.com