By Sandi Jerome, Sandi Jerome Computer Consulting
When a dealer sells the dealership it is most often a sale of the assets; the parts inventory, vehicles, and goodwill – but what about the dealer management system (DMS)? Is this an asset? Does the dealership own the DMS and the data it contains? This is often a troubling issue during the buy sell process since rarely is the DMS contract term end date the same as the buy sell date.
If the selling dealer has to pay $9,000 a month for the next four or five years to complete the DMS contract term that can seriously dip into that retirement nest egg. On the other hand, the buyer organization probably planned to use its own DMS, and didn’t factor in double technology expenses for the remainder of the contract.
How can you avoid these issues? The best method is to get a “buy sell clause” built into your next DMS contract.
Waiting until you sell your dealership is the worse time to negotiate with your DMS provider. One of my clients sold a smaller dealership to a former employee. When they got ready to open the dealership, the DMS provider informed both of them that new contracts were required to let the new company use the DMS system and change the legal name.
As I found out later, it was quite a scramble to get contracts faxed, signed and sent – but on Monday morning everything was worked out. It wasn’t until a few years later, when my client wanted to end his contract, that he found out those new contracts extended his contract by seven years and he had guaranteed the new dealership’s DMS charges.
When that dealership shut down he became liable for the past due charges and the remaining term. I was shocked that they had signed this contract before sending it to me to look at first, but they got pressured with the upcoming buy/sell date. Having a buy/sell clause in place would have prevented the unfortunate lawsuit.
What DMS info should a buyer ask for?
We all know that a new buyer wants the customer database, parts inventory, and vehicles in stock – but what else should you request in a buy/sell that will help you operate the new company? The repair order history is important. This enables service advisors to know what prior work has been done to the vehicle and when customers are next due for service. Sales history can be valuable too. If you want to do an Equity Finder campaign to find customers who might be able to trade in their vehicle and buy a new one for less per month, then you need the car deal file with the number of payments, vehicle options, interest rate, and amount financed.
DMS advice for a buyer
As a buyer, should you review the seller’s DMS contract? Yes. Since part of the purchase is often the computer database you should know about any fine print that restricts you from getting the data you need and obligates you for future charges.
I’ve seen contracts that have a “due on sale” clause that accelerates the remaining monthly fees if the dealership is sold – or even if the dealership starts using another DMS system. In one instance the new buyer wanted to use their own DMS, but agreed with the seller to continue paying on the old system until the contract expired. The DMS provider found out they weren’t using it and shut it down – along with sending them a bill for the remaining payments.
To avoid these last minute issues your next DMS contract should have a buy/sell clause that enables the dealership to end the contract early if it is sold or terminated by the factory. It should provide at least 60-90 days for the selling dealership to have access to the computer system to close their books and settle the accounts at a pre-determined price (normally the amount you currently pay for the accounting portion of the monthly fees and a limited amount of users).
It should guarantee that the buying dealership has the option to continue the contract at the same price with an addendum that changes the dealership name and creates a new set of accounting books on the buy sell date. If the buying dealership does not continue the contract there should be minor early termination fee – if any. The clause should clearly state that the data contained on the DMS is owned by the dealership and that access to that data will not be restricted in the event of a sale or change in DMS systems.
Sandi Jerome is a computer consultant and DMS technology expert. She can be reached at sandi@sandijerome.com or 1-360-406-5062 X706. If you would like a free review of your buy sell clause in your next contract, email it to Sandi Jerome.
