By Erin K. Tenner, partner, Gray Duffy LLP
If you are thinking of buying or selling a dealership and reading through the myriad of articles on the subject you may be wondering “where do I begin?” Getting back to the basics is the best way to answer that question. There are three different ways to buy or sell a dealership. They are: 1) asset transfer, 2) stock transfer, or 3) transfer over time.
This article is the first in a series of five articles. It will briefly describe each type of transfer and the circumstances under which each type of transfer is typically used. Subsequent articles will go into detail about basics of each of the three types of transfers and a final article will describe how the dealership’s real estate figures into each transaction.
Asset transfers are the most common way in which auto dealerships are bought and sold. In an asset transfer, the buyer enters into an agreement to buy substantially all of the assets. The assets that are purchased typically include fixed assets (furniture, fixtures and equipment), parts and accessories inventory, new vehicle inventory, used vehicle inventory, work-in-process, some select vendor contracts and goodwill. Sometimes leasehold improvements are also included.
Also included are things that will keep the buyer in touch with customers, like phone numbers, e-mail addresses, websites, social media accounts, customer lists and customer records. Excluded are things like cash, accounts receivable, and liabilities, except specific liabilities a buyer may agree to assume such as certain equipment leases. This form of transfer is most preferred by buyers because it limits the buyer’s exposure to obligations incurred by seller. The seller is responsible after closing for paying all the dealership’s obligations and closing its books.
A 100% capital stock transfer is a less common means of buying or selling a dealership. Capital stock is the means by which an owner of an auto dealership owns the entity that has title to all the assets of the dealership, and responsibility for all the liabilities of the dealership. Capital stock is simply the evidence of ownership of the entity. If the entity is a limited liability company rather than a corporation, the means of ownership is by ownership interest, rather than by capital stock, although capital stock can also be issued in a limited liability company to represent the ownership interest.
A buyer will sometimes agree to buy capital stock instead of assets when they want to sweeten the pot for the seller, or when the cost of selling assets would be too high for the seller. This can happen as a result of a variety of issues. For example, very high LIFO or contingent liabilities that vest upon sale of assets – like unfunded pension plan liability — can result in taxes or other obligations that can be costly after an asset sale. It might be impossible for a seller to sell without having to pay out a lot of money unless the seller can find a buyer who is willing to buy stock and take over the exposure. Why would a buyer do this? Because the liability can often be deferred and reduced over time.
A transfer over time is almost as common as an asset sale and typically involves a transfer of some, but not all, of the capital stock of the corporation. This occurs when a seller wants to sell an interest to a general manager or other employee or to a child. Another situation in which a dealer might decide to sell less than 100 percent of the dealership is when he or she needs cash and finds a partner who will buy some stock in the dealership, which will provide an infusion of cash.
Whenever a buyer is buying 100 percent of the capital stock, they are buying the entire dealership, which includes ALL assets and liabilities of the entity. This includes, but is not limited to, all accounts payable and receivable, all employee obligations and claims, all lawsuit liability, and all environmental liability owned, to name a few, which is why asset purchases are generally preferred by buyers. A purchase of some of the capital stock is likewise a purchase of some of the exposure.
Due diligence is important in any purchase, but is especially important in a partial or complete stock purchase because the buyer is buying 100 percent of all the liabilities and will need to know what those liabilities are.
Erin Tenner is a partner at Gray Duffy LLP and can be reached at etenner@grayduffylaw.com or 1-818-907-4000.
