By Richard Kotzen, CPA
Sales of auto dealerships continue to accelerate, with a growing number of longtime dealers deciding to take advantage of today’s active merger and acquisition market. The first article in this series looked at some of the preparatory steps owners should take before putting a dealership or dealership group up for sale. In this article, we will explore some actions dealers can take to keep a deal on track and moving forward once a potential buyer has been found.
Building Confidence in the Deal Process
Selling a dealership or a dealership group is different from selling cars to retail customers, yet the two processes do share at least one important characteristic: Once the sales process is underway, it’s essential to maintain momentum. A stalled deal can have many unexpected consequences.
The most obvious cost of a failed acquisition is lost opportunity time – after all, today’s robust seller’s market will not last forever. A failed transaction also can raise doubts among other potential buyers, possibly tainting future buy-sell negotiations.
Even if the sale is eventually completed, an excessively long deal process can still have negative consequences. The longer it takes to consummate the transaction, the greater the likelihood that word will leak out prematurely, potentially unnerving employees, manufacturers (OEMs), bankers, and other interested parties.
One key to maintaining momentum during an acquisition is to maintain the buyers’ confidence – not only in the desirability of the deal but also in the likelihood it will succeed. When buyers begin to question whether the transaction will be completed, their doubts can become a self-fulfilling prophecy.
Communication Issues
Clear, consistent communication is important to maintaining buyers’ confidence, but the immediate buyers and sellers are not the only parties who should be kept up-to-date. The professional team that the dealer has assembled to help manage the sales process – including attorneys, CPAs, brokers, and other consultants – also should be kept informed about how the transaction is proceeding.
When communicating with other stakeholders outside the immediate deal team, sellers must be sensitive to timing and confidentiality issues that could derail the deal. Both sellers and buyers should have a strong nondisclosure agreement in place. While it is helpful to get buy-in from family members, minority shareholders, senior managers, long-term employees, OEMs, lenders, and others, the desire to keep them informed always must be weighed against the critical need to maintain deal confidentiality as required. Achieving the right balance can be a challenge.
Avoiding Financial Surprises
Sound financial preparation is another essential step to maintaining buyer confidence. Most buyers prefer to receive financial statements that are prepared in compliance with U.S. generally accepted accounting principles (GAAP), so professionally prepared financial statements are an important early step.
These statements should include an accurate financial overview of the dealership or dealership group, along with clear and justifiable add-back schedules or income normalization adjustments to the GAAP statements. Unless sellers choose to get buyers’ input on the asking price first, they also should include an asking price analysis. In such instances, sellers should work carefully with their brokers and other professionals to be sure the analysis is realistic – unreasonable pricing expectations can derail a deal quickly.
Sellers should strive to eliminate any financial surprises that could cause buyer concerns if they are uncovered during the due diligence process. Common financial statement red flags include:
- Balance sheet or income statement misstatements
- Income statements that vary substantially from tax returns
- Improperly stated reserves including bad debt, inventory, financing and insurance (F&l), and vacation reserves, as well as reserves for self-insured medical expenses or other insurance
- Improperly accrued or misstated self-insured reserves to cover prior sales promotions or customer loyalty programs such as “free tires for life” or “free oil changes for life”
- Intercompany reconciliation issues among related businesses
- Income smoothing adjustments that transfer income between periods
Addressing Sellers’ Concerns
In addition to addressing buyers’ concerns, keeping a deal on track also requires that the sellers remain comfortable. To do this, sellers should perform their own due diligence as early as possible in order to uncover all critical information about the buyers and their plans including:
- The full identities of all buyers and investors, including “silent partners” or others who might want to maintain a low profile
- The relevant business experience of all those involved
- Buyers’ plans and ability to obtain OEM approval
- Details of the proposed deal structure, particularly sources of debt or equity financing and the buyers’ financial worthiness
- A detailed outline of the expected transaction process, including internal approvals and timelines
- Any requirements or requests the buyers intend to make of the sellers, especially related to financing or continued participation in management post-settlement
Real Estate Issues
Sellers should disclose any potential real estate issues early in the deal process instead of waiting for them to be discovered during due diligence. Examples include easements, EPA concerns, or OEM-mandated image programs.
Such issues always are discovered eventually by lenders or attorneys, so it is best to put them on the table early. The longer the delay, the greater the likelihood that real estate issues could lead to last-minute renegotiations or difficulties in obtaining financing.
Structuring the Deal With Tax Questions in Mind
Unexpected tax issues can be very costly, particularly if they are discovered late in the process, forcing buyers and sellers to renegotiate, which in turn could put the entire deal at risk.
Sellers should begin working with their tax professionals early to develop transaction structures that could mitigate tax ramifications. Bear in mind that some effective tax-saving strategies must be implemented several years prior to a transaction – preplanning can be critical to maximizing after-tax proceeds.
The concluding article in this series will look at some of the documentation issues that sellers should anticipate along with other steps they can take to maintain deal process momentum.
Richard Kotzen is a partner with Crowe Horwath LLP and can be reached at +1 954 489 7430 or richard.kotzen@crowehorwath.com.
