By Ronald Sompels, CPA, and Richard Kotzen, CPA
Owners who are considering selling their dealerships should be aware of and prepared for a thorough review and analysis of information (which is a buyer’s due diligence) supporting the sales price they are expecting to receive.
The sad reality is that missing or incomplete documentation has caused many a promising deal to fall through or be extended for a long period of time. That’s particularly true in complex transactions such as the sale of an auto dealership or dealership group.
This article, the third in a series of articles exploring today’s active dealership merger and acquisition (M&A) market, will focus on some of the critical documentation that’s involved in such transactions. While it can be tempting to dismiss some of these requirements as mere “paperwork,” failure to provide timely, accurate, and thorough documentation can cause unnecessary delays – and ultimately could lead a buyer to lose confidence in the deal altogether. (See Part I and Part II.)
In addition to helping avoid delays, complete and accurate documentation also can make a positive contribution to the transaction. A thorough and up-to-date documentation package can help build buyer confidence and facilitate an orderly and successful closing of the transaction.
Financial Documentation
The most obvious category of documentation related to the sale of a dealership or dealership group is financial information. Along with the OEM financial statements, current, professionally prepared financial statements are the starting point for buyers’ due diligence.
Potential buyers prefer statements that comply with U.S. generally accepted accounting principles (GAAP). Depending on the size of the transaction, they also prefer these statements to be audited or reviewed by a credible CPA firm with industry expertise. This is particularly important if the buyer is a large, publicly-traded company or one of the growing number of nontraditional buyers such as private equity groups, family funds, and investors from other industries that are seeking to diversify their holdings.
The four fundamental financial statements – balance sheet, income statement, statement of changes in owner’s equity, and statement of cash flow – should be supplemented by additional documentation that includes any add-back normalizing adjustments that are made to the GAAP statements to make them more relevant to a particular buyer.
These supplemental add-back normalizing schedules should include clear and accurate analyses of at least two years prior to the proposed sale, along with supporting documentation to justify any add-back or normalizing type of adjustments.
Well-maintained and well-supported add-back schedules can help maximize the value of the dealership or group. But the reverse also is true – schedules that are carelessly prepared or supported can damage buyers’ confidence to the point where the deal itself is threatened.
Sellers should provide thorough documentation of all reserve calculations, such as bad debt, inventory, finance and insurance (F&I), and self-insured medical or health insurance reserves, as well as reserves for post-sale customer loyalty programs.
Some sellers might also choose to present a formal asking price analysis. If so, the sellers’ broker and other professionals can provide essential guidance and support in preparing the analysis and supporting documentation.
Real Estate Documentation
The real estate aspects of a sale also involve extensive documentation. In addition to basic real estate documents such as property deeds and tax records, sellers also should thoroughly document the following:
- Mortgage loans, improvement loans, and any related liens and records
- Current appraisals for all real estate
- Facility leases including both third-party leases and related-party lease-back arrangements
- Environmental Protection Agency studies or other actions related to pollution controls or cleanups
- Records of any easements that have been granted for access or other purposes
As noted in an earlier article, real estate issues are always researched carefully by buyers’ counsel and financial institutions, so it is important to provide thorough documentation up front.
Other Documentation
Sellers also should be prepared with up-to-date documentation of various other contracts and agreements that could be material to the transaction. These include:
- Franchise agreements, addenda, and other original equipment manufacturer (OEM) documentation such as right-of-first-refusal agreements, proposed new points in the local market, and any OEM-imposed working capital requirements
- Current OEM image program requirements and related cost estimates to bring facilities into compliance
- Documentation of lease arrangements such as equipment lease-back arrangements, as well as equipment leases involving related parties
- Debt agreements and hedge agreements
- F&I agreements with the related financial services companies
- Dealership management systems and other software licenses
- Employment-related agreements such as pay plans, union contracts, key executive contracts, and employee benefit programs
- Summaries of any pending litigation
- Listings of assets to be excluded from the transaction
Lacking or incomplete documentation is one of the most common causes of delays in completing the sale of an automotive dealership or dealership group. It is also one of the most frustrating, because such shortcomings usually can be avoided.
With adequate attention to detail, and with the support of qualified professionals who are experienced in such transactions, dealers can prepare a documentation package that addresses buyers’ legitimate questions, helps avoid unnecessary delays or concerns, and maintains the critical momentum that ultimately leads to a successful outcome.
Ron Sompels is a partner with Crowe Horwath LLP and can be reached at +1 813 209 2401 or ron.sompels@crowehorwath.com. Richard Kotzen is a partner with Crowe Horwath LLP and can be reached at +1 954 489 7430 orrichard.kotzen@crowehorwath.com.
