A dealership buy-sell timeline from LOI to closing and beyond

By Christian J. Scali, Halbert Rasmussen, and Gus Paras

This article seeks to provide a general roadmap of timing issues that are often present in a dealership acquisition. With the multitude of issues present in any dealership sale, many factors can extend or shorten pre-closing and post-closing deadlines and expectations. But mapping out the timing of a particular deal early on can help the parties plan and prepare for a smoother transition and ensure they each have what they need to close.

1. Letter of Intent Planning and Drafting

Most dealership acquisitions start with some initial discussion and negotiations that are often memorialized in a letter of intent (“LOI”): an overview of contract terms that the parties negotiate and finalize before they are ready to agree to a detailed asset purchase agreement  (“APA”). The length of time it takes to complete an LOI can depend on several factors including the parties’ level of interest, their commitment to close, any pressure from the applicable manufacturer(s), and whether the parties seek only a general summary of their negotiations or a detailed LOI with many of the APA’s major deal terms, which will take considerably longer to negotiate and draft.

2. Post LOI Execution Dates

A few deadlines typically follow the execution of the LOI. For example, the parties may agree to any or all of the following through the LOI:

1. A deadline for the party drafting the APA to complete an initial draft, which is typically not more than a few weeks after the LOI is executed.

 

2. An exclusivity period, during which the seller agrees not to solicit or negotiate the sale of the dealership with any other buyer. For example, the parties may agree to a thirty day exclusivity period while the APA is being drafted (which can have its own exclusivity period or provide for exclusivity until the deal closes or the APA is otherwise terminated).

 

3. A confidentiality clause that obligates the parties not to disclose any deal terms, and which typically continues in perpetuity, even if the LOI is terminated. This can be done by reference to a separate confidentiality agreement (that often governs the LOI and the subsequent APA) or through a clause in the LOI itself.

3. Post APA Execution Dates

The APA typically includes several deadlines that are tied to the date of its execution. For example, an APA could include some or all of the following:

1. A deadline for the buyer to make its initial deposit, often a few days after execution.
2. A deadline for the seller to provide the buyer with copies of all environmental reports and other property condition documents.
3. A deadline for the seller to provide various disclosure schedules concerning the assets, their condition, financial and operating disclosures, employee compensation and benefit information, and other facts about the business being purchased and its assets. Sometimes certain schedules must be provided before others. For example, a schedule of fixtures, furniture and equipment can typically be provided much earlier than a vehicle inventory schedule that needs to be finalized on closing day to account for sales up until the closing.
4. A deadline for the parties to agree on a final escrow holdback agreement (addressing any holdback escrow of sale proceeds after the closing, if one exists).
5. A Due Diligence period for the buyer to inspect the property, review business operations documentation, and generally decide on whether or not the condition of the operating assets, property, and business operations are suitable.
   1. Dealership due diligence periods can vary in length greatly depending on the circumstances. Before the end of this period, the buyer must decide whether to accept the assets as reviewed and allow their deposit to go hard, walk away from the deal with their deposit, or object to any issues that must be resolved while still moving forward with the closing.

4. Pre-Closing Deadlines

Other APA deadlines are typically based on a party providing the other with some deliverable by a certain date prior to the closing or on the day of closing. For example, an APA may address:

1. A deadline on or before the closing for the buyer to obtain manufacturer approval of the transaction (and/or sign a sales and service agreement with the applicable manufacturer(s)).
   1. Some manufacturers refuse to provide any formal approval until very shortly before the closing and in some instances, only on the day of execution or the prior day.
   2. The seller’s sales and service agreement with its manufacturer(s) should be carefully reviewed by experienced legal counsel to make sure that the application process for factory approval is completely properly and timely.

2. A deadline for the seller to provide the buyer with tax releases, which vary in scope and timing due to each state’s tax agencies. By way of example, here are some typical California releases:
   1. Employment Development Department and Franchise Tax Board: obtaining these releases takes approximately a month, depending on many factors.
   2. CDTFA Tax Release: The California Department of Tax and Fee Administration will issue a tax release only after the closing occurs. Depending on the several factors, this can take a few weeks or one to two months, on average. Although this is technically a post-closing deliverable, we have grouped it with the other tax releases since many APAs group them together.

3. A deadline for the parties to complete physical inventories. The vehicle inventory is typically done only a few days before the closing whereas parts can be slightly farther out with adjustments for any final pre-closing parts sales. The parties typically need to do a final vehicle inventory on the day of closing to ensure all vehicles being purchased are present at the dealership and to adjust for any sold vehicles.

5. Post-Closing Deadlines

Finally, some APA deadlines are typically set for after the closing. For example, an APA may address some or all of the following:

1. A deadline for seller to remove all vehicles, parts, and/or other inventory that the buyer did not elect to purchase (if the APA provides that some assets may be purchased at the buyer’s option), which is usually set for a short period of days after the closing.
2. A deadline for the parties to make any final post-closing pro-rations and adjustments that could not be made as of the closing, which is typically a few weeks after the closing.
3. A post-closing period during which any accounts receivable that were incurred in connection with the seller’s pre-closing operation of the business will be remitted to the seller, which is typically a period of months.
4. A period during which the seller agrees to non-solicitation and/or non-competition terms.
   1. The scope and timing of these clauses vary according to the laws of each state. For example, in California, state law prohibits covenants not to compete unless made in specific contexts (including the sale of substantially all of a businesses’ assets), and reasonably limited as to the activities prohibited, the geographic scope of the restriction, and the amount of time during which competitive activity is prohibited.
   2. The scope of restrictions on non-competition and non-solicitation clauses far exceeds this article and experienced counsel should be utilized to ensure these clauses are legally enforceable.

5. If the seller is the owner of the sold dealership property, the buyer will enter into a lease (sometimes with an option) or purchase agreement for the property concurrent with the closing. In connection with other post-closing deadlines, the parties should plan out their obligations with respect to the real estate, including the timing of any installment payments for the property or the periods of any lease and option terms.
6. If an escrow holdback is in place, deadlines for the buyer to make any holdback claims against the seller and a final date for the release of all funds not subject to any unresolved holdback claims.

Although this article addresses the planning of some common timing issues, we cannot address all of the timing issues surrounding any specific buy sell in a short publication, especially since these issues are often deal-specific. Anyone seriously considering the purchase or sale of an automotive dealership should consult with legal counsel experienced in the automotive industry, well in advance of negotiating and signing an LOI.

Scali Rasmussen’s attorneys are thought leaders in the automotive industry, often called upon to provide their opinions on new and trending issues on auto distribution and franchise, F&I, employment and advertising issues. The firm drafted the CNCDA’s 2015 and 2017 Advertising Law Manuals, providing auto dealers with practical guidance on advertising practices.  

The authors can be reached at 213-239-5622 or CScali@scalilaw.com (Christian J. Scali), hrasmussen@scalilaw.com (Halbert B. Rasmussen), or GParas@scalilaw.com (Gus N. Paras).

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