By Thomas England, DHG Dealerships
You are sitting at the closing table, just moments after wrapping up the entire process. From broker offerings to the LOI to due diligence to solidifying the Asset Purchase Agreement (APA), you are officially done and it is time to celebrate. Right?
Perhaps you need to apply the brakes for just a second. While reaching the end of a buy-sell is undoubtedly an exhilarating experience (one to be proud of), the closing table is not an allegory for the final page of the transaction.
What Do I Mean?
Dealers and their transaction team in a buy/sell generally do a great job of evaluating the assets ( the “what” behind the purchase), the revenue and margins (to see what future opportunities exist) and even the personnel (the potential “who” behind the purchase). However, dealers don’t always assess the processes and how they may affect operations moving forward, which can create challenges.
Let’s drive through a few key items to consider directly after closing.
As a dealer, if you have just acquired a new store there is a good chance that ownership hasn’t transitioned yet and may not for some time. Employees of the new store could have accumulated goodwill and loyalty with the previous owners. Furthermore, there tends to be some overlap where the office manager/controller will perform job responsibilities for the old and new owner. While you never want to assume the worst, opportunities do exist for the office manager/controller to make errors…or even potentially commit the dreaded “F” word – fraud.
There is rarely a clean cut off when it comes to a deal, mainly because you don’t want to halt business and stop selling as the transaction completes. Neither the buyer nor the seller wants that. It can be a time to pick up some extra dollars along the way as well, which is another negotiating tactic.
It is your responsibility to ensure that you have agreed upon a proper cutoff for sales, benefits, payroll and utilities, just to mention a few. To further the point, make sure you understand the mechanics of the calculation surrounding what you are paying for or what you are owed.
Inventory/Floorplan: After receiving the opening entry, it’s time to focus on stocking in the invoices and relieving the original opening entry. This may seem like an obvious and simple step; nonetheless, it is imperative to set this up correctly and reconcile any differences between the original entry and any settle up sales or purchases.
Fixed Assets: Hopefully you have performed a physical inventory observation and actually “touched” all the fixed assets at this point. If not, there’s no better time than the present to make sure you put your hands on each of these assets and tag them. On the accounting side, there have been numerous occasions whereby the new owner will simply roll the previous owner’s fixed asset listing onto their system without verifying the existence of those assets. You will also want to ensure that these assets are going on the books for the fair value, which might be the purchasing price.
Blue Sky: Otherwise known as the number you negotiated over for so long. It’s now time to determine how much needs to be allocated to goodwill versus franchise versus other potential intangible assets. The important piece of advice to remember is that there are tax implications in addition to future impairment considerations to keep in mind as you come up with the values.
You made the decision as to whether or not you keep the previous owner’s DMS or utilize a different one. Either way, setting up the appropriate user access controls is of great importance. The DMS is a key driver in the foundation of internal control environment and segregation of duties. It can be tempting to allow accounting staff super-user access right after the closing due to the post-closing commotion. But consider manual journal entry access, adjusting journal entry access, check writing abilities, user profile access and others. We always encourage our dealer clients to fully understand the access levels and what that means for potential errors, fraud and accountability.
As you dive into purchasing new stores, it’s common to focus on the assets you are buying. You might interview and look at some key employees, make sure the margins smell right, seek opportunities in units in operation/used sales/new sales/F&I penetration, but it’s unlikely that you are truly focused on the processes currently in place and how they might affect your business moving forward. Let’s take a look at a few of those areas and where you might run into challenges:
Booking Deals/Desking Process: You may not have inherited the previous owner’s liabilities. However, you probably will inherit the tendencies of the respective employees, and it’s likely that these employees picked up their habits (whether good or bad) from the previous dealer’s management style. Make sure you understand the entire desking process, including:
- How manufacturer rebates are treated on the RISC
- How credit reports are pulled
- Presentation of the F&I menu
- DMS calculation of sales tax
- The complete filing of deals
- RDR’ing vehicles that haven’t sold
There is so much to consider here that it would be tough to completely narrow it down to just a few suggestions. Below outlines just a few summary examples of experiences with deal booking/desking process issues:
- The dealer listed the manufacturer customer rebate as “cash” consideration on the RISC, even though the customer was not giving any cash consideration on the deal. This particular bank charged them back the full commission and dropped them due to the percentage of defaulting contracts.
- During a sales tax audit, we found the dealer had set up the sales tax calculation in a similar manner to the previous dealer’s DMS system. The dollars were big with interest and penalties. The answer of “this is how we have always done it” didn’t work.
- Credit reports have been being altered and chargebacks hidden on the previous dealer’s financials (explaining why F&I penetration was so good).
Payroll: You had the foresight to analyze salaries, commission structures and pay plans. However, are the pay plans really representative of what the employees are getting paid? It is commonly uncovered that specific managers and sales people are not getting paid according to their pay plans. When we ask why, the typical explanation looks something like this: “Well, we make exceptions for that person based on x, y, z.” The need for flexibility is certainly understandable. That said, as the new owner, you need to be the one to make exceptions and lead direction as opposed to simply inheriting these types of decisions.
It is customary to get to know the new culture from the focal point of where opportunities are, what works well or what doesn’t work well. However, what acquiring dealers don’t often ask themselves is: “will the environment change the way the store is doing business once I’m the owner?” Do you prefer more of a hands-off approach that might enable potential errors? Are you more hands-on in sales or fixed operations where the previous owner was not? The latter might cause frustration, affect the operations and, ultimately, the margins of the business. Ultimately, you need to make sure you understand the effect your ownership you will have on the future organization and does it support your vision.
Many of these topics can, and should, be performed as early as possible in the acquisition and selling process. However, at a minimum, be sure to remain on top of these items when it’s your responsibility. Once the dealership has been up and running smoothly for a couple of months, go ahead and kick your feet up with that celebratory bottle of bubbly.
Thomas England is the Assurance Senior Manager at DHG Dealerships. He can be reached at 1-404-575-8917 or firstname.lastname@example.org.
DHG Dealerships serves more than 1,500 rooftops across all 50 states, representing dealerships of all sizes.