By Myla Remer, CPA, MBA, Partner, Rosenfield and Company PLLC
If you think there is a chance that you might sell one or more of your dealerships in the next few years, you should seriously consider having an outside audit done according to Generally Accepted Accounting Principles (GAAP). It will likely be much easier to sell the dealership and to obtain the best price possible if quality financial statements are audited or reviewed by a respected outside accounting firm with expertise in the auto dealer industry.
Why would such an audit help facilitate a sale? An outside audit can ensure that you convey a full, accurate picture of the financial health of the dealership that potential buyers can trust, ensuring that you get a full, fair price for your dealership.
The availability of reliable historical financial information is critical for potential buyers in assessing the long-term operational success of the acquisition. Without an external audit, buyers may be wary of the dealership’s internally-prepared dealer financial statements, as there are many ways a dealership looking for a buyer might seek to make the opportunity look more attractive through these statements.
For example, the buyer may be concerned that the seller may show lower operating expenses to improve net income and future cash forecasts. The buyer may also worry that the seller is showing higher sales figures by recording sales in the incorrect accounting period or recording deferred revenues as income in the year of cash receipts. Financial statements audited on a GAAP basis reduce the amount of financial due diligence required by buyers.
Analyzing the financial health of a dealership could be especially difficult for a prospective buyer if the dealer’s internally-prepared financial statements are the only documentation available, as there is no standard approach for dealers to take in reporting certain unusual and/or non-recurring transactions.
For example, dealers could record the one-time sale of a large asset, or the one-time significant receipt of insurance proceeds or large incentives from manufacturers to operations, which will improve margins in that period. But if that transaction was non-recurring, the dealership’s margins would likely drop the year following the acquisition.
In audited financial statements using generally accepted accounting principles these types of income are generally disclosed separately and include explanatory notes, making it easier for a potential buyer to understand the dealership’s cash flows and make a confident valuation of the business. To be clear, the examples above are not illegal or fraudulent, but they still could be potentially misleading to a buyer.
Audited financial statements will also expose the amount of potential chargebacks due on extended warranties. Although not a direct financial impact to a buyer, but they are an indication of the quality of the Finance and Insurance (F&I) department.
When a dealer presents GAAP-compliant financial statements, it is also easier for a potential buyer to obtain information about specific accounting transactions and processes. The owners may not know the particulars of the accounting end of the records; it is likely to be easier and more enlightening for a potential buyer to review documentation done by the dealership’s auditor, as such documentation is fairly standardized across the industry.
The notes accompanying the audited financial statements are another great source for information as they often reveal details of leasing arrangements and long-term contracts that may impact future cash flows. Public companies are required to have GAAP basis financial statements. Most large privately-held automotive groups also have GAAP basis financial statements, typically because they are required by their banks.
When a new dealership is to be acquired by a company that is already audited based on GAAP, then the dealership to be acquired will also be required to be thus audited, often shortly before or soon after the time of the acquisition. If any issues are found during the audit, this can jeopardize the entire transaction. At the very least, the buyer is likely to put a lot of pressure on the seller to lower the transaction price based on the newly-discovered issues.
For an auto dealership, having an external audit before you put the dealership up for sale is a lot like a homeowner having a home inspection before putting his or her home on the market.
Consider this analogy: Suppose you are trying to sell your home. You get an offer, but the offer is contingent on a home inspection. The home inspector finds several problems. The buyer then demands that you fix all the problems before closing or make significant price concessions or they will rescind their offer.
In any acquisition, the buyer is also concerned about hidden, unreported, trade liabilities that may become apparent only after the transaction is finalized. These hidden trade liabilities are obviously important to know about in advance as they will affect future cash flows.
A GAAP basis audit is designed to identify and report all material liabilities, so there should not be any “hidden” liabilities. By providing such audited financial statements, the seller can provide the buyer with peace of mind that there will be no unwelcome surprises after the deal has closed.
Even if you have no immediate plans to sell your dealership, having your financial statements audited based on generally accepted accounting principles will enable you to identify issues that need to be resolved so you can rest assured that everything at your dealership is as it should be. And if it ever does come time to sell, you will be ready.
Myla Remer is a partner in Rosenfield and Company PLLC, a CPA firm with offices in Orlando, Florida, and Manhattan. The firm has one of the largest automotive practices in the country, with a nationwide client base. She is the Attest Team Leader for the firm and is the partner in charge of attest services for some of the largest dealer groups in the country.
She can be reached at Myla@rosenfieldandco.com.