By Kenneth R. Rosenfield, CPA
True story. Here we are, a week before the closing of one of our client’s dealerships, ready to send our team out to prepare the closing statement, complete the final balance sheet and income statement, and deal with any last minute issues.
During the conference call with the manufacturer for pre-closing, the buyer tells the manufacturer, “Well, I don’t think I am ready to be a dealer.” It had nothing to do with due diligence issues, being approved by the manufacturer, nothing to do with financing terms with the bank … the buyer just did not feel like going through with the acquisition.
Now what? After a deep breath, as the seller and consultant to the seller…what is the next step? What is the right thing to do after the initial reaction of what the H—!!! There are a number of alternatives that can be reviewed. Do you tell the buyer that there is an enforceable contract on the table, and barring that no due diligence barriers exist, that the buyer must go through with the deal? Do you pause, counsel the buyer, and find out what the trepidation is and perhaps find a way through it? Or do you acquiesce and say fine, we will not go through with the deal?
Pausing and holding off the sale is not only a nuisance, the impact on the staff can be significant. They are now in limbo and may find out the buyer is considering backing out. The delay could be difficult to explain to the staff and create quite a bit of unnecessary drama. This is most likely the biggest hurdle to overcome, regaining the confidence of the staff.
Also, it may be necessary to turn back on all the leases that were being cancelled such as the DMS system and vendor contracts. Not to mention reverse any of the impact on the local business community and possibly the retirement plans of the selling dealer! After all this, is there a backup or another buyer close at hand to take over and stand in the shoes of the buyer? Could there be some loss of value with the extra time to sell the dealership?
Another question could be: Did the broker who brought the buyer to the deal properly vet the buyer? Is there any liability on the broker for not doing so? Did the broker representing the seller have any stake in this besides losing a commission? These are all questions that get discussed shortly after the issue has been brought up.
What are the legal remedies of forcing the buyer to consummate the transaction? Can the buyer back out with some type of reliance on the due diligence aspect? Is risking the loss of a substantial deposit worth the risk of becoming the owner of an automobile dealership? Will forcing the transaction be the best thing in the long run?
If the seller is holding back any note or deferred Goodwill, this could be disastrous. If the buyer’s heart is not in it, there is a substantial risk of getting the dealership back in worse condition than when it changed hands and will be much more difficult to get back in the same or better shape that it was in at the time of the sale.
This is an often overlooked aspect of a sale that should be considered when drafting the Asset Purchase Agreement and contemplating the structure of the transaction. The manufacturer after learning that the buyer “just does not feel like it” could not approve the buyer and we are back at the starting gate.
Yes, this can happen! Consider having what happens in case of a back out at last minute crafted in your agreements to protect the seller. Large non-refundable deposits can help, as well as break up fees and cost reimbursement language. Although rare in occurrence, it can be real. Always be prepared.
Mr. Rosenfield is the managing partner of Rosenfield and Company, PLLC, an Eastern Seaboard Regional CPA firm with one of the nation’s largest Automotive Retail Practices. With over 30 years experience, Ken has served hundreds of dealerships across the globe.
He can be reached at email@example.com or 1-407-849-6400.