By Don Ray, Portfolio Reinsurance
People often underestimate the impact on the buy sell process of the structure of the F&I products sold at the dealership. Total profits and expenses coming from the sale of these F&I products may not necessarily be recorded on the income statement of the store. Of course the dealership typically records the gross profit from the sale of these products, but what about the underwriting income that these products earn? Are there spiffs being paid to your F&I personnel directly from your product provider(s)? How do items like these affect the “multiple” being paid? Are they factored in to get a true picture of the dealership profit opportunity?
Let’s start with the spiffs. It is common for F&I personnel to be paid spiffs directly from product providers. This could be a few hundred or a few thousand dollars per month for a single employee. If the buyer changes providers, does he/she end up with an unhappy employee? Do you simply lose that employee if you don’t replace the spiff with additional compensation? Any way you slice it, a cost is incurred unless your new product provider matches the old spiff.
But just who do you think is really funding the cost of the spiff (or trip)? The dealership is funding it through higher administrative cost fees or higher product cost or both. With provider-paid spiffs, the dealership loses some level of control over its own employee. Many dealers are okay with this, but I prefer that the dealership develop and administer its own F&I pay plans based on the wishes of the dealer, not the F&I provider.
I recently spoke with Bob (not his real name to protect the guilty), a general manager of a store in a large dealer group, who told me that his F&I people were not being paid directly by their product provider. Funny, I said because I was told by Mary, another GM in the same dealer group, that her F&I folks were indeed being spiffed by the same F&I provider.
Upon further investigation Bob found out that in fact his lead F&I person, we’ll call him Frank, was being spiffed a few thousand dollars per month by this same product provider. No wonder Frank was resistant to making a change in F&I product providers. You may ask what this has to do with a buy sell, but educated buyers want to see employee pay plans so they can make informed decisions about how much to pay for the dealership and how to structure pay plans after the transaction. These spiffs are part of the employees’ pay.
Ok, let’s move on and talk about the income side. We all measure how much gross is being generated each month from the F&I department. Most folks look at a Per Vehicle Retailed (or Per Retail Unit) of $1,000 to be the minimum acceptable level, although some dealerships are at $1,500 PVR while still being compliant with the various laws and regulations impacting their business. If the income to the dealer stops at this point then that dealer is selling “walk-away” products and does not participate in the underwriting income of those products.
But what about the underwriting income generated by the sale of these products? First I will steal a definition of underwriting income from http://www.investopedia.com as “…the difference between premiums collected on insurance policies by the insurer, and expenses incurred and claims paid out.” We all know that insurance companies make a profit from their underwriting income or they would be out of business and unable to provide insurance products (or exotic trips).
Some auto sector insurance companies allow dealers to participate in this underwriting income either in a retrospective (retro) program or in a reinsurance position. In a retro program the insurance company, makes a periodic retro payment to the dealership, the dealer or his assigns. In many cases these retro payments are made outside of the dealership and not included in the income of the store. In this case, the amount of these retro payments should be used in determining the value of the dealership. Sounds like an “add-back” doesn’t it? It should also be noted that these retro payments are taxed at ordinary income rates, whether received by the dealership or by an individual such as the dealer.
Now what about a reinsurance position? There are basically three options here for dealers. First is a Non-Controlled Foreign Corporation (NCFC). Domestic corporations are really not a viable option for car dealers, but a dealer could use a Rent-a-Captive which could be either foreign or domestic. The third option is a Controlled Foreign Corporation (CFC) sometimes referred to as an Entity of Economic Convenience. What are these structures and how do they impact a buy sell transaction? More to come in future issues of Automotive Buy Sell Report.