By Mark Counts, partner, Counts, Bonacci & Smith
The dealer management system (“DMS”) contracts offered by the major DMS vendors require dealerships to commit to a fixed period of time, require the vendor’s consent to an assignment of the DMS contract and (generally) do not permit early termination. This can create a very large and expensive headache for dealers who wish to sell their dealerships. Fortunately, there can be an easy fix to the problem of transferring a DMS contract in a buy-sell agreement.
Typically, the selling dealer has four (4) options: (1) have the buyer assume the DMS contract on its existing terms; (2) “keep” the DMS contract and pay it off in the time and manner set forth in the contract; (3) “keep” the DMS agreement and ask the DMS vendor for an early termination of the DMS contract (presumably with an early payment discount); or (4) institute a legal proceeding designed to void the DMS contract and/or minimize the damages that are to be paid under the DMS contract.
Each of these options has distinct disadvantages because they require the seller to obtain the approval of a third party(ies) and may also require the seller to spend additional monies to rid itself of an unwanted (and unnecessary) DMS contract.
An easy fix
The better option (and the easy fix) is to prevent the problem from ever occurring. In order to do this, dealers must realize that their dealership is a fungible business operation for which there is a ready and available market. Dealers must further realize that at some point in time their dealership will probably be sold and that they should plan accordingly. Finally, dealers must realize that the best place to deal with the transference of a DMS contract is within the DMS contract itself not the buy-sell agreement.
Thus, in a perfect world, dealers will negotiate for and obtain an “escape clause” to the DMS contract. This clause simply states that if the dealership sells the assets of the dealership to a third party then the selling dealer can void all (or portions) of the DMS agreement.
In the case of a dealership group, these clauses can be structured on a point by point basis. These clauses give dealers the power to terminate DMS contracts without cost or the approval of a third party. If properly written, these clauses entirely eliminate the problem before it ever arises.
Own your data
There is a nuance to this “easy fix” however. In order to grasp it dealers must understand that the data stored within the DMS is, in all likelihood, far more valuable than the remaining cost of the DMS contract. Further, dealers must recognize that unless the DMS vendor consents, dealers cannot effectively extract the data stored in the DMS.
Thus, DMS contracts should not only contain an “escape clause” but should also contain written acknowledgement that the “dealer owns the data” and, more importantly, has the right to access and export that data (a “data access guarantee”). Again, these contractual clauses must be placed within the DMS contract not the buy-sell agreement.
Assuming a selling dealership has no right to “escape” the DMS contract, the selling dealer should attempt to quantify the value of the data stored in the DMS and use that value to increase the selling price of the dealership. Typically speaking, the value of the dealership’s data is lumped into “goodwill.” However, computer data is almost universally recognized as tangible personal property which has intrinsic value.
In order to capitalize on this, dealers may want to enact accounting procedures aimed at capturing the value of the data stored in their DMS by showing the revenue that data actually produces. For example, if a selling dealer can capture the revenue generated through the internal data mining efforts of its business development center then the selling dealer may be in a position to insist that the buying dealer provide additional compensation for the acquisition of the data in the DMS.
The take away point of this discussion is that a properly-structured DMS contract should be nothing more than a minor obstacle in a buy-sell agreement.
Counts, Bonacci & Smith is a Houston-based law firm specializing in dealer representation, commercial litigation, and employment law.
