By Carl Woodward, CPA, Woodward & Associates
Most dealerships will ultimately be sold. At the time of sale, or close to the closing of the sale, details the Seller has forgotten sometimes emerge which can cause a deal to fall apart. Among those details are financial obligations on vendor contracts that the Seller either has to absorb or try to get the Buyer to absorb.
I have seen dealership sales where an IT vendor expected the selling dealer to continue paying for monthly support, say $2,000 per month for the remaining 40 months of the agreement ($80,000), though no services will be supplied by that IT vendor and the vendor incurs no costs. This would be a windfall to the IT vendor and a huge termination cost to the selling dealer, and can impact the sale of the dealership.
Some oft-overlooked details include:
Information technology contracts (data processing) Vendors often have long term written agreements with dealers. When you initially start negotiating with these types of vendors, you need to require in your written agreement with them certain terms. Ideally you want written terms so that upon the sale of the dealership, with 60 days’ notice you can cancel all future obligations for their IT services at no cost or obligation to the dealership. You will still be obligated for any payments on equipment you have purchased or are leasing.
Other vendor contracts Mechanics uniforms and shop supplies contracts may carry termination cost of several months of fees and agreements can be obligations for several months or longer. Do not sign more than 90 day agreements, or insert a cancellation privilege in the agreement in the event the dealership is sold.
Advertising Media agreements at times are for a period that might be more than 90 days or require you to spend a certain amount to take advantage of the “reduced” price. Add a provision to this agreement such as “upon sale the agreement can be canceled with 30-90 days’ notice.”
Earned vacation pay You will probably be obligated to pay all “earned” vacation pay to all employees at closing of the sale. Sometimes the Buyer will pay this obligation and the Seller will give the Buyer a credit for these benefits in the closing statement.
Chargeback Almost all dealerships have obligations for future finance income, insurance income, and service contract income chargebacks for many years. This chargeback amount can be substantial, even for dealers with a finance reserve agreement limiting the chargeback time period. An estimate for the amount of these future chargeback obligations can be determined by taking the average month’s chargebacks over the most recent 12 months and multiply this average amount month’s chargebacks amount by 24.
Lifetime programs. Some dealers have obligations to certain of their customers for programs such as “lifetime oil changes”, “tires for life”, “lifetime warranty” and other similar programs. Sellers need to be aware they have certain obligations for these programs. If you can see ahead to when you might be selling your dealership, you might consider discontinuing these programs on future sales of vehicles.
If the selling dealer can’t discontinue them then either make an estimate for the future amount and give the buyer a credit, or agree to reimburse the Buyer for these chargebacks for some period of time. In some cases there is a benefit to the Buyer and this becomes a non-issue.
Dealership extended warranties. Many dealers offer informal “extended warranty” coverage on used vehicles such as a 100% reimbursement for repairs for some period of time. Keep good accounting records of these obligations as you will probably have to reimburse the dealership’s Buyer for covered repairs.
In summary, knowing you will most likely be selling the dealership at some time in the future, try to itemize the above obligations. Since most buy-sell agreements take 60 days or more to close after the asset purchase agreement has been signed, try to make sure you have protected yourself as thoroughly as possible with written agreements with any vendors expiring upon sale with a 60 day’s notice.
Woodward & Associates of Bloomington, IL provides specialized accounting services to automotive dealerships. www.cpaauto.com