By Kenneth R. Rosenfield, CPA
The past few months in the automotive retail industry have been very challenging, to say the least. Among the issues the industry is facing: A new President, looming trade tariffs, tax incentives for US manufacturing, import issues, tax breaks and possible elimination of the interest deduction.
Manufacturers are also being squeezed in their margins and looking hard at who will acquire dealerships. In addition, sales and ups have diminished significantly in the past few months, greatly reducing profits and potentially reducing the fetching price of a dealership.
Despite the uncertainty, with the enormous amounts paid for Blue Sky in the past months, the continued relatively low cost of funds, and the demand for dealerships outweighing the supply, it is still a “sellers’ market.” We continue to see a high amount of competition for quality dealerships.
In such a competitive market, paying attention to the operational details when closing a deal becomes even more important. That isn’t always happening. In some recent transactions, we have seen both the banks and those preparing schedules get a little “sloppy” in reconciling vehicle inventory schedules to floorplan payoffs.
That is especially true in accounting for in-transit units and in “off the invoice” credits such as certain Chrysler incentives and programs. These figures could be substantial. If the closing occurs in the middle of one of these programs, such as in mid-quarter, it may make sense to delay closing until the end of the period to make sure the seller can collect all the funds, that the program is a “use or lose,” and that it is not assignable to the purchaser.
Another substantial issue could be with those sellers that have established incentive programs such as Tires for Life, Warranty for Life and similar in-house programs. Part of the due diligence process should be a thorough analysis of the units in operation that have these promotional items attached to them and figuring out what the buyer is going to do with the program. Consider establishing some type of reserve for this by multiplying a money factor times the number of units out there. It could be a substantial figure and create severe negative goodwill if not addressed properly.
Vendor contracts are another area where sloppiness can be costly Prior to selling, if the buyer is not going to retain the current DMS system, start negotiating the breakup fee with the vendors well in advance of the closing. If newly into the contract, this amount could be substantial, in some cases in the millions. Enlist the support of someone well-versed in the contract with the DMS vendor and perhaps with some connections to assist in negotiating a settlement.
From a buyer’s perspective, get a good look at the seller’s system to make sure the schedules are in good order, the data to be transferred is also in good order, none of the data is corrupted, and that the data is in a suitable format. If the DMS system will not be changed, make sure that a well-coordinated plan of transition is in place; complete with guaranteed arrival dates of new systems and a well-timed plan for transition.
DO NOT ASSUME that vendors will be easy to deal with and will all show up on the same day or time. From the seller’s perspective, make sure that some sort of agreement is in place to allow for an additional 90 days of time to transact business on the system either on premises or remotely so that the receivables can be collected and accounted for properly and expenses paid correctly, AND that final schedules, general ledgers and all other necessary accounting documents can be memorialized for a final tax return and accounting.
There are quality buyers with a lot of capital willing to pay a hefty price for a dealership in today’s market. We are even seeing private equity groups invest in dealership organizations and compete with banks and financial institutions for capital fundraising. It is definitely getting interesting out there in the world of finance.
With the possibility of a trade tariff, it remains to be seen what impact there will be on the blue sky of the import brands. In recent months however, we have already seen a drastic dip in market share of the venerable Lexus brand. Porsche dealers are only being held up by sales of the Porsche Macan small SUV. Other Porsche models have seen sales plummet. Until recently, these two brands were commanding very high prices.
Chrysler/Jeep/Dodge dealerships, meanwhile, are still bringing in high prices, as are Ford, Toyota and Mercedes. One can only speculate what is going on behind closed doors with the automotive manufacturers and the new administration, but the end result will sure be interesting!
While speculating, however, don’t lose sight of sound accounting practices. They are something you can rely on in these turbulent times.
Ken Rosenfield is the managing partner of Rosenfield and Company PLLC, a CPA firm with offices in Orlando, Florida, Manhattan and Florham Park, NJ. The firm has one of the largest automotive practices in the country. He can be reached at firstname.lastname@example.org and 407-849-6400.