By Marc Spizzirri and J. Michael Issa, GlassRatner
The term crisis usually implies an infrequent event. Unfortunately, in many dealerships, crisis has become a consistent and life-threatening reality. Frequently, GlassRatner is asked to intercede with struggling dealerships on life support when their survival is at significant risk. The earlier a dealer acknowledges and addresses a crisis, the higher the probability of surviving.
The most common symptom of a potential disaster is a cash-flow shortage, which often leads to a series of increasingly bad decisions. Strong dealers prepare for these events by utilizing cash management practices that anticipate and prevent cash problems before they become fatal. The goal is to identify a significant problem early before it becomes unmanageable.
Too often dealers avoid confronting a problem and finally begin to take action only after the dealership is in a death spiral. Dealers want to believe they are on top of their stores and can identify and fix whatever may be wrong. Sadly, dealers’ egos often get in the way of addressing problems while the problems are still manageable. When a crisis is finally recognized, many dealers become focused on who is at fault rather than establishing a plan to address and solve the problems.
The dealer that takes responsibility and asks for timely help is generally the one that survives. When a dealer avoids confronting the problem, business decisions become legal decisions and the situation usually spins out of control.
Most crises that occur in automotive dealerships are a result of smaller failures that go unrecognized or unrectified until they develop into a larger, unmanageable problems. Most dealers have occasionally slow-paid a flooring payoff after collecting the CIT, usually to cover payroll or rent.
There is nothing inherently wrong with this until the practice becomes epidemic and hopelessly large in amount. It can lead to selling out of trust (SOT), the practice of selling a car that has been paid for using a loan and not using the proceeds to pay off the loan.
The need to cover a recurring obligation such as rent by holding payoffs is a warning sign of potential problems for an attentive dealer, who might then ask a series of questions of his management and himself.
- “What caused this shortfall?”
- If my dealership is consistently profitable, why are we out of cash?’
- If we aren’t consistently profitable, how are the other dealers in my region/20 Group performing? If they’re profitable and I’m not, what’s wrong and what can I do about it?”
- “If I have to go SOT to survive, how is that going to eventually be resolved? Do I have a corrective strategy beyond blind hope that things will somehow improve?”
At the first sign of trouble, including cash shortages and lack of operating profits, dealers must address the situation while a solution is still possible. GlassRatner is currently working on a case where the dealer was over $20 million out of trust. Note carefully that conversion of collateral, aka SOT, is a felony for which dealers are occasionally prosecuted. Also note that certain types of unpaid liabilities can become non-dischargeable, even in a bankruptcy, and can follow the dealer to the grave.
Large SOT’s are not only a dealership problem, they can ruin a dealer’s life. Past a certain point, working out of a SOT becomes a mathematical impossibility and the failure of the dealership becomes inevitable.
In normal business conditions, operating fixes can generally be quickly implemented by enlisting qualified assistance and executing appropriate strategies. The key points to resolve cash or profit problems include the following.
- Don’t hide from the problem.
- Acknowledge there is a problem but lead with confidence.
- Reach out to experienced industry professionals who can share the burden and provide professional guidance, while also interfacing with the dealer’s creditors.
- Stay positive and optimistic while continuing to embrace core operating values.
- Establish best practices for cash management and a monitoring system that will enable you to recognize a problem and anticipate issues before they become a crisis.
- To counteract a culture of blame, recognize employees for bringing concerns to the forefront as they occur.
- Once best practices and monitoring systems are in place, invite participation from dealership management team and outside consultants for ongoing review of performance and status of implementation of the turnaround plan.
- In a national economic crisis like the Great Recession (US new car registrations declined from over 16 million units to 10 million units peak-to-trough), engage early with the manufacturers and with the flooring lenders to get counsel, financial assistance, and buy-in to a joint plan of weathering the storm.
Jonathan Michaels, Pulitzer nominee and renowned Southern California attorney specializing in the automotive industry, offers the following comment.
“When a crisis situation occurs, it is critical that you get out in front of it as soon as possible. It cannot be business as usual, and you cannot use the kind of thinking that allowed the situation to develop in the first place.”
Jay Ferreiro, President and CEO of CARS (Capital Automotive REIT) has said:
“Many dealers face cash flow problems for many different reasons. It is imperative that the dealer confront the problem immediately and surrounds herself/himself with the right team of experts to best navigate through the trouble.”
If you have been SOT, struggled to meet payroll, slow-rolled your payables, been delinquent with tax payments, or have been confronted with any other anxiety-creating dilemma, you can’t wait. You must confront the issue while there is still time to execute a solution.
Michael Issa is a Principal at GlassRatner Advisory & Capital Group, wholly-owned subsidiary of B. Riley Financial, Inc. (NASDAQ: RILY). He is a CPA and a Chapter 11 Bankruptcy Trustee in the Central District of California. He can be reached at firstname.lastname@example.org.
Marc Spizzirri is Senior Managing Director for GlassRatner Advisory & Capital Group, LLC (link), a specialty financial advisory services firm and wholly-owned subsidiary of B. Riley Financial, Inc. (NASDAQ: RILY). He can be reached at 949.922.1006 or MSpizzirri@glassratner.com.