By Alysha Webb, editor and publisher
Publicly-held dealership groups were once the only 800-pound gorillas in the dealership room, but privately-held dealership groups are becoming increasingly powerful, as well. That was made clear to me a few days ago when an executive at a privately-held group mentioned that his group was being asked by Chrysler to sign a framework agreement.
A framework agreement is a separate contractual agreement between a dealership group and an auto manufacturer that aims to limit the influence one dealership group has over a specific brand. Groups that are asked to sign such agreements have clout.
“Everyone of scale has them now,” James Taylor, managing director at The Presidio Group, told Automotive Buy Sell Report.
Under the agreements, there are usually qualifiers a dealership group must meet before acquiring an additional dealership of a specific franchise, Taylor explained. The agreements are enforced through a score card of sorts involving a dealership’s sales performance, customer satisfaction scores, image compliance facilities, and the like.
They were initially put into place to make sure the publicly-owned dealership groups didn’t corner regional markets for a particular brand. But, “I do think you will see some trickle down” to privately-held groups, said John Davis, a partner at DHG Dealerships.
Framework agreements could theoretically negatively impact a dealership’s valuation but in the current environment, with a limited supply of dealerships and a huge demand, “I don’t think it is affecting things significantly right now,” said Davis.
Indeed, framework agreements can even drive the value of a brand in important markets, said Taylor, because “you hold a franchise that has selected availability.”
The fact that Chrysler is asking a privately-held group to sign a framework agreement also says something about the improving value of the Chrysler brand. Framework agreements have been most common with import and/or luxury brands.
Huge impact on buy/sell
While framework agreements have a neutral or even positive impact on valuation, they can have a negative impact on the ability to do a buy/sell deal, said Mark Johnson, president of M.D. Johnson, Inc. Framework agreements control your ability to grow, he said.
The manufacturers have total control over your ability to own certain stores, and the dealer can’t even submit a request to buy a franchise in a certain area without notifying the manufacturer in advance that they are entering into the agreement, said Johnson.
“You can have a completed document ready to sign and you can’t sign it without giving notice to the manufacturer,” he said.
The agreement can also call for a group to divest of stores that are not performing well in order to buy additional stores, added Johnson.
As for Chrysler (which declined to comment for this story), among the publicly-held groups, Lithia owns the most Chrysler franchises at 10. AutoNation is about to acquire eight Chrysler franchises when it closes the deal to buy Allen Samuels Auto Group in Waco, Tex. That will bring AutoNation’s Chrysler franchise count to nine.
It is too soon to know if Chrysler will have any problem with that acquisition.
