By Kenneth R. Rosenfield, CPA
With over 70 percent of General Motors dealerships having completed their required remodel or new construction of facilities, what is next for the Essential Brand Elements Program and how does compliance or noncompliance with the program impact the value, desirability and profitability of the franchise?
The current version of the program expires at the end of 2016, so those dealerships that have not stepped up in their facility image program have very little time left to do so.
Depending on the franchise, GM dealers were collecting between $300 to $700 per vehicle from the factory after completing the required enhancements and image upgrades to their facilities. For some dealers, unfortunately, these monies were the make or break for income for the year. But losing the income stream may not have a huge impact on their valuation because most valuation preparers strip EBE cash from earnings in computing the Fair Market Value of dealerships.
In addition, tax elections can be made to increase depreciation deductions on these improvements, which also helps to offset the cost by reducing current income tax expense, and in some tax jurisdictions, reduce the real property taxes on the facility upgrade.
On the other hand, for those dealers that have opted out of the EBE facility image program, the value to their dealership will be greatly diminished as there will be no incentive cash available to help offset the high cost, in many cases, over $1.3 million for an upgrade.
And an upgrade is important. GM has made massive investments in the technology of their vehicles, going from “worst to first” in some vehicles. That mega-billion dollar product investment must be complimented by dealerships that both convey and embrace the new technology, and, deliver in terms of selling and servicing the new and improved branding.
Is anything on the horizon for GM dealers? According to the GM Authority website, there are rumors that there may be a new installment of the EBE Program. It will most likely require investment in technology, advertising, employee training and high tech digital displays. Although nothing formal has been announced, it seems that if there is going to be an EBE 2.0, dealers will still be required to make significant investments in their dealerships, only this time in technology.
With the highly competitive environment for small increases in market share, GM is taking a tough stance and aggressive position to “knock out the competition” and seems very willing to step up to the plate for dealers to invest in facilities and technology to help with achieving those goals.
But EBE 2.0 will likely not have the substantial cash rewards offered in the current version. This is precisely the reason that GM dealers will need to get back to the basics of making money through selling and servicing vehicles at retail.
Regardless of how the next level of cash rewards compares to the current level, when EBE 2.0 is announced take advantage of it. GM is ready, willing and able to step up to help dealerships reinvest in themselves, their facilities and technology. It will be up to the dealers to use the money as requested and reinvest in themselves.
This investment is good for your dealership’s valuation in the long run. But don’t count on that cash to survive. Do that through selling and servicing vehicles. That will add continuing value to the dealership and the brand, which can make the return on the EBE investment that much greater.
Ken Rosenfield is founder of Rosenfield & Company PLLC, a full-service accounting firm serving dealerships from offices in Orlando, Manhattan, and Florham Park NJ.