By R. Scott Mahl, US Bank
Having a strong relationship with your financial partner and including it in an acquisition process early on is vital to increasing the chances that the deal is completed in a timely fashion. However, we have found that some dealers don’t bring their financial partner into the process until it is well underway.
This failure to communicate with a financial partner early can, at best, result in delays and frustration on the part of the buyer and seller and, at worst, result in a deal that does not get completed at all. To illustrate my point on why early and frequent communication is paramount, I will discuss a few of the items that are needed to complete a successful acquisition.
To start, you need to set up a bank account for the new legal entity that will be created for the just-acquired dealership. To do this, you need a bank account, and that requires a bank. The bank will need a variety of information about the new entity to comply with the large number of regulations that exist to prevent money laundering, terrorist financing and other forms of criminal activity.
Bankers refer to the gathering of this information as “Knowing Your Customer.” Once the information is obtained, it must go through a number of national databases. Banks can’t take short-cuts with this process as there are substantial monetary fines if everything is not done correctly, and the regulators have no tolerance for mistakes. As such, it is important to get these items taken care of as early as possible.
In addition to having a bank account, you will also need a “Cash Drafting Letter” as part of your application to prove to the manufacturer that the dealership has a flooring line. In order to obtain the Cash Drafting Letter, a financial partner will require that the dealership show it can meet specific working capital requirements.
The flooring limit is typically based on the manufacturer’s requirements and your financial partner will need to assess the adequacy of the line to make sure that it is supported by the level of planned working capital. This letter can be provided by a bank or the automaker’s captive finance company.
As far as the deal structure, the purchase price for the acquisition is usually based on a combination of working capital, fixed assets and goodwill. While the manufacturer will have its working capital requirement, your financial partner may have a different requirement, so it is important to know that up front as it may affect your return analysis.
Once the price is set your financial partner, as well as the manufacturer, will want to know where the funds are coming from before considering the application. Are the funds coming from the owner’s personal liquidity or is the dealer planning to take a distribution from an existing dealership?
Many times, I have seen buyers sign buy-sell agreements then look to their financial partner to provide the funding commitment afterwards. While this may work for many dealers who have substantial financial wherewithal, not every dealer does. It is better to consult early in the process with your financial partner so you can negotiate your best deal with the seller knowing that you have that financial partner’s backing.
Even for those dealers who have substantial financial wherewithal, your financial partner can still add value by helping to structure the deal and provide objective feedback on what else is going on in the market. Bankers lend to a variety of dealerships and franchises, while captive finance companies tend to focus solely on their manufacturer’s respective brands. Financial partners can bring that diverse experience to the negotiation.
Lastly, the manufacturer may require facility improvements as part of the approval for the change in ownership. If the dealer needs to finance the improvements, an appraisal and environmental report will be required, and these take time to prepare and review.
I have given an overview of a few items and considerations from the buyer’s side that must be addressed to ensure the successful completion of an automotive buy-sell. In my next column, I will consider the value a financial partner brings to the sell side of the deal.
US Bank, established in 1863, is one of the oldest banks in the country and has served dealerships for 75 continuous years.
R. Scott Mahl is Business Line Leader – Dealer Commercial Services. He can be reached at 1-949-863-2441 or rscott.mahl@usbank.com.
