By Stephen P. Linzer and James P. O’Sullivan, attorneys, Tiffany & Bosco P.A.
Are You Considering Selling Your Auto Dealership? Now or a bit further down the road? Whether you are expecting a leisurely drive with the top down or a rally-car cliff hanger, some special auto industry insights can help you avoid wrong turns and dead ends.
What’s Motivating Your Move? Better the reason be thoughtful dealer planning for the good of your family and employees, rather than finding yourself on the dreaded “D List” (Disenfranchisement, Default on Debt, Divorce, Disability or Death). Whatever the motivation, careful analysis of your circumstances, clarifying your transition goals and engaging skilled advisors will enhance your potential for a successful succession.
Early Trip Planning Critical. Just as you need to know road conditions and have navigation aids, the succession highway requires informed pre-planning. You need to plan the trip ahead of time – impromptu excursions, without travel aids, can lead to unexpected results. If you start at the last minute many of the resources and planning tools are no longer available. Various types of trusts, gift giving, long term purchase and sale agreements, deferred buy outs and other mechanism to save you money and ease the burdens of the trip often cannot be capitalized on without advance planning.
Who Will be Joining You on Your Journey? A well-groomed family member, key employee or other heir-apparent? One or more co-owners or former co-owners? A trusted neighbor or friend? A “new-to-you” passenger you found or who found you along the way? And let’s not forget Uncle Sam: although the IRS seems to be having trouble recently finding even its own internal e-mail, you can bet the Taxman will be along for this ride! Your passengers will greatly impact the route you take and the nature of your trip.
First Stop: Your Dealer Agreement and Franchisor Policies. Every journey has a starting point, and we suggest you begin with a careful review of your dealer agreement and franchisor policies. Our experience recommends an early analysis of some essential auto manufacturer controls that can fundamentally impact your ability to transfer your business – whether through an internal succession plan or a sale to a third party:
- Manufacturer rights to terminate a dealership, with or without “cause”;
- Approval criteria for qualifying buyers;
- Franchise agreement or statutory rights of first refusal to repurchase a dealership that can “chill” third party interest;
- Site control that greatly impacts and may thwart your ability to freely transfer or even retain dealership property;
- Controls on ownership and management that can frustrate traditional estate planning techniques. For example, does your dealer agreement or franchisor policies have restrictions on lifetime gifting of ownership or have requirements about your use of trusts for succession planning?
Pop the Hood & Check Your Tire Pressure. How prepared is your vehicle for this journey? Are you hearing strange noises as you head on down the road which suggest difficulties ahead? Do you have significant liabilities such as finance reserve charge backs, warranty policy issues, tax or labor matters? Can you safely make the buyer’s requested representations and warranties? Any undesirable long term contracts? Have you removed private and proprietary data from computers? Have you taken care of personal items run through the dealership to avoid add backs required by the buyer?
Road Work Next 10 Miles. Having determined where you want to go, clarified the manufacturer’s “rules of the road,” and inspected your vehicle, now is a great time to inventory and review all of the governing documents for the dealership (e.g., Articles of Incorporation and other state public records, tax filings, Bylaws, Operating Agreements and Buy-Sell Agreements), as well as any estate planning or other succession planning documents. If documents were drafted — but never signed – put those also in the stack for review and get the benefit of any “hindsight” since the drafts were prepared.
Changed lawyers since important documents were drafted or signed? Make sure your current counsel has access to those files. It is a uniformly unpleasant and commonly expensive experience to be in the midst of a dealership sale (or owner divorce) and be faced with a claim from a former employee (or spouse) based on a signed document no one else remembers. A lawyer’s job includes keeping good records, and a prior attorney’s file can offer helpful insights for interpreting earlier contracts at the time of a later business sale or in updating succession agreements.
While an in-depth discussion of succession contract terms is the subject of a separate column, we’ll mention a few key concepts. The focus of the documents should be the goal of an orderly internal transition or sale to a third party. For example, what will trigger buyout rights? How much will be paid, when and to whom? How will payment be secured? Would insurance help provide buyout liquidity and working capital during transition? Are nonemployee family and other minority owners prevented from “greenmailing” to obtain their approval during a sale?
Are We There Yet? Gifting of ownership and related valuable dealer estate planning is best accomplished when transition is still hypothetical, and not immediately after signing the letter of intent to sell the dealership. Your best move is to start the discussion early and to involve your attorney, CPA or other tax advisor, mergers & acquisitions intermediary, insurance advisor, banker and wealth management planner.
Happyland: Next Exit. Although Confucius (551–479 BC) is widely credited with the following quote, our money is on Bill Murray (1950- AD): “And remember, no matter where you go, there you are.” So, why not get underway? Beep Beep.