By George M. Taylor, III, Burr & Forman
Many dealership lawyers tend to represent what is commonly referred to as “serial acquirers,” that is, existing dealers who repeatedly purchase additional stores, constantly adding to their empires while rarely disposing of any dealership interests. It is easy to become accustomed to that role and to have difficulty reorienting yourself to the seller side of things. In my forthcoming series of articles, my goal is to comment on acquisition agreements from a seller’s perspective.
This column will focus on details in the pricing of assets. The next will go through those representations that are particularly sensitive for the seller and how they might be modified. Finally, I will write about the indemnities and boilerplate language in an acquisition agreement and how it acts to expand or limit the seller’s risk.
Given that upwards of 90 percent of dealership sales are structured as asset transactions rather than stock purchases, I will assume an asset purchase for each of these scenarios. The comments are equally valid for stock deals but are heavily dependent on whether asset-type adjustments are made in the stock purchase process. As for the purchase price computations in an asset transaction, here are some considerations for the seller:
- Purchase Price Calculation – Both sides to the transaction will typically acknowledge that the basic vehicle purchase price is invoice minus holdback. Less attention is given to the additional adjustments that are made by the manufacturer on the invoice. These include floor plan assistance and advertising allowances. Most buyers insist that these be deducted as well, but frequently these end up getting split or adjusted in some way that is more beneficial to the seller. Language in purchase agreements also has a tendency to be loosely-worded when it comes to advertising association payments. A seller who has not focused carefully on the pricing language might well find that amounts the manufacturer is paying to an advertising association over which the seller has no control are being deducted from the new vehicle purchase price.
- Parts Inventory – Manufacturer parts are normally priced based on the price stated in the most recent manufacturer parts catalog and based on an actual inventory. In the most seller-oriented agreements, that is all the explanation that is needed – but buyers are always interested in further restrictions. The elimination of obsolete parts is a given and that standard often duplicates the standard requiring that the parts be priced in the parts catalog. However, some buyers go further and exclude parts of a type for which there has been no sale in some period of time. The seller is then left to argue whether the part has value to the buyer. Often times, the best the seller can do is lengthen the period during which the part is still considered valid.
One of the more damaging provisions from the seller’s perspective relates to the returnable parts standard. For years, every acquisition agreement provided that buyers were required to purchase only those parts that were returnable to the manufacturer under current return programs. This was a short-hand method for determining which parts were good because manufacturers had generous return programs that would permit the return of any part with any value to the dealership. However, as time has passed, many parts (although listed in the latest manufacturer parts catalog) are non-returnable from the moment they are purchased by the seller. These are mainly parts containing some degree of hazardous materials or which are otherwise difficult to ship or redistribute. Those who use the old returnable parts standard may find themselves with a quantity of perfectly good parts which the buyer could easily use in its operations but to which no purchase price is assigned because they are not technically returnable.
A second issue relates to the treatment of those parts not considered returnable. In the most buyer-oriented agreements, those parts to which no purchase price is assigned are lumped into the other assets category and are considered purchased as part of the blue sky. In other words, the buyer receives them for free. The better approach from the seller perspective is to provide, at minimum, that any part to which no specific purchase price is assigned will be an asset retained by the seller. Those parts typically end up being negotiated at closing, but at least the seller has some basis on which to negotiate. If negotiations fail, the seller has the unpleasant option of excluding them from the sale and disposing of them on its own.
- Fixed Assets – The purchase price for the fixed assets frequently receives little attention in the negotiation process, with both seller and buyer frequently accepting pricing based on depreciated book value. The depreciated book value standard typically permits the buyer to purchase fixed assets at a price much lower than their fair market value. In that case, the seller may be much better off with an appraisal. Every single asset in the appraisal process, whether fully depreciated or not, gets a purchase price – which often results in a higher number for the seller. Regardless, the seller should be careful about the impact of accelerated depreciation on the pricing of assets when the book value standard is used. A middle approach is to accept book value pricing but to exclude the impact of any accelerated depreciation, or the impact of any tax law that allows the immediate expensing of capital assets.
- Assumed Contracts – In a dealership transaction, a buyer likely can contract for any service or product that it needs to run the business as soon as it purchases, which makes it unlikely it will have great need for any of the existing contracts of the seller. The seller, on the other hand, is only selling its assets, and every contract that it fails to get the buyer to assume will be something that it must pay for on its own. A twenty-four- or forty-eight-month uniform contract or a five-year DMS system agreement does not terminate just because the dealership is sold, and if the buyer does not assume the contract, the seller could be paying it off for years to come.
Many lawyers wait until after the acquisition agreement is assigned to focus on the assumed contracts. At that point, both seller and buyer are pretty much committed to the transaction and are moving forward with manufacturer notification. By that stage, the seller will have the weaker hand in negotiations and might end up having to eat various contracts.
The seller’s best approach to this issue is to get the contract list out there at the front end of transaction. There is no reason that a schedule of contracts to be assumed cannot be attached to the Asset Purchase Agreement when it is first executed. There will be no more than a dozen contracts and asking the buyer to go ahead and review them is very reasonable. Also, at that point, a buyer who has not yet solidified a deal with the seller will be much more flexible in taking on contracts than he might be later in the process.
In the assumption of contracts, the seller also needs to be aware very early on if any of the contracts he wants the buyer to take require the consent of the other party to the contract. Failure to obtain a third-party consent can result in a contract not being assumable at all, which means that the seller will be stuck with it no matter how accommodating the buyer is.
George M. Taylor is the chair of Burr & Forman’s Corporate Section, which consists of the Corporate and Tax practice group, the Banking and Real Estate practice group and the Creditors’ Rights and Bankruptcy practice group, encompassing lawyers from the entire five-state footprint of the firm. He can be reached at (205) 458-5254 or firstname.lastname@example.org.