By Oren Tasini, Attorney
Car sales are predicted to hit 16.6 million units this year and continue to rise the next few years. Buy sell activity is red hot, with sky high multiples. Now is a great time to be a seller. Who would have uttered that statement five years ago, in the depths of the Great Recession? Then, my highest call volume was from dealers being terminated or having their floor plan cancelled. What a difference five years makes.
What if you aren’t selling now but think you might in five years? Or you might retire and let your sons and daughters take over? What steps should you be taking now to ensure that, no matter what happens in the macroeconomic landscape, your stores remain profitable and sellable for the highest price possible?
It should go without saying that you need a five-year business plan. That should be developed working with key management, lawyers, CPAs, and a sell-side broker, as well as all family members, including those who don’t work in the dealership.
But there are also myriad other simple and practical measures you should take now so these issues don’t come back to haunt you when you do sell.
Start by hiring an attorney who has experience in the dealership world to do a legal audit. Audit sounds daunting, but it is merely a review of your most important legal relationships. Then consider these steps:
- Review all the legal documentation related to your real estate. If you have a lease, check the term, any options to extend or purchase, or rights of early termination, and diary the dates when they must be exercised (Don’t miss the dates; the law has little sympathy for late notice in real estate agreements). Check to see if there are any recorded site control agreements with the manufacturer which might impact a sale. A buyer might very well want your franchise but not your real estate, so you need to know where you stand if your real estate were to become vacant.
- Review your mortgage, floor plan and other financing agreements if any. They are almost certainly cross-collateralized and cross-defaulted with your other stores and properties, so determine if there are specific release prices for which location. If not, consider having a meeting with your banker to discuss your plans and a modification to your loan documents to ease the process (please bring your lawyer along).
- Review your DMS agreements. DMS agreements and the equipment that goes with them are generally lease-financed and not assignable, so you are going to have to figure out your cost to get out of the agreement or quantify the cost to the buyer to assume it. If you are fortunate enough that your DMS agreement is coming up for renewal or expansion, be sure to negotiate the new agreement with an eye towards an early termination right as well as the other considerations which were the subject of previous articles on Automotive Buy Sell Report.
- Regarding your internet presence, be sure that you own all your intellectual property. You should have a “work for hire” agreement with whomever designed, built, and maintains your website(s) in order to vest ownership in the dealership’s name, not the website developer and/or the entity that hosts your website’s name(s). In the absence of such an agreement, the vendor who created the website can claim ownership. You should have in your possession an electronic copy of all the source code for the website. (You should have this regardless so that in the event of any dispute with the website provider you can move your website easily by having the source code rather than have your developer shut down your site and your only recourse is legal action.)
- Be sure all of your web domains, Facebook accounts, lead generation sites such as cars.com and other social media presence are registered in the name of the dealership, not an individual employee. In too many cases, the job of creating the online presence is delegated to an employee who registers these accounts in his own name. Getting them back in the dealership name in the middle of a buy sell could be an unwanted and costly obstacle, which is easily avoidable.
- This one is a bit esoteric, but be sure you have legitimate copies of software products running on all your PCs, or the appropriate site license with the requisite number of seats to match how many computers are running it. In the absence of legitimate software it is possible you could face legal action from the software owner. So make sure your employees are not just installing the same software in multiple machines unless you are licensed to do so.
- Be careful about entering into any long term agreements or any agreements that automatically renew unless they are cancelled before the end of the term. If you do have such agreements make sure you diary those dates and terminate them in a timely manner. Buyers typically have their own preferred vendors and will not assume your agreements. If you have a large multi-store operation try not to enter into master agreements that cover all locations. Try to treat each store as a silo, at least for legal purposes. By signing a master agreement you obligate each store to the obligations of the other. Of course, there is usually a cost savings to doing a multi-store agreement. But in a scenario where you are selling off a group of stores one by one, it may be difficult to sever a single store from that obligation and the original cost savings will be lost over time as fewer stores become responsible for that larger obligation.
- If you have in-store programs such as free oil changes or tires for life, consider whether to continue them. It’s going to cost you to have the buyer honor the program(s), if they even will, so you need to quantify the profit you are seeing by offering them, versus what it may cost you in purchase price on sale.
- Finally, if you have a partner or other owner in the store (chief operating officer, general manager, family members, family trusts) be sure to have a written and signed agreement in place and be sure that agreement covers the mechanisms of sale. Not having an agreement in writing, even with family members or other entities such as trusts established for estate planning, almost always leads to litigation.
The agreement should give you, the dealer, unfettered authority to sell one or more of your dealerships without the consent of the other owners, and only require that you account for the proceeds and pay the other owners their share once the sale has closed. As a cautionary note, having “partners” raises a multitude of legal issues. Owners have significant legal rights by law e.g. you as the majority owner and director owe a “fiduciary duty” to the other owners. A fiduciary duty is one of the highest in the law.
Instead of an ownership interest, you might consider what is known as a phantom stock plan, which is a contractual agreement to allow a person to share in the proceeds of a liquidation event. As a contract the phantom stock agreement does not establish the same relationship as with an owner and creates simple contractual obligations, not fiduciary obligations.
Although, it may seem daunting, preparing your store(s) for sale is a necessary and worthwhile exercise. In addition to the planning, it will refresh your memory about all the working parts of your operations, costs, and who you are doing business with. You may find cost savings, or come to the realization that a long time vendor, or perhaps an employee, is no longer performing at the level you require and result in a long needed change. And perhaps that is the moral to this story. Change is hard, but usually ends up for the better.
Oren Tasini is an attorney and a Partner at Haile Shaw & Pfaffenberger. He can be reached at otasini@hsplaw.com or 561 389 4475.
