By Dan Schneider, M.A., Partner, The Rawls Group
Consider this conundrum: You’ve got this great dealership in just the right location. You’re selling lots of cars; you’ve got great CSI scores; and the manufacturer is thrilled to have you as a dealer. You are almost ready to retire. What’s not to like about that situation?
Well, if you haven’t identified or don’t have an immediate successor available then you’ve got a challenge on your hands. Your kids like the idea of owning a dealership, but they don’t want to work those long hours. Your GM wants to buy the business but doesn’t have the financial strength. No outside buyer is waiting in the wings to make you an offer you can’t refuse. What’s an otherwise-successful entrepreneur to do?
For those who want to continue to receive income from the dealership but not participate in the day-to-day operations, consider ownership on an investment basis. One advantage of this approach is that it keeps the dealership within the family, and is still a source of income. Also, if the “skip” generation has children who actually have “shiny metal fever” and want to be in the car business, that could be possible under this scenario. Here’s how some people make it work.
Is it the dealership business or just the lifestyle it affords?
First, decide for yourself whether the dealership is the legacy or if the way of life is the legacy. Identifying the purpose of the business requires a level of objectivity that can take some time to develop. After weighing the driving factors for the business, many dealers conclude that the business feeds the legacy, but it’s not the real legacy. Once you know what your motivation is for the business, succession planning — the process of transferring the legacy to and through the next generation of owners and leaders — becomes easier. Now you can explore the options open to you and make decisions that build the value of the business interests that will allow the way of life legacy to continue.
Here’s how to help that along. Create a set of “Director Expectations” and provide guidance and direction on what to watch for in terms of strategic direction and operational excellence. The characteristics the manufacturer will view as important are volume, sales effectiveness, customer satisfaction.
As for the Board, its priorities include profitability, relationships (with customers, vendors, manufacturers, employees, and the community), and sustainability. You may need some by-laws or operating agreements that help clarify how family members move on to or off of the Board (and out of the company). A trusted Certified Succession Planner can help navigate and quarterback this process for you.
While the Board is being created, you can also evaluate the overall strength of your management team. You no doubt have some good people on the team. Good as they are, they may not have the skills set or the temperament needed to be an effective management bridge. If that’s the case, then you’re going to be in the recruiting business.
It’s important to remember there’s a difference between hiring and recruiting. Lots of people you won’t have an interest in will show up asking to be hired. The person(s) you’ll be looking for are already working for someone else, so you’re going to have to go after them; and you’re going to have to make it worth their time and effort to keep your business within your family. Tie compensation to performance and provide the handcuffs needed to keep your new talent in the business until the next generation is ready to play.
If you choose to sell, you have two options. The common approach we’ve seen involves a sale to a General Manager or another employee. In some cases, the stock is recapitalized into voting and non-voting shares, and the owner retains the majority of the voting shares until the end of the transaction. Obviously, that allows the owner to stay in control until the very end of the buyout. In cases where the buyer has access to sufficient capital, the sale is a “one and done”; and the former owner simply walks away with cash.
Some of our non-dealer clients ask about ESOP’s, or Employee Stock Ownership Plans, which are becoming increasingly popular. They work well as a tool for monetizing the current owner, but their structure makes subsequent exits from the business difficult for those who follow. They are also expensive, require regular valuations of the business, and, as mentioned above, make exiting the business difficult for later generations.
The second option involves sale to an outside party. In either case, it’s important to consider the tax implications. It’s equally important to recognize that in most cases the business will not be worth as much to the potential buyer as it is to the current owner. So, it’s important to consult with attorneys and your CPA in structuring a deal that fits your particular circumstances.
In such a transaction the big question you might have to answer presents another conundrum: Do I sell to maximize my value, or do I sell to maximize the impact for all stakeholders? That’s a question that a good many people will have an opinion about, but one that only you can answer.
Regardless of the option you choose, it is important to recognize that one of the prime purposes of succession planning is to continue building the present value of your business to increase your future financial position. To do so, it is always important to consider the following factors: Your motivation and perspective; your personal estate and financial planning; business structure; strategic planning; business performance; management synergy and teamwork; leadership continuity; successor identification and development; family dynamics; and family governance.
Taken collectively, these factors are what really create the legacy you’ll be passing on to someone in some form. The only “right” way to move the dealership to and through the next generation is the way that makes it possible to keep the goose laying those golden eggs.
Dan Schneider, M.A. is a Partner with The Rawls Group, a national business succession planning firm. He can be reached at dschneider@rawlsgroup.com. For more information visit www.seekingsuccession.com
