By Leonard A. Bellavia, Esq., Bellavia Blatt & Crossett
We have all seen the classified ads listing dealerships for sale containing the proscription “No Brokers” or “Principals Only.” These prospective sellers should consider spending five minutes speaking to an experienced dealership buy-sell attorney. They would likely be told that embarking upon the tumultuous journey of selling an auto dealership without an experienced broker is like hiking the Canadian Rockies without a guide.
The purchase and sale of an automobile dealership is a complex transaction. Aside from the legal issues which inevitably arise in any such transaction, a number of equally important issues need to be addressed and resolved both before and after the execution of an agreement to buy or sell a dealership. Many of these issues may be resolved with the assistance of an experienced dealer broker.
For example, when an automobile dealer first considers the possibility of selling his dealership, confidentiality is usually of great importance. If rumors spread concerning the possible sale of a dealership, dealers are forced to answer awkward questions from employees and vendors concerning the possibility of a sale.
Such rumors, true or not, have significant impact on the day-to-day operation of the dealership. These rumors, however, may be avoided if the dealer retains the services of a savvy broker. Typically, an experienced broker will be able to market a dealership without disclosing its identity until a serious buyer is presented.
As an attorney representing automobile dealers, I receive countless calls from brokers who ask if I know of anyone interested, for example, in a “European import dealership located in Eastern Long Island.” The broker will then provide me with information concerning the dealership’s finances, carefully avoiding any information which may disclose the identity of the dealership being sold. Obviously, if the dealer attempts to market his dealership on his own, such confidentiality is impossible.
Moreover, an experienced broker will typically have a large pool of potential buyers whom he has researched to ensure financial capability to purchase a dealership. The broker’s experience in the industry will also serve the potential seller well when determining the fair market value of a dealership. The broker can provide the dealer with recent market trends and comparable sales in the industry, which may help the dealer to establish an acceptable purchase price for the dealership. Without the broker, the seller would not have these advantages, and as a result, may significantly undervalue his dealership.
After a potential purchaser is located, negotiations concerning the terms of the transaction begin. It would be unwise to assume once the purchase price for the good will of the dealership is agreed upon no other issues concerning the sale will arise. Indeed, a variety of issues must necessarily be resolved prior to entering a contract. These issues include the valuation of parts inventory, assumption of personal and real property leases and the valuation of new, demonstrator and used vehicles. A good broker who is knowledgeable about the automotive industry will understand that these issues exist and undertake to resolve them between the buyer and seller even before the attorneys are retained.
Equally important, the experienced broker can serve as a mediator to resolve disputes between potential buyers and sellers during the more fragile stages of negotiation. As mediator, the broker can talk directly to both parties involved in the transaction in order to find out their exact concerns.
In this regard, the broker has a distinct advantage over the attorney who is prohibited from speaking directly to an adversary. Rather, the attorney’s communications must be through counsel for the opposing party who may, albeit unwittingly, not properly express his client’s concerns.
After execution of the contract, the role of the broker continues to be significant. It is quite common for a knowledgeable broker to assist a potential buyer in preparing the pro forma financial documents and dealer application package for the manufacturer’s review. An insightful broker will recommend modifications to the documents where necessary.
In one relevant example, a broker who was a former dealer, upon reviewing a dealer candidate’s business plan, detected that the candidate’s plan would result in a manufacturer determination that the candidate was under-capitalized. A finding of under-capitalization is likely to result in a manufacturer’s rejection of the proposed transaction. The broker then advised the candidate how to restructure his business plan in order to establish adequate capitalization. In this instance, it is quite likely that the broker saved the entire transaction.
It is a common misconception that the use of a dealer broker is an unnecessary expense. As exhibited above, the role of the broker can be invaluable at every stage of a transaction. It is my experience that the use of a knowledgeable dealer broker is money well spent.
Leonard Bellavia is a senior partner with Bellavia Blatt & Crossett PC, with offices in New York, New Jersey, and Connecticut. He can be reached at 1-516-873-3000 or lbellavia@dealerlaw.com.
