By Jason Borden, Senior Manager, Dixon Hughes Goodman
As a store or multi-store owner, retirement is in your future. Whether your timeline for departure is drawing near or is further into the horizon, the question you should ask yourself remains the same – “What have I done to prepare for my future and the future of my dealership?”
Driven by increased sales, more lending options, high valuations and a very active acquisition market, dealers now have more opportunities to secure their future than ever before. Though family succession has been historically favored, it is no longer the only option. New succession trends are becoming more prominent in the industry as investors, private equity funds, family offices and private strategic buyers are diving into the dealership market.
Between increasing regulatory controls, compliance demands, consolidation, competition and other industry pressures, dealerships face challenges regularly. As such, adding an additional exit strategy “to do” to the list – whether that be via family succession or selling to an investor – is not always on the top of every dealer’s mind. Currently, however, the market is up and the pool of dealership buyers is growing. Now is a great time go shopping for an exit strategy, regardless of the type of buyer you seek.
Major Considerations When Planning Your Exit Strategy
There are a few nuances to keep in mind. It is critical to know what an investor is interested in. For example, if your plan entails selling to a private equity group, you will want to understand terms like discounted cash flow and EBITDA – items that are top of mind for a private equity investor. Being able to speak the investor’s language will benefit you down the road.
However, even with a more non-traditional exit strategy, a large majority of traditional succession planning considerations remain the same. It is important not to overlook these elements. Items you should always keep in mind when determining what the future of your dealership looks like include:
Family Future: Consider what a successful future for your family business looks like and how the sale to an investor might impact that. Once you identify your family’s role in an exit strategy, you can adjust your plan to accommodate that end goal.
Relationships: As you build your exit strategy, you should also identify your most trusted advisors. Bring your dealership accountants, attorneys and business consultants on board. These advisors can help ensure success during the transition and into the dealership’s future.
Building and maintaining strong relationships is a cornerstone to many dealers’ business philosophies. Your succession plan should take into account the relationships you built to make sure they are not lost once you are gone.
- Manufacturer – Understanding the relationship with your manufacturer is critical in the event of succession via a dealership sale, as the manufacturer will need to approve the buyer and may set forth “conditions” of a sale (i.e. required facility upgrades). Each manufacturer has different agreements, so consult with those who can make the approval process less painful.
- Banker/Lender – Regardless of whether your succession involves the next generation or an investor, ensure that the successor is introduced to your banker early and often in the process. Banking and lending is important on both the dealership and personal levels, so the transition will be much smoother if the relationship is already in place when it comes time to transfer ownership.
- Advisors (Accountant, Attorney, Consultant) – Dealership industry-specific advisors with accounting, legal and business focuses can help ensure you have all your bases covered and your written agreements buttoned up. Investing on the front end can help save you money on the back end.
- Key Dealership Employees – If there are any individuals that will enhance your exit strategy or any potential employees interested in running dealership operations, identify them early and make sure the successor is familiar with them. These people can help keep the succession planning on track and help make the transition successful.
Accounting/Operational: On the accounting side, the tax consequences could vary drastically depending on how the transaction is structured. If you plan your exit strategy early enough, you can work to minimize the tax implication when you decide to sell or transfer your business. While this presents upfront costs, such planning could potentially save millions in the long run. Specific areas of focus on the accounting and operational side include:
- Tax Accounting Implication & Opportunities
- Estate & Trust Planning
- Transaction & Due Diligence
- Business Structuring
- Dealership Valuation
What’s Right for You?
The dealership space is unique in that dealers may not want to leave the day-to-day operations – much less the business – in general. Furthermore, the future is never certain in this industry. So with the introduction of new investors and subsequent exit strategy options, now is an opportune time to take advantage of the many exit strategies currently available to dealers.
Regardless of the succession path you choose, you need to build a proper foundation of succession before it is too late so that your dealership and family are protected and the legacy of your business and brand outlives your ownership transfer.
Jason Borden, Senior Manager of DHG in Memphis, TN, has more than 13 years experience in public accounting working exclusively with automotive dealerships. He currently serves dealership clients in the areas of accounting, audit, tax and management advisory services and consults with dealers on buy/sell agreements. He can be reached at 901-684-5653 or Jason.Borden@dghllp.com.