By Don Ray, Portfolio Reinsurance
A few years ago I had the pleasure of attending a conference called “The Art of the Deal” sponsored by Car Dealer Insider. While I get a chance to attend a great many dealership-focused conferences, I don’t attend that many. However, I thought this was a very worthwhile conference. The general theme of “The Art of the Deal” conference was centered on buying and selling car dealerships. Presenters included both public and non-public consolidators, factory folks, attorneys, brokers and even accountants. I think the title of the conference was meant to convey the idea that structuring a successful buy/sell is much more of an art than a science. I agree with that concept as far as it goes, but there is more than art involved in a successful deal.
At this conference, both the factory representatives and the public companies presented that buy/sells of dealerships can be pretty forthright transactions. The other presenters tended to disagree with that assertion. Which camp am I in? Well it depends! It depends whether I am representing the buyer or the seller. It depends on the needs and circumstances of my client. It also depends on the needs and circumstances of the other party to the deal. Each deal that maximizes benefit to the appropriate party is unique. There is no “one-size-fits-all”. Anyone that tells you differently doesn’t have a clue!
Several years ago, when I was still in public accounting, I was involved in a buy/sell that is a great example of the variety of deals. We represented the seller and we were negotiating with two different buyers. Unfortunately, our dealer client was a C corporation (he was not previously a client of ours, so don’t blame me for the incompetence of his CPA) and that created additional challenges. As we studied the position of our new client, we also gathered information about the prospective buyers. After understanding the needs and circumstances of the seller, we began to formulate our plan.
However, after also understanding the needs and circumstances of both potential buyers, we knew that to maximize the after-tax cash to the seller, we really needed two different game plans. We then structured two very different offers and presented the appropriate offer to the appropriate buyer. We explained the after-tax results of each offer to the seller. The offers were structured to provide essentially the same after-tax results to the seller. At the end of the day after-tax results rule. As you can tell, we painted two very different pictures to the potential buyers. Some may call that the “art of the deal”, we called it the “smart of the deal”! Painting is one of the means to maximize cash, which is the true end game.
While the structure of each deal is unique, there are some basis concepts to consider. Will this be a stock sell or an asset sale? Very rarely today will a seller get to sell his or her stock and walk away with a totally capital gain transaction that doesn’t include some liability exposure and hasn’t had the sales price adjusted to offset liabilities assumed by the buyer. These liabilities include potential bad debts, water in the inventories, EPA concerns, employment issues, finance and insurance chargebacks and LIFO recapture.
Much more common is the asset sale. Now some would lead you to believe that that is a relatively simple transaction. It certainly can be, but often it is in the best interest of one or more of the parties to creatively structure the deal. The deal for a relative as buyer, or key manager as buyer, can be entirely different.
Remember, the best deal structure depends on the circumstances in areas such as lease termination, rental payments, covenants not to compete, net operating losses, corporate structures, capital losses, blue sky valuation, consulting arrangements, stock basis, employment contracts, health benefits, risk adversity, inventory values, bonuses, tax-free exchanges, furniture, fixture and equipment values, like-kind exchanges, Sec. 338 (h)(10) elections, Sec 754 elections, state tax laws, estate planning opportunities, the use of a grantor retained annuity trust (GRAT) or even in some cases factory participation.
While not every technique fits every deal, someone on your side needs to know when and where to apply the various structuring techniques. The “sales price” is not the most important factor. The present value of the after-tax cash or cash equivalent is what really counts. If you or your advisors are not looking at this then you are not maximizing your opportunities. This may be the only buy/sell deal you are ever engaged in. Make sure that is not true of your accountant or of your attorney. If they do not have car deals already under their belt, please put together a team who does.
Often times the other party will have car deal experience and this could give them a great advantage in the structure of the deal.While the tax consequences of a deal are very important, so are other areas. How will parts be priced? How will new vehicles be priced? Are you buying or selling real estate or is there a lease involved? Or maybe it should be structured as a lease/purchase. Some of these areas may on the surface seem simple, but there are details here that can significantly impact the results of the deal.
Remember, make a smart deal and leave the art to Picasso.
I hope to see you in Orlando October 18-20 for the annual AICPA Auto Dealer Conference. Great line-up including consolidators and a panel of brokers…and me!
Don E. Ray works at Portfolio…THE Reinsurance Company for Auto Dealers. He can be reached at 917-359-5128 or dray.portfolioco@gmail.com
