By Vic Lance, Founder and President – Lance Surety Bonds Assoc., Inc.
While the pace of buy sells may have slowed in the first quarter of this year, there are still plenty of interested buyers looking for that dealership they can turn around.
Getting a proper state license and posting auto dealer bonds are indispensable for the lawful operations of dealerships in the country. But how are bonding and licensing handled in case a dealership is bought or merged with another business?
The answer is different depending on where your business is located. Every state has its own rules regarding car sales licensing. This means the requirements towards businesses in cases of auto dealership mergers and acquisitions can vary greatly.
Often the transferability of the license and bonding is also defined by the structure of the merger or acquisition. Thus, the way licensing compliance is handled will be set by the decisions of the companies that are entering in new legal relationships.
Let’s take a look at the general license and bond principles that are applied for mergers and acquisitions of car sales businesses.
Licensing in auto dealership mergers and acquisitions
Whether a dealership can change its existing license details or needs to obtain a new license altogether is determined by a number of factors. Licensing authorities in different states approach changing of the business formation that is licensed in diverse ways. Additionally, depending on the agreements between the buyers and sellers, the new structure of the company may affect the need for new licensing.
The change of business formation typically does not include the addition or removal of owners or officers. It does include any changes to the dealership’s structure, such as moving from a sole proprietorship to a corporation. In the later cases, in most states the dealership should apply for licensing from scratch.
There may also be differences in the rules for handling change of ownership depending on the initial business structure. This means that a sole proprietorship which is transitioning to a corporation may need to meet a certain set of requirements, while, say, a limited partnership may have to follow a different procedure.
The bonding requirements
How surety bonds are handled in auto dealership mergers and acquisitions follows the same logic as the licensing. Providing an auto dealer bond is one of the typical requirements that dealers need to meet during the licensing process. If a new license is needed when a business is bought or merged with another one, then a new surety bond will also be required. The only two states that currently do not require a surety bond are Vermont and Ohio.
Surety bonds are often not transferable from owner to owner, as they are underwritten based primarily on the personal finances of the principal owner. When a dealer applies for a bond, the surety needs to consider the associated risk in providing the bond. The bond rate for one person may not be appropriate for a different owner. If a bond underwriter determines that the level or risk is similar enough, they may allow a bond to be transferred to the new owner.
What holds true in all cases is that a new indemnity agreement is always needed in case of ownership changes. When obtaining a bond, owners must both as a corporate and personally indemnify by signing such an agreement. In this way, the new principal owners take full financial responsibility of the dealership’s operations.
What is your experience with licensing and bonding in cases of auto dealership mergers and acquisitions? Please share your experience and insights in the comments below.
Vic Lance is the founder and president of Lance Surety Bond Associates. He is a surety bond expert who helps auto dealers get licensed and bonded. Vic graduated from Villanova University with a degree in Business Administration and holds a Master’s in Business Administration (MBA) from the University of Michigan’s Ross School of Business.
He can be reached at (877) 514-5146 or info@suretybonds.org.
