By Fred O’Halloran – MD Johnson, Inc.
Over the past year, I have read articles by highly-regarded automotive attorneys detailing the benefits of using a broker or M&A specialist to conduct a buy/sell transaction rather than just making a deal between friends. These attorneys felt a dealer was better served by having experienced representation to assist in selling a dealer’s hard-earned assets.
In thinking about a similar question, I ask, is a dealer better served by hiring an attorney with experience doing dealership buy/sells? What does such experience bring to the table?
Many of our clients have good friends who have been their legal counsel for many years. When one is new to the business, you start your legal relationship as client and attorney. As time passes, this relationship becomes a friendship, spouses become friends and you start socializing.
The friend/attorney handles all the dealer’s legal needs including legal challenges in the daily operation, HR issues, loans, contracts, incorporation, estate planning, and the like. But in a dealership buy/sell transaction, there are a number of nuances that an attorney without actual buy/sell experience may miss. That can cost the client thousands, even hundreds of thousands, of dollars.
Most buy/sell transactions have two parts, an asset agreement and the real estate agreement, including a third-party lease. Did you know you don’t have to submit your real estate purchase agreement to the manufacturer? You only have to provide a lease to prove to the manufacturer you have a place to do business for at least 5 years.
Real estate may seem cut and dry but consider these nuances: Who pays for the Phase One and Phase Two Environmental Surveys? I have seen the seller pay, the buyer pay, and both parties split the cost. Obviously, any remediation cost must be borne by the seller. Is closing going to be held up pending completion of remediation or can you close with an escrow agreement for the remediation?
What about the representation and warranties of both the asset and the real estate agreement? What about the guarantees backing up those representations and warranties? I have been involved in two transactions recently where an experienced deal attorney found issues with surveys and titles. These issues had been around for many years and missed or ignored by other attorneys during previous sales transactions and refinancing. The experienced attorney’s discovery saved the buyer money and prevented a delay in closing.
The asset agreement can be even more challenging than the real estate contract. An attorney experienced in automotive buy sell documents knows what nuances to look for, they know what the manufacturers want to see, what the capital structure should look like, how the debt should be structured, and what you can and cannot pledge as collateral, so a deal won’t be rejected by the manufacturer.
If you are selling more than one franchise, an experienced attorney will know how to structure deals to avoid a manufacturer’s “Right of First Refusal”. If you are only selling one store, a ROFR is no big deal, the manufacturer will match the deal you have and the only injured party is the original buyer who is left out in the cold. If you are selling multiple stores, a ROFR can destroy an asset purchase agreement. How is this handled? Does your friend/legal counsel know how to address this?
Hiring experienced counsel doesn’t mean spending hundreds of thousands of dollars on a big firm. We had a deal we worked where the buyer was going to use one of these large, expensive M&A law firms. We told the seller, our client, we would wait until the buyer used a more reasonable attorney. If one side has an expensive firm, the other side is forced to spend a lot more money during the process.
Actual buy/sell transaction experience is also important. We have had several instances where folks on the other side of the table hire people who specialize in one aspect of the automobile business, but not actual deal transactions. In these cases, our client triumphed as these less-experienced attorneys cost their clients a great deal of money.
Some of the areas that could be missed are inventory pricing, advertising credits, floor plan credits, holdback credits, used vehicle pricing, asset pricing, length of guarantees, assets to back up the representation and warranties, and holdbacks for the representation and warranties, to name a few.
An experienced automotive buy/sell attorney doesn’t have to start a contract from scratch. Because he or she knows what the manufacturer wants to see and how the deal should be structured, he or she has a leg up on those who don’t.
The question is not do you need an attorney with dealership buy/sell experience. The question is how could you not use one?
Fred O’Halloran is a consultant to MD Johnson, Inc., a dealership transaction advisory firm. He can be reached at 816-415-0947 or fred@mdjohnsoninc.com.
