For some dealers, acquiring a new dealership is routine. For others, it can be an exciting, yet traumatic event. Having been through hundreds of acquisitions with clients all over the country, there is one thing in common, be prepared! The great coach John Wooden was quoted as saying “Failure to prepare, is preparing for failure”…. In any acquisition, being fully prepared and being able to adapt to a changing transaction, is key for a successful acquisition.
The first item to cover is why….does the acquisition fit the requirements of your current or future business model? Is the reason to diversify your portfolio of franchises, hedge dependence on one or just a few franchises or to develop future generations of owners and managers? Growth for growth’s sake, may not be a good reason. Make sure that the acquisition is for sound business purposes.
With any acquisition, due diligence of the target is essential. One of the first items is to determine the attitude of the manufacturer in that market….were they pleased or not pleased with the performance of the incumbent dealer? If they were not pleased, and you are a strong and aggressive, well capitalized dealer, chances are the manufacturer will welcome your application to be a member of their retail organization. If they were having strong discussions about the underperformance of the dealer, they may already have their “champion” thought of and an exercise of a first right of refusal may be in the future. One of the first elements of due diligence is to make this determination and to review the Sales and Service Agreement currently in place. Rights of First refusal by the manufacturers are getting to be much more frequent than in the past. In some states where they hold less weight, we have even seen Termination Letters be filed at the first hint of an acquisition. That can really stall the process.
Another vital step is to secure the financing well in advance of the transaction. Knowing what your financial institution is willing to do can really help in structuring the deal…if this is your first acquisition and the bank is hesitant to finance as much as you desire, it may be necessary to structure a deal where the seller holds some financing for a period of time. Have seen many of these, the selling point to this is where a highly liquid seller can get a great return on their investments!
After a deal is struck, the next step is the due diligence process. This should be a very thorough investigation. Merely looking at past dealer financial statements does not tell you that much. Obviously, the key asset acquired is the Franchise. If the location is suitable, and you are acquiring the real estate, many more issues arise. But a key element is the assembled workforce…the quality of the employees and staff. Each department needs to be evaluated as to the quality of the employees.
The accounting department staff should be all well trained in their positions and even better, cross trained in all of the functions in the accounting department. This ensures a strong staff with deep bench strength. The finance department should have a solid reputation with the finance companies that they deal with. Chargebacks and contracts in transit should be at a minimum due to bad paperwork. Perhaps your own bank has some knowledge and insight as to the quality of the paperwork coming from the dealership.
The service department should have a high CSI score and very little comebacks. Obtain the following reports as part of the due diligence process: Technician productivity and efficiency analysis; comeback report, open RO’s, voided RO’s and service writer productivity and realization reports. Another good source would be the various peer group reports issued by the manufacturers. An analysis of all of these reports will give a good indication of the quality of the back end staff. And a good walk through of the service and parts department for how orderly they function never hurts either.
The approval process with the manufacturer can also be a hectic process. If this is your first time, perhaps enlist the experience of your Auto Law firm or CPA firm that has prepared these in the past. This is putting your best foot forward with the manufacturer and the quality of the presentation of the application goes a long way in the approval process. If you are an old pro at this, it also does not hurt to step up your technological skills in your presentation. A good business plan presented in video and graphic form can add some “pop” and excitement.
If you do not already have a due diligence checklist in place, feel free to contact the author to obtain a free comprehensive checklist. Best of success in your endeavor to find the right new dealership for you!