It’s a topic that’s rarely far from the headlines in auto retailing these days. But if you’re a dealer that’s thinking about the future, the best way to approach succession planning might seem a bit like navigating a minefield.
Making matters even more complicated has been what some describe as an acquisition “frenzy” in Canada with dealer groups acquiring new stores at a torrid pace over the last few years.
“I don’t think there’s a single point dealer located in a major metro market that’s not looking to the future and thinking, how can I compete?” Says Chuck Seguin, President of Seguin Advisory Services (and Canadian auto dealer columnist).
With the acceleration of factory imaging standards required by OEMs, rising land values, shrinking margins on new vehicles, and higher than ever standards expected from consumers when it comes to auto purchasing and ownership experiences, the advantages of being part of a dealer group, which can spread its resources across several stores seem obvious.
Nevertheless, just because there’s been a great deal of activity in store acquisitions, it doesn’t mean dealers should rely on a purchase as their sole approach to planning for the future. Rick Gauthier, President and CEO of the Canadian Automobile Dealers Association (CADA), says that while receiving a lucrative offer that guarantees financial security for the dealer and their family is nice, having a solid succession strategy in place gives you greater options and less risk.
DO YOUR RESEARCH
And a good place to start is with CADA’s Dealer Succession Planning Guide. Since it was introduced in 2012, Gauthier says he’s received highly valued feedback from dealers across the country. “We’ve had dealers come up to us and say the guide was really helpful.” Gauthier says a number of dealers said they were intimidated by the process of succession planning and didn’t know where to start. “They saw the guide as giving them a road map, so they were then able to sit down and say ‘okay, now I know where to begin and how to formulate an action plan.”
Awareness of the importance of succession planning is something CADA has been actively focusing on since the association took a hard look at the matter back in 1997. The last time dealers were polled, 43 per cent didn’t have a succession plan in place and as many are now a few years older, the issue today is even more pressing. Although awareness is slowly spreading, evident not only by the number of store transactions taking place, but also by the growth in firms positioning themselves as succession planning consultants; industry experts still advise to tread carefully when putting a plan in place.
PLAN FOR THE UNEXPECTED
Perhaps the first and most important factor is making sure you plan for the unexpected — injuries, illness, death, changes in financial circumstances affect us all so having contingency plans in place to ensure the process of succession continues is critical.
Additionally, dealers really need to take into account those people they want to assume responsibility of running the business, are firstly, capable of doing so, secondly, are also willing and furthermore, are also approved by the OEM.
There have been cases where a dealer has put a succession plan in place, only to find the OEM did not grant approval because they felt the proposed management team didn’t meet their requirements. As CADA’s Dealer Succession Planning Guide points out, while it might be the dealer’s own business, a new car retail outlet is still a franchise and given that each OEM has specific agreements with its dealers, this needs careful consideration to ensure obligations, legal or otherwise are met.
As CADA’s Rick Gauthier notes, working with the OEM on succession planning is “a collaborative effort, but a very important one.”
Although the buying frenzy appears to be continuing — during our discussion Gauthier noted that by the end of that a day a few more deals were likely to have been reached — there’s evidence to suggest that the high rate of consolidation we’ve witnessed in recent years won’t necessarily continue so dealers need to plan accordingly. As part of the succession planning process, Chuck Seguin says, it never hurts for dealers to conduct a market study, to find out the state of their market — is it growing, shrinking or in a state of flux? Furthermore, the brand the dealer represents also warrants consideration. Is it a solid performing brand, does it have longevity? How does it view the future of auto retailing? These are all questions that need to be asked. And while the buoyancy of new vehicle sales, rising real estate values and pace of consolidation are currently cause for optimism, hinging the future of your dealership business on the potential of a purchase, as Rick Gauthier succinctly puts it, is a bit like “betting on a lottery win as your source of income instead of going to work every day.”
SMALLER GROUPS
Chuck Seguin notes that although a lot of the emphasis on buying stores and consolidation has focused on the bigger dealer groups getting bigger, he’s also seen a growing trend in smaller operators expanding their own footprint. “We’ve seen those that have two stores and are now looking to acquire a third, maybe fourth or fifth.” Seguin notes that competition, a desire to improve efficiency and stronger market position are just some of reasons driving this growth in smaller groups. He also says that the larger groups are now also looking to acquire smaller groups, not just individual dealerships.
“In terms of profitability, potential and volume, I’d say you have two types of buyers out there,” says Seguin, “those who are looking for successful, profitable organizations and are willing to pay accordingly, or those looking for opportunities, who want to use their methodology to increase profits.”
Dealerships that have been struggling in some areas of their operations are often seen as prime targets for acquisition, since a fair price can often be negotiated for their purchase, while the acquirer can also find ways to improve the business and generate profit in areas the stores are currently struggling.
Seguin notes however that many of these types of stores, especially in metro areas have already been acquired or absorbed into larger groups and for those dealerships that remain independent, whether they are seen as ripe for acquisition or not depends a great deal on both the store and the position of the potential buyer. As a result, dealers faced with such a situation clearly need to think about this when it comes to succession.
“Dealerships are generally selling for more money today than they were five years ago,” says Seguin, but he cautions that with sales margins shrinking and OEMs downloading more and more costs onto the dealer, there is an economic ceiling in terms of how much a store will ultimately sell for.
IS THERE A FUTURE FOR SINGLE POINT DEALERS?
It would appear that the rapid pace of consolidation, the increasing cost of doing business and other factors such as competition and the needs and wants of consumers, are putting ever more pressure on independent franchised dealers, making it tougher for them to compete.
That said, it is likely single point stores will still have a significant role to play in Canadian automotive retailing. As Seguin notes, in some markets, consolidation doesn’t always make sense. “There are still a lot of single point stores that have not consolidated, or if they have, the rate of consolidation is very small.” He says it often boils down to the brand, the market and geographical location. “If you don’t fit within the mandates of a bigger group, chances are they’re not going to be interested in acquiring your store.”
So what then? If you’re a dealer looking to hand over the reins and your store perhaps doesn’t meet the requirements a purchaser is looking for, what’s the solution? CADA’s Rick Gauthier says that when the consolidation dust settles the remaining dealers who have not been acquired will need to decide if they’re in it for the long haul. “Dealers by nature are optimists,” he says but cautions that the sooner a succession plan is put in place, the better. “The option of selling might come along but if it doesn’t you need to be prepared. It’s far easier to change a plan that already exists than to start one when it’s already too late.”
DEALER VIEWPOINT – SINGLE STORE OPERATOR
“Dealer consolidation is impacting us all there’s no question. If you’d asked me about succession five years ago it might have looked like my sons taking over while I rode off into the sunset. Today, however, it’s different. Almost everybody is looking at consolidation as an option. We’re a single point but I have a partner with interests in a number of other stores. I don’t see single points going away but what I call the “intelligence” of the business means you will have to be really sophisticated to stay competitive and respond to market demand. It’s going to be difficult if you’re not part of or associated with a consolidated group.”
— Alex Baum, Dealer Principal, Cochrane Toyota, Cochrane, Alta.
DEALER VIEWPOINT – MULTI-GENERATIONAL, MULTI-STORE GROUP
“It’s an exhilarating business and it’s always changing every day. I was born with a motor in my heart and a shifter in my hand so I always knew I wanted to go into the business. We are a fourth generation business but to gain responsibility you have to earn it. Having good mentors and understanding how the business works is essential if you are going to be running it someday. Another important part if you are looking to family, is making the decision to step aside so your children can take over. It doesn’t necessarily mean giving up the business it means stepping aside, providing guidance and giving sage advice. Keep every option open when it comes to succession and remember, love your business but don’t fall in love with it.”
— Bert Hickman, President, Hickman Automotive Group, St. John’s, Nfld.
