Buy and sell experts offer their advice on what dealers need to know when selling their dealerships.
Dealers looking to sell their business face a variety of factors, some of which they may not be aware of, and find themselves in trouble too late into the process, according to mergers and acquisitions experts.
Canadian auto dealer contacted several people in the M&A field who provided a checklist of key things pertaining to planning, day-to-day involvement of the seller, employee retention, taxation, possible environmental issues, and the reason it is important to employ a broker to understand all of this and maximize opportunities rather than doing it without professional help.
Farid Ahmad, Founder and President of Dealer Solutions Mergers and Acquisitions, says most sellers don’t know all of this in advance, in particular owners of a single store.
“They find out the hard way and that’s the problem,” says Ahmad. “Any corporation or large group that buys and sells dealerships understands all of this, but I’m specifically talking about that mom-and-pop business who’s never sold their business before and these are the people that normally run into the most trouble.”
Michael Lewicki, President of Lewicki Automotive Consulting Ltd., says selling a business is not rocket science, but there needs to be a solid plan in place.
“One just doesn’t wake up one morning and decide to sell,” says Lewicki. “Are you going to be selling in the next five years? That factors in place from the point of view of what does your own succession plan look like?”
Lewicki says that when the transaction involves a relative who is already in the business or an employee who already owns a small percentage in the company and is on a plan to acquire a majority stake over a period of time, there doesn’t need to be a whole lot of preparation. He says when the sale doesn’t apply to those alternatives and involves going to the market for a third party it’s an entirely different situation.
“That is not something you do overnight,” says Lewicki. “That’s something you plan for a minimum of one year in advance because it’s going to take a year probably to get all the ducks lined up. First and foremost you want to have your internal accounting clear and current. It’s got to be current and produce reasonably accurate information that a buyer could take a look at.”
As an example of that, Ahmad says a dealer may have sold a portion of the company to an employee for a specific sum and subsequently bought back those shares but didn’t officially record that information, raising a red flag in the lawyering process.
“Get your books clean —your corporate books and your accounting — because that’s where I find sometimes things go awry, ” says Ahmad.
Ahmad also said it’s crucial to have a property appraisal done by a professional company before going to market to understand the value of the land and the building to tell a prospective purchaser.
“People don’t know their walkaway number and make a decision to sell and either they don’t get enough for what they need to retire on or they actually get too much because now there are tax issues on that extra money,” says Ahmad. “Know your walkaway number before you start going down the road of selling the business.”
Another issue pertains to the governance of the store. Lewicki says a buyer would want to know how involved the seller is in the day-to-day operation of the business.
“If the dealer is so integrated in the operation of the business, a buyer will identify that as a significant weakness going forward because they have to replace that person and at what cost?” says Lewicki. “It is irritating and is time consuming and will, in fact, hurt the goodwill of the sales price. If the dealer is so entwined in the day-to-day process, start changing that now by delegating key responsibilities to capable managers. When that gets created the store has a much greater value to the buyer.”
Ahmad says the seller needs to assess who their key employees are and whether they will stay once the business changes ownership.
“You may have an amazing used car manager and the value of the business is because your used cars are doing so well, but if you sell that used car manager is going to retire and that’s going to impact your value,” says Ahmad.
Gordie Gerbrandt, who oversees the Canadian market for the Tim Lamb Group, says the seller should have a clear understanding of what the areas of opportunity are in the business and do they have a quality person in place because that makes the store more valuable. He also says it’s important for the seller to understand their sales efficiency report to see how the business is performing relative to the market.
“This is a tricky part and when a broker breaks that gap and answers those questions,” says Gerbrandt. “Our job is to sell the upsides in the store. If a dealer was going to sell it themselves that would be something that is really relevant for them to really understand what the upside opportunity is in the business.”
He also says a broker would be invaluable for pointing out factors that include non-operational shareholder compensation, a clear picture of annual redemptions and excess personal vehicles on the floor plan.
“It would all be subject to what kind of expenses that may or may not be put through the business that a buyer may assume…what is solely running the business and what isn’t?” says Gerbrandt.
He said it is worth spending the money to use a broker rather than trying to do it without one to get a complete analysis of the dealership and an accurate range of what the business would do in the marketplace. He says some sellers might know anywhere from five to 10 people who have expressed interest in buying the store, whereas the broker may know hundreds.
“It’s like selling that used car at an auction, do you sell it to the wholesaler that walks on your lot or do you bring it to the auction that has 100 wholesalers?” says Gerbrandt. “With me I just say to the dealers I can assure you you’re going to see top dollar from your store. If you’re going to just one independent person you can’t find a true price.
“I’ve never had a dealer say it wasn’t worth it. Normally with dealers meeting us, they have a really good pulse on the retail industry, they just kind of get lost on how to process that transaction, so we kind of hold their hand, start to finish, advising them on a fair-market value and through the purchase agreement, through OEM approval, all the way to the finish line,” says Gerbrandt
Lewicki says environmental issues pertaining to the land could negatively impact funding from the bank because of risk factors.
“It’s a big, big issue, and it will kill deals,” says Lewicki. “In a dealership, the environmental impacts are significant with respect to polluting of the land. You can bet dollars to donuts it’s at the top or near the top of every buyer’s due diligence checklist. You might as well deal with it before the question is asked. It’s always an issue to deal with. Even when the incoming dealer is going to lease the land from the outgoing dealer, it’s still an issue. It happens enough that the banks won’t fund without it.”
He says there are specialty firms that do environmental reports with respect to the history of the property in terms of the businesses that have been on it for the past 50 years and reach a preliminary conclusion of the risk of contamination below the surface by doing drilling for core samples and analysis.
Lewicki says if the dealership is going to be turned into a condominium at some point in the distant future, it won’t matter because the buyer will be digging up the land anyway.
