Acquiring a Motor Vehicle Dealership
By Allen D. Lentz
alentz@gsrm.com

The love affair Americans have with their cars has led many people to consider acquiring a motor vehicle dealership.

The buying of motor vehicle dealerships is a challenging endeavor, and one that can be rewarding, but it should be undertaken with a full understanding of the effort and risk involved.

This article is designed to provide insight into some of the key considerations involved in the acquisition process.

• The right brand. Brands of cars and trucks go in and out of style. Auto manufacturers periodically enjoy good times only later to endure hard times. Determine what brands are available in your locale and whether those brands are likely to provide successful products for the dealership to sell over the years. Luxury manufacturers are often very restrictive in awarding new franchises.

• Location, location, location. A dealership’s location is critical to its success. The acquisition price should reflect the size of the tract and the quality of the improvements. A minimum of five acres (less for rural and lower-end stores) is a good guideline. Rural locations tend to be smaller operations, and thus more manageable and affordable, albeit with less profit potential and usually less financial risk. Engaging a qualified environmental engineer to assess the site can help you avoid liability for hazardous substances.

• New or existing franchise. The availability of new franchises is often limited. The advantage of starting a new one instead of an existing one is new franchises do not involve the payment of any “blue sky.” Blue sky is the value of the dealership over and above the value of the hard assets.  

• Buying or leasing land. Leasing usually involves less initial capital outlay than an outright purchase. However, many dealers prefer to purchase the property, then lease it back, and ultimately sell it for a considerable profit. The credit requirements of the lender, based partly on the appraised value of the property, may drive the decision between buying and leasing. Dealers must also be keenly attentive to ingress and egress, as well as maintaining a safe, well-lit, and attractive facility – the style of which is dictated by the manufacturer, as are facility improvements.

• Franchise approval. The manufacturer must approve the buyer as a franchisee, and this can be a lengthy and difficult process. The application itself is a complex document. The goal is to convince the manufacturer you have the financial strength and experience to sell motor vehicles. If you’re a current or former dealer, your consumer satisfaction index is an important aspect of the approval process.

• Financing. Depending on your situation, you may need a term loan (perhaps to purchase the real property), a working line of credit loan, and a floor plan loan to support the purchase of inventory.

Some lenders specialize in financing dealerships; others don’t. The manufacturer’s lending unit will want to provide floor plan financing, typically with a less attractive rate of interest, but with other advantages, such as purchasing retail customer contracts from the dealership. Certain commercial lenders provide floor plan credit facilities, with typically lower rates of interest, along with a full-service banking relationship, attractive terms on accounts and credit cards, and a nearby branch.

Finally, personal guarantees of the dealership indebtedness are usually required. The financial strength and experience of the borrower are important factors, as well as the appraised values of the collateral offered to the lender. Floor plan loans, which are secured by the inventory, may not require personal guarantees; term loans and line-of-credit loans usually do.

• Good help is hard to find. Absentee ownership entails risk, so dealership owners should be on-site as much as possible. Do thorough background checks on all prospective employees. The industry experiences considerable turnover in personnel. Consider a performance-based incentive plan for successful employees.

• Compliance issues. Dealerships face the scrutiny of several regulatory agencies. Here in Tennessee, the Motor Vehicle Commission has authority over motor vehicle dealerships. Dealership must comply with truth-in-lending; truth-in-advertising; privacy act requirements; laws regarding employer-employee relationships; and laws, rules and regulations governing environmental compliance. Hiring experts in these areas is of enormous benefit in achieving compliance with the legal and regulatory structures imposed on dealerships.

• A good team. Assembling a team of experienced professionals can help you make intelligent decisions while maximizing the reward and minimizing the risk. Certified public accountants and lawyers can help you navigate the complex tax and liability considerations involved in the choice of entity for the dealership and determine whether an asset purchase agreement or a stock purchase agreement is best.