Surprisingly, many auto dealer principals have no formalized succession plan or exit strategy.  This highly preventable situation leaves families vulnerable to financial loss, confusion and needless stress that results from crisis-planning in the absence of a current, proactively-maintained plan.

Our team at Nancy Phillips Associates has witnessed this unfortunate situation firsthand many times in our three decades of serving as a trusted advisor to dealers throughout their ownership lifecycle, and assisting buyers and sellers of franchised auto dealerships. From this experience, we share the proven best-practices below to inform and empower you to act now in order to reap a secure future and the peace of mind you’ll gain from proper planning and knowing your dealership’s value.

Create & Maintain a Formal Plan

A formal plan ensures that your specific intentions are expressly understood and expeditiously fulfilled; not left to a court or franchisor to decide. For example, if you die unexpectedly, your outdated estate plan or lack of succession agreement can place the ownership of your dealership at stake. Triggers that necessitate a formal plan include death, serious health issues, divorce, family issues, partnership disintegration or departure of key personnel. Other reasons to plan: Tax deferral, family or partnership buy in/buy out, estate planning, annual gifting and more.  A current evaluation of your dealership’s worth is the foundation of this plan.

Know the Current Value of Your Dealership and Its Assets

Business value is a core metric of every plan and transition for your dealership. It’s vital to understand and track the value of your business as it evolves with the economy, personnel and market factors.

Plan Early | Update Annually | Maintain Current Valuation Records

Hire an experienced estate attorney to write a plan that addresses your current concerns. Revisit your plan annually, or sooner based on changes, and maintain current documents that support your plan. Key documents include regularly updated business evaluations and dealership real estate appraisals.

Prevent Partnership Pitfalls

Partnerships can be rewarding but without formal planning they can be fraught with issues, problems and discord.  These steps are essential to help minimize potential partnership difficulties: Obtain a professional evaluation of your dealership’s worth at the start of your partnership; Create buy in/buy out agreements that rely upon periodic dealership evaluations; and communicate consistently.

Consider Family Members

When family members serve as partners or are being groomed for succession, it’s critical to establish a benchmark value of your business and adjust it periodically, to avoid the adverse effects of misunderstandings, incorrect transfer of shares, flawed pricing, and family dissension.

Ensure Inheritance Fairness

Dealers often separate their assets with the intention of being fair to their beneficiaries but market fluctuations can turn a good plan upside down. Business values and real estate values can become radically disproportionate from the inception of an estate plan to its execution. Dealership and real estate values, as well as plans to right-side unexpected impacts, should be part of any estate plan.

Maximize Tax Advantages

Wise dealers take advantage of favorable tax laws that may benefit their long-term plan. This may mean incremental transfer of ownership to partners or family members or establishing revocable trusts. Regular evaluation and documentation of dealership and real estate values is typically part of such long-term planning.

Hear Nancy’s Key Insights Now on The Secret Thoughts of CEOs Podcast 

In her sincere and forthright style, Nancy recently shared vital information that all dealer principals need to know in a brief recorded interview on the podcast, The Secret Thoughts of CEOs. 

The episode, titled Pre-Succession for Automotive Dealership Owners: A Conversation with Nancy Phillips, isreceiving positive feedback from listeners who appreciate Nancy’s candid insights from her firsthand experience over three decades of advising dealers throughout their ownership lifecycle.

LISTEN NOW on Spotify or Apple Podcasts

View the 7 Strategic Planning Insights and Asset Valuation Best Practices

Too often, we have witnessed the unfortunate and highly preventable situation of dealers leaving their families vulnerableto financial loss, confusion and needless stress resulting from crisis-planning in the absence of proactive succession planning and asset valuation.

As markets continue to change and adjust with the latest economic factors, many dealers revisit their exit strategies. With increased taxes on the horizon, industry consolidation, questionable futures, and at the same time higher dealership values, it's easy to see why  owners are rethinking their long-term plans. 

The Seller's Market: How Long Will It Last? 

The benefits of selling your dealership now rather than later have never been so transparent. The prices of new cars and used cars have never been higher. With an average dealership net profit increasing around 40%, dealership values are setting records! Once auto prices stabilize, so will dealership values. What goes up must come down and 2021 is seeing an unprecedented seller's market for automotive dealerships. 

Biden's American Families Tax Plan could increase capital gains to an unprecedented rate of 39.6% and eliminate gains passed down to family members through estate planning. As a result, the top federal rate on capital gains could rise as high as 43.4% from the current 23.8%. Under Biden's tax plan, business income tax collections would increase to 3% of GDP in 2022 and rise to about 3.3% after 2025. Economists are warning this level of taxation has only been reached one other time in the last 40 years, from 2005 to 2007. Those dates correspond to the peak of the housing bubble, a troubling sign. 

The Microchip Shortage: Far From Over 

In a recent report from Auto Forecast Solutions, "global automakers have announced production cuts of 5.16 million vehicles from their production schedules and could lose a total 6.3 million because of the crisis." Nearly 20 auto factories have cut production back or paused it altogether over the parts shortage. According to the Washington Post - Ford, GM, Tesla, BMW and Daimler have reported continuing difficulties because of the microchip issue. 

The Decline of Future Earnings 

The employee shortage, impending inflation, market competition, and interest rates will all play a factor in the valuation of your dealership. With so many economic changes on the horizon, future growth earnings are sure to be affected. 

Average Franchisor Approval Time Frame 

The average franchisor takes about 120 days from the date of submission to approve your Buyer. The timeline begins after all the paperwork has been completed and submitted to your franchisor. If you have not determined the value of your dealership, you cannot sell it. If tax changes and market fluctuations concern you, then getting a dealership evaluation today can help you make the right choices to secure your future. 

If you are reconsidering your plans for dealer ownership next year, be sure that a dealership valuation is one of the first steps in your research. The value of your dealership will determine your timeline and, with the last months of 2021 right around the corner, time is running out. 

We can help you understand not only the value of your dealership, but your position as a taxable business under the current administration. With over 30 years of experience in every type of market - our evaluation and understanding of your situation will help you make informed and intelligent decisions for you and your family's future. 

Get started and request your dealership evaluation today!

Introduction 

An Auto Dealership Evaluation prepared by Nancy Phillips Associates helps you define your personal needs and business options in terms of financial goals, the future direction of the business and your own exit plan. Knowing the value of your dealership is essential to making informed decisions about your personal and financial goals.  Your exit plan may be to transfer the business to heirs, sell outright, sell incrementally to a partner or separate the business from its real estate with a plan for each entity.  Understanding how to interpret the value of your dealership will help you to select the best option to maximize proceeds. 

The Evaluation Process 

The evaluation of your business involves extensive research and analysis of all of the elements which impact its value.  As a result of the high level of productivity our company has experienced in the sale of auto dealerships throughout the Northeast, Nancy Phillips Associates has acquired substantial knowledge and experience relative to market areas, demographics, franchise value, manufacturer's marketing plans and other elements affecting the value of your dealership. 

Recasting Financial Potential 

Since most automobile dealerships tend to keep reported profits as low as possible, financial recasting is a crucial element in assessing and understanding the actual earning history and the true profit of your business.  In assessing your company, Nancy Phillips Associates recasts the financial data for the preceding years.  For example, primary sales accounts and key expense accounts are re-allocated at market levels.  Sales opportunities are estimated at average industry levels while expenses which are too high or low are re-aligned.  Once recast, the financial history of your dealership translates the company's past into a tangible present value providing the data required to make an educated decision about the most suitable exit plan. 

Demographics and Market Area Analysis 

The analysis of important external factors ensures comprehensive assessment of the intangible value of your business. The position of your company in the local, regional and national industry is examined.  Industry trends, growth factors, competitors, market areas and geographic influences are analyzed.  

Business Assessment 

The completed Evaluation Report communicates the performance and potential of your dealership and makes educated recommendations as to its minimum and optimum value. The methodology employed in assessing your business is based on current dealership results, industry averages, profit potential and adjusted past and present cash flow projections. 

Confidentiality 

Nancy Phillips Associates, Inc. does not disclose any information regarding its clients’ identity, markets or financial history.