By Kenneth R. Rosenfield, CPA

In today’s environment of roll ups, acquisitions, financial requirements imposed by manufacturers, changes in driving habits, the types of vehicles being produced, and the ever-changing economy, it is no wonder that dealers are questioning the future of their business. Many options are available, and none are really bad, but one must figure out what is best for you, the owner.

First comes soul searching: the introspective part, for an owner to be able to acknowledge their personal goals, objectives and long-term vision for the dealership and how that aligns with a succession strategy. Some dealers do not feel that their children, siblings, or current staff are ready to take over the reins and continue with the tradition of their locally owned auto dealership. For this situation, the market is still a seller’s market and there is a plethora of qualified buyers ready and able to pay a top price for a dealership.

But for some, passing the torch and keeping the family business around for future generations has enormous appeal. This step requires many conversations with the next and future generations of leadership. Whether it be family members or current staff, these heart-to-heart conversations are difficult but necessary to determine if the next generation is capable of guiding the dealership forward into the future. And creating the proper financial plan to allow the smooth transition to the next generation is crucial.

Considerations include: What is the motivation for wanting the dealership to continue long-term? Is the passion to continue the tradition there? Will the future operations of the dealership ensure the retirement and financial requirements of the past generation? Is the family (owner) in the position to gift much of the business to the next generation, or will the future owners be able to pay the full price for the business to compensate current ownership?

All these questions must be in forefront of discussions to facilitate making a well-informed decision that will benefit both the family and the success of the dealership. As soon as a succession plan has been agreed to, applicable filings with the manufacturers should take place to have the successors qualified as dealers and part of the Sales and Service Agreements. This manufacturer’s approval is an important step in the process and should be dealt with as soon as possible.

Sometimes, to help ensure a qualified and successful new leadership team, it is a good idea, to incorporate formal training in dealership management through a number of schools that offer automotive management certificate programs such as Northwood University, NADA Management School, or Keiser University. Of course, nothing is better than quality on-the-job training and community involvement.

Once an owner has decided to make ownership changes, one of the first steps is obtaining a formal valuation of the business and related entities. This would include the operating dealership, the real estate (if owned) utilized in the business, and other connected entities such as an extended warranty company, a marketing business, a finance entity, and any other related business entity. The valuation would be the starting point for any gifting element of the succession plan and any formal price to be paid for the business.

Once the value is determined and agreed upon, the strategy begins. The structure of the transition then comes into play. The estate planning structure would include the ultimate estate planning entity and succession line. The dealership transition structure can be incorporated into the overall estate plan to provide for the best interest of the family elders and to mitigate potential estate and gift tax exposure.

It is important to form a team of professionals who can guide you through the challenges you might face as you execute your succession plan. Your advisors should be well versed in estate planning strategies from both the federal and state tax aspects and to be in legal compliance to ensure that the planning meets all the manufacturer’s requirements, and the estate planning flows correctly for multiple generations.

Fine tuning the plan will revolve around the comfort level of all involved. In some cases, the current ownership may be reluctant to relinquish control at first. In this instance, there are several strategies that will accommodate a step-type transaction where ownership is given/sold to the next generation in intervals based on payments, number of years or other milestones. In some cases, a combination of gifting and outright sale may work better. All strategies considered should be agreed to by all parties of the succession plan.

Another important aspect of succession planning is positioning the dealership for future success. Ask yourself, is the business poised to take on the challenges of the future? Is it well capitalized? Are all requirements of the manufacturer met in terms of market share, facility, units in operation, technician suitability, and is the person scheduled to be the dealer successor properly trained and qualified? What is the quality of the local competition and forecast of the economy in the local marketplace?

If in growth mode, what is the possibility of another point being added to the area? Does the current sales and service agreement contain a right of first refusal for the manufacturer which could impact succession planning or a future sale? All these questions and scenarios should be considered in crafting an effective, efficient and viable plan to carry the dealership into the future with your preferred members of family and/or staff.

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Ken Rosenfield is the Founder of Rosenfield & Co. PLLC, a full-service certified public accounting firm with offices nationwide. Rosenfield & Co. is well respected in automotive retail and its related industries, having one of the largest practices of its kind and representing hundreds of dealerships across the globe.

This article was written for Getting to Go, a buy/sell newsletter from Scali Rasmussen.