Financing first but have a plan to achieve OEM approval, too

Financing and manufacturer’s approval are the two main hurdles first time buyers face when seeking to acquire a new vehicle franchise, say industry veterans.

They have some suggestions as to how to clear each of those obstacles. That starts with having a plan to obtain both or your deal will go nowhere, they say.

“The two questions that every seller wants to know is: Do you have the money, and can they get approved by the OEM?” Andy Church, vice president, USA East of M&A advisory firm DSMA, tells Getting to Go!

Don’t forget working capital

For anyone looking to acquire a new car franchise, financing is the most crucial aspect, a senior banker handling dealership financing tells Getting to Go!. Without financing, a deal doesn’t get done regardless of the prospective buyer’s other qualifications.

“They may be the best operator in their mind,” the banker says, “but if they don’t have the ability to get underwritten it is a moot point.

To acquire a new car franchise, the buyer generally needs floor plan financing, term debt, and working capital. They also need to pay for real estate unless a third party is supplying that portion or the seller wants to keep it, the banker says.

DSMA has a pre-qualification form a potential buyer fills out with questions such as has the buyer already talked to a bank, how much liquid investment the buyer has, liabilities, and net worth. That helps DSMA’s finance team determine if the buyer needs financing.

A bank will generally only finance at best 85% of the real estate and at worst 50%, based on the transactions DSMA has completed, Church says. As for the Goodwill portion of the price, “the best you’re going to get, probably, on Goodwill is a 50% loan from somebody,” Church says.

One aspect first-time buyers tend to forget is the need for working capital, he adds. The amount required varies depending on the manufacturer, “and some are quite substantial compared to others,” Church says.

The working capital has to be sourced debt-free, he says.

Manufacturer approval tips

DSMA counsels first-time buyers to be realistic about the franchise they seek to own. Some brands are more likely to approve a first-time buyer than others.

“When they go, well, I don’t want Mitsubishi, I don’t want Nissan, I don’t want Infiniti, I want a Porsche store. Okay, fantastic, I hope you’re a billionaire,” Church says.

Even with financing in hand, a first-time buyer may still have a hard time getting manufacturer approval to buy a store. That could be for a variety of reasons including the manufacturer has somebody else in mind already and so claims a Right of First Refusal or ROFR.

If the buyer already works as a successful manager at one of the brand’s stores and a manufacturer is familiar with them, that is helpful, Church says. Some manufacturers have programs aimed at first-time owners, he says, and a buyer should be aware of those.

Graduating from the NADA Academy is also a plus. “I’ve seen first-time buyers be able to get approved through, you know, the fact that they graduated from the NADA Academy,” he says.

If a first-time buyer has financing but lacks experience in new car operations, adding someone who does to the equation can make them more attractive to a manufacturer, Willie Beck, co-managing partner at dealer advisory firm Bel Air Partners, tells Getting to Go!

Bel Air Partners worked with a buyer who had used car operations experience to acquire a Ford store. The challenge was finding a factory- approvable general manager as part of the package, Beck says. The manufacturer “vetted both our client and the GM,” he says.

Choose an experienced team

Working with a team, including advisors, accountants and attorneys who are familiar with buy sell deals is crucial for a first-time buyer, Beck says. They can avoid potentially lethal mistakes in the complicated process that includes due diligence, the LOI, the Asset Purchase Agreement, and the real estate lease.

“The negotiation of those documents is a real art,” Beck says. “When they have been through it before, those attorneys know which things are going to be important to the manufacturer.”