Take preventative measure against theft and fraud to make your dealership a more attractive acquisition

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No dealer likes to think his or her employees are stealing from them. But it happens, and when it does the cost can be substantial. And all dealers have to cope with issues such as fake identity scams.

Those threats are not only costly in terms of dollars, they can even scuttle a buy sell deal, so taking preventative measures is vital.

“Some of our biggest claims are employee dishonesty claims that can run into the hundreds of millions of dollars,” says Kevin McWilliams, president of Dealer Protection Group.

Employee dishonesty is most often found in areas of the dealership “where people control money” such as the parts department, says McWilliams.

For example, one large claim involved an employee not recording engine cores taken from vehicles that came in for repair, then selling the engine cores out the back door. Usually, the engine core is sent back to the factory to be recycled.

One of the best ways to prevent – or at least detect – such employee dishonesty is to require employees to take two consecutive weeks off, says McWilliams. “Then you start digging,” he says. If there is something amiss, it will “pop up,” he says.

Outside audits are also important, though smaller dealerships groups or single-point stores often don’t have such audits done, says McWilliams.

“False pretense” claims on the sale of a vehicle – using a fake identity to buy a car – are one of the most frequent scams dealerships face, he says.

Greed on the part of the dealership staff can play a role. “What is most interesting,” says McWilliams, “is the deals that are the most egregious are the ones with the most profit involved so the dealership staff overlooks a slight discrepancy.”

The employee who overlooked the discrepancy will get charged back on the commission, but meanwhile, “the dealer is out the balance of the money,” says McWilliams. And it could increase insurance costs as some companies have step deductibles, he adds.

“False pretense claims are very preventable with the right processes,” says McWilliams.

An ounce of prevention is truly worth a pound of cure where these sorts of losses – be they from employee dishonesty or employee laxity -- are concerned if you are considering selling your dealership.

A single add-back for theft is reasonable, says Stuart McCallum, practice leader of dealership services at advisory and accounting firm Withum.

But, he says, “when a diligence team discovers multiple instances of theft or multiple instances of theft are disclosed by the seller, then there is a question of whether the buyer is purchasing an opportunity or a headache.”

That could indicate the dealership has a fraudulent culture, says McCallum and “that would certainly have an impact on the amount a buyer is willing to pay.”

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