Exit Strategy and the Importance of Having One.
The struggle that an exit strategy can become if not prepped properly.
Throughout my career I have witnessed dealers struggle with their exit strategy if they had one to begin with, worse yet they have passed away and left a big tangled mess behind them. If you have been in the auto retail business long enough as a dealer operator, even if you are not old enough to exit the arena, it is crucial that you have an exit strategy. Most of the advice on this subject is usually given by attorneys and tax advisors with one exception, neither one really would get involved with the operational preparations of the business to have a maximized return and smooth transition.
In order to be prepared whether you want to sell your business or have a succession plan you must take into consideration a few things and systematically act on them. First you must identify which one of the following categories you fall under:
1- Have no successor, must sell and cash out.
2- Have a successor in the business who will take control
3- Have a successor outside the business who does not want to run a car dealership
4- Have a successor too young to take over
Take advantage and plan ahead
If you do not have a successor and getting ready to sell, make sure to plan ahead at least a year or two out. Take advantage of this time period to streamline your business, particularly the way it looks on paper. Clean up your books, reflect your yearend write offs in 13th statement entries, evaluate your retained earnings and net worth. If they do not substantiate a healthy and profitable history you have some options. Particularly if you have not yet converted your dealership entity into a “Living Trust”, you can transfer your assets into a new entity, capitalize adequately and then convert to a Living Trust. This of course is something you need to consult with your attorney and tax accountant. If you are the land owner this would be a good time to re adjust your lease agreement to fair market value, one that you would be satisfied with as a land owner and at the same time would maintain property value. If you do not own the land, you may want to explore to enhance your options if you have any or ask for a new option agreement.
Ultimately, before you decide on an asking price, whether it is an earnings multiplier, or an amount based on potential and opportunities, you must add back management fees if you have any (above a reasonable owner’s salary), life reserve, any service contract reserve not reflected on the statement, and some fixed assets depreciation amount (under certain circumstances) to the reflected net profits prior to the valuation for the purchase price.
If you do have a successor and he or she is in the business and would be an acceptable candidate as a dealer operator, make sure to add their name as a “successor dealer” in your dealer agreement. This will eliminate the possibility of the franchisor to exercise its Right of First refusal. If you have a successor who is not in the business, then you must appoint a qualified general manager and add their name in the dealer agreement as a “Non-owner dealer operator” to accomplish the same thing. This of course would apply to “Young Successor” example as well.
Last but not least, if you intend to sell the property as well, to the benefit of the potential purchaser, make sure to have two separate purchase agreements for the property and the dealership. This will not only make it less desirable for the franchisor to exercise a right of first refusal since they will not have that right for the property, it will also eliminate their site control conditions to a great extent.
I know it is a lot to think about, but if you plan a head you will also maximize your return on sales as opposed to being in a hurry and end up with a fire sale. Operational evaluations are critical in determining how to prepare for these transitions, at Convergent Alliance this is another one of our area of expertise. I am always available for questions by phone or e-mail.
Have a great month of March.
Phone: (310) 717 1876
Fax : (310) 883 0019