Turning Lemons Into Lemonade

November 20, 2011

Dealership acquisitions call for careful forethought.

Ann Landers may no longer be with us, but one bit of her advice still rings true: “When life hands you a lemon, make lemonade.” Nowadays, most dealers are being handed a lemon in the form of plummeting profit margins, stiff competition, fluctuating interest rates and increasing demands from automakers.

Yet a few brave dealers are trying to take these sour times and turn them into lemonade by acquiring other dealerships and expanding their operations. Should you follow suit? Maybe, maybe not — deciding whether to acquire another dealership calls for careful forethought.

Ask the right questions

Before even considering an acquisition, you need to look at many factors. First, is your business in good shape in terms of cash flow, revenue and profitability? Uniting two struggling dealerships rarely creates one strong operation. Other pertinent questions to ask include:

  • Do franchise requirements complicate the picture or, conversely, might there be factory assistance available when consolidating several brands under one roof?
  • What do you see in the future for the brands involved? A weak brand today may be much stronger tomorrow — or vice versa.
  • Is your dealership’s area economically diversified or does it count on one company or one industry for its prosperity?
  • How do your banking relationships and your access to capital look?

Remember, a successful dealership — selling at a premium — will require a substantial initial cash outlay and probably pose some challenges in generating a return on your investment

Think geographically

Another important matter to consider before expanding is the degree to which the move will allow you to spread out your normal business risks.

For instance, your skill and good reputation may tempt you to expand in your community and to choose a brand that appeals to your current customer base. After all, these are the people you know, and who know you.

Unfortunately, a downturn in your community, or among that core of customers, could hit your businesses hard. For this reason, many dealers choose to venture into new territory. In some cases, that means buying in a different town with a different economic base. Or it may mean purchasing a dealership that is likely to appeal to a different clientele.

Thus, if there is an economic downturn in one area, the likelihood of it adversely affecting both operations is lessened. Diversifying in this manner can also help protect your dealership from being wiped out completely in the case of a natural disaster.

Consider your team

Although you’ll need to thoroughly examine the books and the economy as a whole, you should also take a good look at the people working at the dealership you’re considering buying. Easier said than done, of course — especially if the current owner doesn’t want a potential sale to distract his or her staff.

But it’s still important to determine the strengths and weaknesses of the workforce you’ll be inheriting, because auto retailing is ultimately a people business. Also check the prospect’s employment and work policies. Is there going to be a clash of cultures if you take over?

In addition, just as any acquisition is guaranteed to disrupt the business being acquired, it can also negatively affect your own staff. Questions, typically unspoken, will run the gamut from “Will I still have a job?” to “Will I be expected to do more work?” to “Could I get a promotion out of this?”

Generally, the best way to handle the disruption is through open communication. Let your workers know what is happening as soon as the ink is dry. Have a transition plan ready to go and implement it as quickly as possible. Acquisitions can be disruptive, but with a firm hand and a sound strategy, the dust should settle quickly.

Cover your bases

Even in today’s tough auto retailing environment, expanding your business through an acquisition isn’t out of the question. You just need to be cautious and take the time to do the necessary due diligence.

Be sure to bring your accounting and legal advisors into the picture as well. And, above all, don’t rush into an agreement before you have done all your homework.

Sidebar: Should you launch a satellite service facility?

You are busier than ever — and so are your customers. As a result, you may have noticed that more and more of your clientele are becoming increasingly lax about scheduling (and perhaps showing up for) service appointments.

Some dealerships are grappling with this problem by opening satellite service locations. Doing so not only helps your customers continue to use your dealership for service, but it provides an important sales tool — especially for dealers who sell to a wide geographic area.

In fact, satellite service facilities tend to do best for dealerships whose buyers live in a concentrated area far from the dealership as well as for dealerships adjacent to large, thinly populated areas.

Of course, there are risks: The start-up costs will likely put a considerable drain on your cash flow. And if the facility doesn’t carry its weight, you may have to pull the plug and face a considerable loss.

But if acquiring another dealership seems a bit too much, opening a satellite service facility can offer a potentially profitable alternative.

Frankeberger Vausher + Company, CPAs… is a full service CPA firm whose partners have collectively served the dealership industry for over 35 years. We provide a full compendium of professional services including traditional taxation and financial statement preparation as well as strategic consulting for dealers in areas such as: Internal Financial and Operating Controls, all activities for Buy/Sell transactions, valuation requirements, estate planning assistance as well as being Expert Witnesses in Litigation Matters. In addition, we provide expertise in Forensic, Fraud and Embezzlement situations as that need may unfortunately arise. Please contact Dennis Frankeberger at 909-597-1100 to discuss this article or any other dealership issue that may be of interest to you.

Email address: dennisf@fvcpas.com

 

Moshe’s comment – we have known Dennis for many years. He has helped and guided dozens of our clients when buying or selling a new car dealership. We highly recommend his services should you need a CPA in general or a second opinion from a real expert.

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