August 30, 2018
Considering the average age of auto dealers in New England, there’s no doubt that many dealers are looking towards retirement. With this reality on the horizon, the need for succession planning becomes imperative. Succession planning can encompass a variety of meanings to organizations.
With privately-held auto dealerships, succession planning is usually focused on transferring ownership to a family member, often a son or daughter. While most dealers would like to transfer their ownership to a family member, this is not always viable. In such cases, selling the business to a third party might be the best option.
When considering succession planning, whether it be to a family member or selling the business outright, ownership should develop a plan that addresses the following elements or concerns.
Transfer of the business to a family member:
- Has the prospective successor been vetted to the point of confirming their ability and desire to carry on the legacy? Sometimes dealers are afraid to acknowledge that their preferred family member successor is not capable of running the business, or worse yet, doesn’t really want to run it.
- If the family member identified as successor has the ability and desire, what impediments would prevent a successful transfer? The key here is the candidate’s ability to be approved by the manufacturer. If additional training and experience are required to receive approval, is the candidate willing to put in the time and work necessary?
- Once the successor is identified, the dealer should begin discussions with outside professionals (CPA and attorney) to formally develop the plan of how to transfer ownership. Part of the discussion must be with the dealer to determine what the dealer’s personal cash flow expectations are after the transition. These discussions will dictate to what extent gifting can be utilized, as well as outright stock purchases and redemptions. The tax implications of the transfer, both income tax and estate tax, should be thoroughly investigated. To complete this phase formal business valuations will most certainly be required.
Transfer of the business through a sale:
- Does the dealer have a good idea of the business value? Many dealers feel they have an idea as to value, but it’s good to talk with a broker or CPA who has experience in determining value for buy/sell purposes.
- Is the determined value and net proceeds from a sale enough? The dealer should look at the net proceeds and determine whether there’s enough to “pay the bills” and continue the lifestyle he or she is accustomed to, well into the future. It is not uncommon for a dealer to get to this point or beyond and find out there’s not enough left after closing costs and taxes.
- Determine the type of sale. Seller should early in the process determine the type of sale that should occur. In this regard, there are basically two types of sale, an “asset sale” and a “stock sale.” Each have distinct tax implications and should be reviewed before going to market.
- Who are potential buyers? The dealer and his or her professionals should determine who might be the best buyer. The pool of potential buyers could include a competitor, a cross- town dealer, large groups, new upstart dealers, private equity firms, home office firms or publicly traded companies. Each of these potential buyers should be considered. At issue is always the question of manufacturer approval.
- The buy/sell process requires early preparation. Once the decision is made to sell, the dealership should be made “ready for sale.” This could be started years in advance of going to market, and should at a minimum include identification and clearing of risks that could present as issues to a closing. Bringing in a professional who works in this area is critical to a successful sale.
In either scenario, it is important to remember, you are still in the driver seat. By understanding the nuances mentioned above and promptly inquiring of outside professionals that routinely engage in this space, one can effectively position the business and life beyond the business for the future.