There are thousands of Chrysler and GM automobile dealerships around the country that are currently in the process of restructuring or winding down their businesses. Additionally, we have been involved in and noticed a significant number of other foreign manufacturer automobile dealer restructurings.
Restructuring or wind-down strategies for dealerships may differ based on the strength of their domestic or foreign manufacturer and dealer-specific financial and operational conditions. But there are common threads in these processes. The floor-plan financing used by the dealerships to purchase vehicle inventory from the manufacturer is usually supported by a personal guaranty from the owner of the dealership. Owners have significant personal incentive on maximizing the proceeds from sale or wind-down of their dealerships.
Strategies for Automobile Dealerships Not Part of the Chrysler or GM Go-Forward Plans
For the thousands of automobile dealerships that are not part of the Chrysler or GM go-forward business plans, the options may be complete wind-down, obtaining and converting to a new franchise or converting to a used-vehicle-only dealership and service model.
Regardless of the path selected, these automobile dealerships will be spending significant initial time up-front in the process of resolving their previous economic ties with their manufacturer in terms of disposition of vehicle and parts inventories and collection of remaining receivables. Both bankrupt manufacturers have offered their dealerships some assistance in selling remaining vehicle and parts inventories, and in certain cases some wind-down funds. However, these processes with others result in dealer losses. The task of collecting the remaining manufacturer receivables will include reconciling and resolving outstanding balances and disputes with manufacturers with respect to warranty programs, recall programs, sale incentive programs, various dealer support and marketing programs and vehicle repurchase programs.
Other wind-down issues to be anticipated may include: (1) WARN Act notification; (2) COBRA benefits coverage; (3) facility lease termination or sale of owned real estate; (4) tax consequences on LIFO inventory recapture (note these tax attributes and potential gains will flow to owners in LLC, S-Corp and partnerships); (5) unfunded union and non-union pension liabilities; and (6) filing a proof of claim in the manufacturer bankruptcy for the “full” amount that would have been recovered under applicable state franchise law from the manufacturer.
Another option for former GM or Chrysler dealers with liquidity, good locations and quality facilities is to buy pre-existing franchises from other dealers or approaching other manufacturers directly for open points.
Converting to a used-vehicle-only dealership/service model involves significant restructuring of the traditional new vehicle dealer business plan. The service business must be reduced, as these dealerships will no longer be able to provide warranty services. Stores outfitted with a number of repair bays will ultimately need to reduce their service staff and parts inventories. Sales personnel evaluations and reductions may be necessary to properly staff a used-vehicle-only operation.
Turnaround Strategies for Go-forward Domestic and Foreign Automobile Dealerships
Evaluating an automobile dealership should be based on its four businesses, each with its own problems: new auto sales, used auto sales, service for vehicles and parts for the brands sold.
With respect to new auto sales, understanding the basic components of the auto dealership industry is key. The franchise dealership is a retail outlet and representative of the manufacturer’s brand in a specific territory. Brands are tracked monthly by the market share they have nationally, but are also tracked regionally to see how different parts of the country relate to that national average. Small parts of a region are broken up into districts to track the individual outlets. Manufacturers try to place the right number of outlets in a region, although sometimes outside influences and constraints on reducing the number of dealerships under state law prevented them historically from having the correct amount of outlets. By understanding where the dealership ranks with its market share in its region, the consultant can determine potential upside opportunities.
The first steps in turning around a dealership involve an analysis of the operation’s financials and benchmarking them against like operations to find faults and areas of potential improvement. Relevant benchmark data is somewhat hard to find in general, but may come from the manufacturer, industry organizations, other consultants and even internal trends. Afterwards, the consultant performs a walk-through and review of the operations with the dealer management team to identify areas of potential improvement.
A similar analysis is also performed for the service operation. It is expected that a certain percentage of units in operation in their territory should return to the dealership for service. If the dealership ranks below average, the consultant must look at the service operation to see what factors are causing the customers to not utilize the service department. Not using a competitive pricing matrix for service operations may also cause lost business. Deficient customer service could also negatively impact customer retention.
The dealership's parts business must adequately support the service department and also run a profitable wholesale operation compared to other dealerships and independent repair shops. A well-run parts department stocks inventory necessary to meet the most pressing needs of the service department. A successful parts wholesale business is one where gross profit earned justifies expenses incurred and risks involved.
Overall, the consultant will identify dealership strengths and weaknesses, and formulate a plan that implements potential improvements. The plan involves time, training and corrected processes to promote new business and retain the dealership customer base in sales and service. Personnel training or replacement is a key factor. Dealership personnel must be focused on customer service.
A key to a successful dealership restructuring is evaluation of personnel salaries. Benchmarking to profitable dealerships may be performed, and compensation relative to performance should be aligned. Another significant-expense line-item, floor plan loan interest on the vehicle inventory may be controlled by analyzing inventory stock turns. Excessive inventory trends will relate to higher floor-plan interest, and also, as the vehicles age, their value decreases, resulting in reduced gross margins. Advertising programs should also be benchmarked to those of more profitable dealers and advertising dollars redirected to more effective programs. Any other expenses that are out of line with high-level benchmarking studies must also be analyzed.
One final point of major importance to a properly run dealership is adequate capitalization to finance the period of time that the dealership management is executing its turnaround plan while weathering the normal seasonal downturns during the year. Recently, we have noted an improving trend in dealership financing and have been able to secure financing for dealerships with strong business plans.