Generally dealerships have fared well during the pandemic as many commuters have turned to buying private vehicles over using public transportation and for other reasons. As a result of your success, you may be eyeing the purchase of another dealership. But before you take that plunge, consider these proactive measures.
Is your business in good shape in terms of its cash flow, revenue, and profitability? Combining two struggling dealerships rarely creates one strong operation. Our dealership team can help you assess your financial position.
Also, consider if franchise requirements related to the deal will complicate the acquisition process as well as your future operation. Does the manufacturer require you to reimage the facility, un-dual franchises, or build a new facility? These could be significant costs that may have to be expended soon after acquisition. For example, if a dealership has two unrelated franchises, such as Ford and Hyundai, the manufacturer may make them separate and require a new facility, so they each have their own showrooms and service facilities.
Strong relationships in the digital age
Conversely, find out if factory assistance is available for consolidating several brands under one roof if that’s what you have in mind. Don’t forget to evaluate the outlook for the brands involved. A weak brand today may be stronger tomorrow, or vice versa.
Lastly, assess the state of your banking relationships and your access to capital. A successful dealership — that’s selling at a premium — will require a substantial initial cash outlay and likely pose challenges in generating an acceptable return on your investment.
Generally, an acquisition should help you control risk. So consider to what degree the move would allow you to spread out your normal business risk. For instance, your skills and reputation may tempt you to expand within your community and choose a brand that appeals to your current customer base.
But doing so could expose your dealership to so-called “concentration risks” based on its location or customer base. For example, a future event that affects your customers — such as a natural disaster or closing a major local employer — could trickle down to your dealership.
However, you can hedge against concentration risk by diversifying into another geographic market or supplementing your product offerings with a complementary line that targets a different demographic. Consider, for example, the luxury vehicle dealer who also sells budget-friendly cars and SUVs. Alternatively, you might seek out a brand that offers more eco-friendly vehicles to take advantage of green energy initiatives expected under the Biden administration.
Take a hard look at the people who work at the prospective acquisition target. That’s easier said than done, of course — especially if the current owner doesn’t want a potential sale to distract their staff.
However, it’s still important to determine the strengths and weaknesses of the workforce you’ll inherit because auto retailing is ultimately a people business. Also, check your prospect’s employment and work policies for potential post-acquisition culture clashes.
Among many financial ramifications, the structure of an M&A deal can significantly affect the tax consequences. Generally, there are three common transaction types: 1) a taxable transaction, 2) a tax-deferred transaction, and 3) a hybrid transaction, in which the deal may be taxable, or partially taxable, to some or all selling parties.
3 ways DMS is right for dealerships
You’ll want to make the most of tax savings with your new acquisition and avoid a big hit from the taxman. To do this, you should decide how to structure payments (for example, a lump sum payment vs. an installment sale and/or an earnout provision) and weigh the pros and cons of an asset vs. a stock purchase. Because auto retailing is a relationship-based business, some deals also may include a post-sale consulting arrangement or non-compete agreement with the seller — and you want the current owner to help (not hinder) your merged operations in the future.
An acquisition can be a smart move. Your financial advisors and attorney can walk you through a myriad of considerations, including the structure of the deal and many other factors not discussed here. Before deciding to acquire, be confident you understand all the implications of the process.