Getting your brand mix right

Posted by Danni Douglas, Staff II, Tax Services on May 25, 2017

Adding or swapping a franchise requires due diligence

After several strong sales years in a row, some auto dealers are considering adding a franchise to expand their sales base.

Exploring Choices

If you’re in the market for an acquisition, picking the best brand to add to your dealership should be based on historic and projected sales volume, recent demographic trends, and objective third-party data. Your Dealer 20 group can provide comparable market data of good and bad branding experiences. Also ask manufacturers for assistance in gauging the viability of your expansion plans — they have a vested interest in your success and the resources to get you there.

Seeking Compatibility

Some brands are like oil and water, while others complement each other perfectly. Ideally, you want the right mix of products to appeal to a broad market without cannibalizing existing sales or sending an inconsistent marketing message.

If your current product mix isn’t producing the amount of revenue planned, then consider exchanging franchises with another dealership. Sometimes these arrangements allow both dealers to offer more consistent images, such as upscale versus middle-market brands. Trading franchises can be a difficult process with the change of signs, parts, accessories, service equipment, and even employees. It also may require approval from manufacturers, lenders, and licensing boards, but the hassle could pay off in the future.

Getting Manufacturer Buy-in

Most manufacturers are highly selective when it comes to granting new franchises or approving franchise sales or swaps because they won’t do anything that might cheapen or compromise their image. They don’t want to jeopardize sales from other franchisors that offer their brand, so their agreements may require you to designate dedicated sales and service professionals for each brand — or even operate stand-alone facilities. Manufacturers also may ask for leasehold improvements as a condition to approving a new franchise. These requirements can make your plan cost-prohibitive.

Pursuing Licenses and Loans

Dealerships typically must be licensed by the state for each brand sold — and you generally must immediately notify the state board in writing if you plan to add, swap, or drop a franchise. You also may have to pay fees and complete an application packet, which includes such documentation as financial statements and affidavits of extended service contracts.

In addition, you’ll need to work with lenders to transition the franchise’s debt obligations. If you’re buying or swapping a franchise, the original owner may retain some of its debt, but floor plans transfer with their respective collateral. Also beware that banks may change loan terms, depending on market conditions and the new borrower’s financial health.

A New Venture

The prospect of taking on a new franchise is exciting, but before becoming swept up in the thrill of it all, make sure you’ve done your homework. LGT's dealer services professionals can assist you with a financial analysis of the venture to help ensure the outcomes will be what you expect.

Contact one of our financial professionals TODAY to learn more about how we can take you to the next level.


Topics: Auto, Accounting Tips, Tax, Audit