Automotive News - February 10, 2020 - Supplement - S7

for recommended service, the retention rate for service
customers and average revenue per repair order.
The examination of financial records can be less stringent
if the current owner is willing to provide a buyer a warranty
of financial statements, which attest to the profitability of a
dealership during a three-year period.
"A seller's dream would be no warranties and a buyer's
dream would be all warranties," Jacoby said. "But most
deals fall in the middle, where the seller says financials are
accurate to the best of his or her knowledge."

Room for improvement?
Buyers also need to investigate whether the profitability
of these various revenue streams can be sustained or even
improved, Meyer said.
A veteran dealership owner will know how to make
this determination. But for less-experienced buyers, an
experienced lawyer, accountant or investment analyst knows
how to evaluate the various revenue centers in a dealership
and determine whether they have growth potential, he said.
"A company like Crowe LLP (a global accounting firm)
would be able to look at the quality of earnings and tell
you where they meet standards and where they can be
improved," Meyer said. "They can take a look at what's
found in financial statements regarding items such as gross
profit, net operating profit, finance and insurance profit and
new- and used-car sales. Then they can run an analysis and
let the purchasers know their thoughts."
In addition, accountants can help tie financial statements
to tax returns to ensure buyers are looking at concrete
numbers. While numbers on financial statements can
fluctuate from month to month, tax returns filed at the end of
the year provide a better and more solidified overall picture.
"And accountants ensure that the numbers are correct,"
Meyer added.
Buyers also should scrutinize the lenders that the current
dealership owner has been working with and compare them
to the lenders that the buyers are using. Sometimes it's a
captive lender, like a bank that's wholly owned by a car
manufacturer. Other times, a dealership works with a group
of lenders that provide third-party financing.
"You need to consider and compare the dealer reserve-
the amount the lender pays to the dealer to complete a
loan," Jacoby said.

Regulatory considerations
The automotive sector is highly regulated. As such,
it behooves buyers to look into a dealership's record of
regulatory compliance, Jacoby said.
"It's good for a buyer to know about a dealership's
regulatory practices before they buy into a bad situation," he
said. "If a dealership has regulatory problems in areas such
as advertising or lending, that's definitely something a buyer
wants to know about."
That's particularly true if the buyer purchases the stock
of the dealership. In those cases, the buyer assumes any
liabilities related to regulatory noncompliance.
"You might have bought a ticking time bomb," Jacoby
said.

If a buyer acquires a dealership's assets instead of its
stock, the buyer may not be liable for prior compliance
violations. "But you'd likely take a serious public relations
hit because consumers may not be aware of changes in
ownership," Jacoby said.
How far back should a buyer search for violations?
Jacoby suggested three to five years.
Records that should be examined include those from
state motor vehicle departments, relevant taxing authorities,
environmental and consumer-protection agencies and so
forth.
"All of these things are important from a regulatory
standpoint," Jacoby said.
He also recommended looking at samples of two to three
years' worth of customer files to see whether any complaints
exist. After that, it's up to the buyer to determine whether
complaints stem from honest mistakes or represent a
pattern of deceit.
In addition, it's prudent to examine how a dealership's
salespeople operate. Buying a dealership effectively results
in also buying employees' sales practices, because most of
them stay on board after a purchase.
"So if employees appear to have great numbers, but
they're achieving them through deceptive practices, they
won't achieve those same numbers after you clean things
up," Jacoby noted.
One thing to look for is a practice known as "packing."
This occurs when a salesperson adds products-think dingand-dent insurance, for instance-to a car purchase without
the customer's knowledge.

Employee and environmental matters
Buyers also need to scrutinize employee compensation
programs to determine whether they're acceptable. Why?
After a sale, all employees are terminated, and those who
want to remain employed must be rehired by the new owner.
"You need to decide if the compensation packages
work for you," Meyer said. "And you want to rehire as many
existing employees as possible. You don't want to interrupt
the profitable operation of the business. ... You won't
have time to put together a whole new workforce after an
acquisition."
Environmental issues also factor into the due diligence
equation. If a buyer consummates a sale and then discovers
the property suffers from groundwater contamination-
perhaps stemming from a leaking underground storage
tank-the buyer is responsible for the cleanup costs. It
pays to have an objective third-party consultant examine a
property before agreeing to a purchase, Jacoby said.
The bottom line: A buyer should do everything possible
to make sure the dealership is financially sound and
operates ethically. And the only way to do that is through
a comprehensive due diligence process, buttressed by a
purchase agreement from the seller that provides relevant
disclosures of liabilities.
Said Meyer, "You have to kick the tires and make sure
you can operate the business profitably after you close the
deal-and beyond."

Automotive News - February 10, 2020 - Supplement

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