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AUTO FOCUS

Spring 2015

Get a jump on
succession planning

Beyond the eye of the beholder


How objective is your appraisal process?

Your store could benefit


from an operational review

5 F&I best practices

Financial Plaza, 221 S. Warren St.


Syracuse, New York 13202
Phone 315-472-9127 Fax 315-472-0026
www.dmcpas.com email: kjacob@dmcpas.com

Get a jump on succession planning

aby boomers are now turning 65


at the rate of 8,000 every day,
according to AARP. Many dealership owners are among this horde
of baby boomers nearing or reaching what has traditionally been considered the
retirement age in the United States. Although
some are choosing to work beyond age 65,
others are turning in their keys.
For most dealership owners, including you,
retiring means selling the dealership or passing
it on to family members. The key to doing this
successfully is implementing a succession plan
well in advance of retirement.

Launching the process


Ideally, succession planning should start at
least three to five years before you plan to exit
the business. It takes time for a good succession plan to evolve, and starting the planning
process early will help ensure that your options
remain open.

Succession planning should start


at least three to five years before
you plan to exit the business.

Begin the succession planning process by


answering some key questions:

n If you plan to transfer ownership to insiders,


will you use an employee stock ownership
plan or management buyout?
n If you plan to keep ownership in the family,
have you identified the next generation of
leadership and started preparing them for
this responsibility?
The answers to these questions will drive much of
your succession planning strategy. For example,
if you plan to transfer ownership to employees or
managers or keep it in the family, youll need to
identify the next generation of leaders and begin
grooming them for this responsibility. Its never
really too early to start this process. In addition
to teaching them all the ins and outs of running
the dealership, take the time to introduce them to
key vendors and representatives from the auto
manufacturers.
If you want to keep ownership of your dealership in the family, your strategy also will likely
address estate planning issues and ensuring
an efficient and tax-advantaged transfer of the
business to family members.

n Will you sell your dealership to an outside


buyer, transfer it to employees or managers,
or keep it in the family?

M&A activity is strong

n If you plan to sell to an outside buyer, will


you focus on the large public buyer groups,
a private buyer or a private equity firm?

If youd like to sell to an outside buyer, your


succession strategy probably will have a different focus. The good news for owners looking

to sell in the near future is that auto dealership


merger and acquisition (M&A) activity is growing strongly.
According to The Blue Sky Report published by
auto dealership brokerage Haig Partners, the
total number of private and public dealership
acquisitions increased by 69% from the first
nine months of 2013 to the first nine months of
2014. In addition, data from Automotive News
indicates that the first nine months of 2014 were
the most active period for private M&A deals
since it began tracking the market in 2010.
If you plan to sell to an outside buyer, you
should focus on increasing the value of your
dealership in order to sell it at the highest price.
The value of an automotive dealership is typically based on a multiple of adjusted pretax
earnings plus the market value of assets, plus
parts and inventory. (See What are dealership
franchises worth? at right.)
Most buyers today are looking for dealerships
with a track record of profitability, strong cash
flow and growth potential. They want to know
that your dealership will be able to generate
enough cash and profits to recoup their initial
investment and earn a minimum return on
investment within a reasonable period of time
usually two to four years.
Its worth noting that private equity (PE) interest
in automobile dealerships has increased markedly in recent years. This became most evident
when Berkshire Hathaway announced last
October that it would acquire Van Tuyl Group,
the nations largest privately owned auto dealership group. The need for auto manufacturers
to approve M&A deals can make these acquisitions more challenging, but PE is now a more
viable option for dealership sellers than it was a
few years ago.

Good economic conditions


The Blue Sky Report states that not only is now
a good time for owners of high-performing

What are dealership


franchises worth?
In late 2014, The Blue Sky Report, published
by Haig Partners, an auto dealership brokerage, included the following estimates for the
typical range of multiples of adjusted pretax
earnings buyers will pay for the goodwill or
blue sky of various dealership franchises:
Mercedes-Benz 6.0-7.5
Lexus

6.0-7.0

Toyota 5.0-6.0
Ford 4.0-5.0
Hyundai 3.5-4.5
Nissan 3.0-4.0
Buick-GMC 3.0-3.8
Mazda 2.5-3.5
While each dealership is unique and actual
multiples will vary, these estimates can provide a good benchmark to use as a starting
point in gauging the blue sky value of your
dealership.

dealerships to sell their businesses, but that


economic conditions indicate that good times
will continue for the foreseeable future. This
makes it imperative to start your succession
planning efforts soon, especially if you plan to
retire within the next three to five years. n

Beyond the eye of the beholder


How objective is your appraisal process?

ustomers are often wary of trading


in their vehicle at a dealership, but
trade-ins are important to dealerships because they can be necessary to make a sale. So, when a
customer walks in your door inquiring about a
trade-in, handle the proposition carefully.

Steps to a fair assessment


The appraisal process at many dealerships is
informal. The used car manager walks around
the vehicle, takes it for a test drive and checks
the Black Book or Kelley Blue Book price. Skeptical customers think value is pulled out of thin air.
But, if you formalize the appraisal process, you
can negate a perception of unfairness while
being true to your stores bottom line. Begin by
creating an appraisal checklist to ensure every
inch of the car is reviewed by your store. Also
obtain a vehicle history report.

Appraisal software products


though sometimes costly can
help dealers quickly implement
a formal appraisal process.

Then ask customers to fill out a questionnaire that


lists missing or broken parts and accessories
for instance, a defective glove box door or dysfunctional cup holder. Replacing such simple
items eats away at your profits when you resell.
Finally, add credibility with a computer-generated
appraisal report that explains how you arrived at
the trade-in offer.

Homework that customers do


Today customers can easily check comparable
vehicle prices at Cars.com or get a trade-in
estimate at Kelley Blue Book (kbb.com). So, its
important to address this data when quoting
trade-ins.
Suppose a customer prints out a kbb.com quote
of $9,500 for her car, as well as three comparable listings in Autotrader ranging from $10,000
to $12,000. You offer $8,000, and the customer
is insulted.
But a strong appraisal report will explain
why this vehicle is worth less than the data
suggests. It might have excessive mileage or
need repairs. Also relevant is the vehicles
desirability index and average days supply
in your geographic market. These metrics
gauge local supply and demand, which affect
how much youre willing to spend.

Objective tools
You can take away the guesswork with appraisal
software, such as NADA Appraisal Suite or Dealertrack AAX. These databases compile information
from reputable third-party sources, including J.D.
Power and Associates, AutoCheck and the NADA

Used Car Guide. They also provide in-depth details


about comparable vehicles, including days on the
market, mileage, condition and vehicle history.
In short, appraisal software products though
sometimes costly can help dealers quickly
implement a formal appraisal process. But
theyre never a substitute for managements
professional judgment.

A documented offer
Be aware that savvy shoppers who are unhappy
with an appraisal from one of your used car managers might return later when another manager is
on duty or request a second opinion from your
store across town.
So keep a computerized log of all used car
appraisals, sorted by VIN and if you operate
more than one store, share the database with

the others. Before inspecting a vehicle, your


managers should always cross-reference your
list to avoid rework and appraisals that contradict what youve offered in the past.

PR value
Plain and simple, auto buyers care about
trade-in offers. In fact, 57% of shoppers rated
their vehicles trade-in value as a major or
determining factor in their decision to buy,
according to results of an Autotrader survey
of new and used car buyers.
There are many things to keep tabs on in the
used car appraisal process, starting with the
market in your area. As you work to arrive at
a price, dont lose sight of the public relations
value of a fair offer and well-explained trade-in
process. If your customers are happy with the
price theyre quoted, word is likely to spread. n

Your store could benefit


from an operational review

f youre like many dealership owners and


managers, you spend so much time dealing with the day-to-day tasks involved in
running the business that its hard to see
the big picture. In other words, you miss
the proverbial forest for the trees.
One of the best ways to avoid this scenario is
to perform a comprehensive review of your
dealerships operations. An operational review
is a thorough, in-depth analysis and critique
of all aspects of your dealerships operations.

Targeting areas for improvement


Conducting an operational review will enable
you to identify areas where your dealership can

improve. With this knowledge, you can determine


what steps to take to make these improvements.
And implementing these steps can enhance performance, increase profitability and boost your
dealerships value!

paperwork is processed, the quicker youll


receive cash for vehicles sold.
Vehicle inventory management. Proper inventory
management is always a balancing act for dealerships. You want to keep enough of the right
vehicles on hand to meet customer demand
without stocking too many slow-moving vehicles
that take up space on your lot and pump up carrying costs.

Your dealership can realize a wide range


of benefits by conducting an operational
review, including:
n Greater operational efficiency,
n Streamlined processes,
n Higher productivity,
n Lower costs and overhead, and
n Stronger cash flow.
An operational review also can lead to better
financial forecasting and more accurate budgeting. In addition, it can result in better inventory
management and enhanced internal controls,
which can help prevent employee fraud and
embezzlement.

Zeroing in on key areas


A dealership operational review typically
focuses on these key areas:
The deal jacket trail. Randomly choose a few
recent vehicle sales and for each one follow the
deal jackets trail through your dealership from
start to finish. At most dealerships, the jacket
follows a well-worn path that is often wrought
with inefficiencies.
Scrutinize your deal jacket trail, looking for ways
to streamline the paperwork process while
making sure proper procedures are being followed every step of the way. Your goal should
be to reduce your frozen capital, or cash thats
tied up in contracts in transit. The faster vehicle

Faster inventory turns mean higher dealership


profits. So carefully track your inventory turnover and decide what to do with vehicles that
arent moving whether this means leasing,
wholesaling or continuing to discount them.
Internal controls and fraud prevention. Many
dealership owners and managers dont realize how susceptible they are to internal fraud.
An operational review can identify areas where
your dealership may be especially vulnerable. A
review also will assess the adequacy of internal
controls that can help prevent fraud, such as
segregation of financial duties.

An operational review can lead


to better financial forecasting and
more accurate budgeting, among
other things.
Employee compensation plans. Different dealership employees are compensated in different
ways. Therefore, its important to periodically
re-examine your compensation plans to ensure
theyre providing the right incentives based on
your overall dealership goals. Your compensation plans may require adjustment periodically
to keep your employees focused on activities
that will produce your desired outcomes.
Cash flow and cash management. Although
collecting accounts receivable generally isnt a
massive problem for dealerships, this doesnt

mean there arent related steps you can take to


boost your cash flow. This is especially true in
your parts and service department. For example,
parts and service invoices should be issued in
a timely manner and credit policies should be
enforced on a consistent basis. Aggressively
pursue collection of past-due payments.
Also follow manufacturers instructions and
procedures carefully when completing warranty paperwork to avoid payment delays and
accelerate cash flow. Similarly, be careful when

completing manufacturers paperwork for


receiving Sales Performance Incentive Fund (or
SPIF) bonuses, because delays here will hamper
cash flow.

Seeking out expertise


It often makes sense to bring in outside expertise, such as a CPA or accounting professional,
to conduct an operational review. A professional who has conducted operational reviews
for other dealerships will be able to bring a high
level of industry expertise to the engagement. n

5 F&I best practices


Dealerships can boost revenue and profitability significantly by taking a close look at the finance
and insurance (F&I) department. When managed well, F&I can be a source of hidden profits.
The key to getting the most benefit from your F&I department is to approach these sales from a
strategic standpoint: Identify the highest margin F&I products, as well as the products your customers are most likely to buy.
Consider these five industry best practices for increasing F&I revenue:
1. Know your F&I products. From vehicle financing to such add-ons as extended warranties, service contracts and gap insurance coverage, you need to see to it that your employees thoroughly
understand these products and, more importantly, how they can benefit customers. Then your
employees can educate customers accordingly, an approach that tends to work better than hard
sales tactics.
2. Learn how to overcome customers F&I product objections. There are a few common customer
objections to buying F&I products, such as not wanting steeper monthly payments. Prepare
answers so your employees will be ready when objections inevitably come up.
3. Avoid the noncompliance F&I pitfalls that can lead to regulatory agency enforcement actions.
Unfortunately, F&I is an area where unethical practices sometimes arise. Make sure your F&I
manager and employees are following all regulatory rules and procedures or you could be subject to large fines and penalties that might cripple your dealership.
4. Create an F&I selling process and use it consistently. Your employees should present an F&I
menu to customers upon every vehicle sale no exceptions. Dont let them prejudge deals
because they think a customer might be uninterested for one reason or another. Your employees
should give 100% every time.
5. Be proactive in making F&I sales. Have your F&I employees get involved in the front end of
vehicle sales, rather than waiting for deals to come to them. This will help them build rapport with
customers before their guard goes up.

This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional
advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. 2015 AFCsp15

Guiding dealers to greater


success for over 25 years

hen you hire employees or buy equipment for your dealership, you look for high
performance and a proven ability to add value to your company. So when you want
accountants and business advisors who can show you how to increase your performance, you look for a firm with industry insight, experience and a track record of
guiding dealerships to greater success.

For over 25 years, Dannible & McKee, LLP has been serving automobile dealerships throughout New
York, Pennsylvania and Vermont. Our more than 40 dealer clients include single franchises as well as large
multi-franchise operations. Whatever your needs, we have professionals on staff who can provide you
with the specialized services required to operate a profitable dealership in todays increasingly complex
automobile industry.
To keep abreast of issues and developments affecting businesses like yours, our firm is a member of the
CPA Auto Dealer Consultants Association (CADCA), a group of leading accounting firms committed to
providing financial and consulting services of the highest quality and integrity to dealerships throughout
the United States. Our services to the automotive industry include:
Audits, reviews and financial planning

Corporate and personal tax planning

Assistance with bank financing

Cash management and LIFO accounting

Income tax planning for entities and owners

Internal compliance self audits on

demonstrator vehicles, sales tax reporting,
warranty contracts and other items

Estate tax planning


Valuation and ownership transition
Buy/sell agreements
IRS audit representation
Internal control and fraud audits
Departmental cost segregation and
profit analysis
Employee benefits and compensation plans

We would welcome the opportunity to partner with you and your business, and assist you in attaining
your growth and profitability objectives. Please contact Karl Jacob at 315-472-9127 or kjacob@dmcpas.
com and let us know if you have any questions about the ideas presented in the newsletter or about
other aspects of running a successful dealership. We look forward to hearing from you and helping you
increase your success.
Karl Jacob, CPA, CDA, is a tax partner who focuses his practice on the automotive industry. He has more
than 15 years experience in helping individuals, privately held companies and corporations with tax and
estate planning, financial planning and tax return preparation. Karl is a graduate of Robert Morris College
and a Member of the American Institute of Certified Public Accountants, the New York State Society of
Certified Public Accountants (including its Employee Benefits Committee) and the CPA Auto Dealer
Consultants Association.

Financial Plaza, 221 S. Warren St.


Syracuse, New York 13202
315-472-9127
315-472-0026

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