Franchised auto dealerships in the U.S. have a long tradition of being family-owned. We currently live in an era, however, where large private and publicly-owned dealer groups have been gaining market share by consolidating family-owned single point stores and groups. For organizations that wish to retain ownership and control within a family or small group of owners, effective succession planning is critical to ensure successful transitions.
All dealer principals will ultimately face transition whether voluntarily via retirement, or involuntarily due to incapacity or death. Identifying and grooming a potential successor may take years. This process is even more complex when family is involved. Generally, planning does not begin until a predecessor’s late forties or early fifties.
Succession planning for dealerships is unique in the sense that all franchised dealers are business partners with vehicle manufacturers. Franchise agreements provide for only one dealer principal with the authority to sell and service a manufacturer’s products and to be accountable for the terms and conditions of the agreement. These agreements also govern the review and approval of succeeding dealer principals.
It has been our experience that when dealer principal changes are sought, manufacturers may attempt to make unreasonable and costly demands regarding facilities upgrades, operations, or financial performance as a condition for approving the changes. To avoid unreasonable demands and delays in the approval process, first identify potential successors as soon as practical. Training and evaluation of candidates will likely take years. Once a specific candidate is identified, begin the process of naming your successor in the franchise agreement. Do not wait for a tragedy, such as an incapacitating illness or death, to have your successor named and approved. Secondly, seek legal advice on franchise law in your state to learn your rights. State laws protecting franchisees may override certain provisions of your agreement and manufacturer demands.
Once a succeeding dealer principal is recognized in the franchise agreement, attention can be turned to other planning and control objectives. Common goals include ensuring sufficient cash flow exists to cover estate taxes, support for surviving spouses, and the orderly transfer of ownership to intended recipients thus avoiding forced liquidations. Also, a dealer may have children that are not involved in the business. Life insurance or other non-dealership assets may be used to provide for heirs who are not involved in the business.
Succession plans are dynamic by nature. Plans will need to be routinely reviewed and updated. It is not unusual for changes to the original plan to occur. Your original successor may not end up being your ultimate successor. Your professional advisors, accountants, attorneys, financial planners, etc., should be consulted regularly to avoid unintentional consequences created by changes in the tax code, franchise agreements, and other relevant laws and regulations.
ABOUT THE AUTHOR
Dana S. Nonnenmocher
Dana is a Principal at Brown Schultz Sheridan & Fritz. As a key member of the Firm’s Auto Dealership Group, Dana assists dealerships with accounting, tax planning, operating and compliance issues, succession planning, and more.