WHEN IT COMES TO SELLING OR CHANGING OWNERSHIP OF THEIR STORES, DEALERS NEED TO UNDERSTAND THE COMPLEXITIES INVOLVED IN DOING SO AND THAT THE PROCESS CAN TAKE LONGER THAN EXPECTED
Owning a Dealership today is anything but simple. One large area that adds complexity is financing. As we all know, banks and other secured lenders insist on personal guarantees and cross-corporate guarantees in addition to registering security positions on specific assets and general security agreements.
Another area is real estate. With imaging renovation so common these days, final municipal sign-offs are often lagging — waiting for one or two minor improvements to be completed.
Let’s look at an example. Tommy has been a dealer for over 30 years. He thinks he has a very simple corporate structure. He has a holding company that owns the shares in his dealership and also has a real estate holding company. He also has a holding company that owns the two other holding companies. He has a general manager partner with 25 per cent ownership in the dealership operating company.
He also has a family trust that owns a piece of the real estate holding company, where his wife and children are beneficiaries. Tommy uses a Canadian chartered bank for his floorplan and operating lines of credit. Tommy has been quite fortunate as he paid off the mortgage on the dealership property about 10 years ago. He also has paid off all long-term loans for equipment etc. that he used to start the dealership. Except for the floorplan, Tommy is debt free.
OPPORTUNITY COMES KNOCKING
While at the auto show in his hometown last February, Tommy ran into Max, a mega dealer from a neighbouring community. They had a great discussion about the current product on display at the show, operations and both Tommy and Max’s future plan. At the end of the discussion, Max turned to Tommy and said, if you ever think of selling, please call me first.
Upon returning to his store the next day, Tommy called Max and they had lunch. Max’s informal offer was pretty good and Tommy asked for a letter of intent so he could deal with some hard numbers. Tommy had never sold a store before and asked Max to put everything on paper to help him decide.
Within 48 hours, Max had delivered to Tommy what he wanted and suggested a 60-day closing. The next day, Tommy went to see his lawyer, then his accountant and both concurred that this seemed like a great opportunity. They worked together on amendments and within a few days had a sign-back in Max’s hands.
Tommy sat on pins and needles waiting for Max’s response hoping that the amendments his lawyer and accountant had made did not scare Max away.
Late the next day Max showed up at the dealership unannounced. He had signed the LOI and had a signed deposit cheque made out to Tommy’s lawyer in trust.
DEFINITIVE AGREEMENT
Within a week Max’s lawyer had a draft definitive agreement in the hands of Tommy’s lawyer. As Tommy worked through the draft agreement with his lawyer, it quickly became very apparent that he had a ton of work to do to prepare the schedules, representation and warranties required in the agreement.
The lawyer explained that there would be two transactions, one for the dealership business and another for the real estate. The lawyer asked Tommy to start working on the schedules.
Since confidentiality was a prime concern for both Tommy and Max, they had decided to keep the deal to themselves for now and only bring in trusted employees, the brand, banks etc. when it was absolutely necessary.
Part of the deal required that Tommy provide a clean Phase II environmental assessment. Max was going to use conventional mortgage financing and provided Tommy with a list of approved environmental firms provided to him by his bank.
UNEXPECTED DELAYS
Tommy was surprised to learn that a Phase I takes about three weeks and a Phase II another four to six weeks. That would push the closing date back since there was no way they could close in the now five weeks before the planned closing.
While Tommy and his secretary treasurer were busy assembling schedules over the past three weeks, Tommy’s lawyer continued to negotiate the definitive agreement with Max’s lawyers. They were close but needed more time. Due to the cost and confidentiality concerns, Tommy was reluctant to start the environmental assessment until he was sure there was going to be a deal.
One afternoon, the call came to say the lawyers had reached an impasse. Tommy and Max sat quietly by themselves and after some back and forth resolved all the outstanding issues. It was now clear that there was nothing standing in the way of this deal closing.
At that point the lawyers started doing their searches. It was a virtual dog’s breakfast. Registrations remained on the business assets and real estate that should have been discharged years before. Max’s lawyers expressed concern over the land registration and easements. It seems that the dealership was located on two parcels of land however there were issues with one parcel that proved problematic for the purchasers. In addition, there were still open work orders with the city and final sign-offs on the image renovation that took place almost three years prior were still outstanding.
At the same time, Tommy met with the zone manager to inform him of the pending sale. He was surprised to learn that the OEM had other ideas and wanted Tommy to sell to a different dealer, a dealer of their choice. After some discussion and back and forth that took a few days, the OEM backed-off its position.
REACHING A SOLUTION
The purchasers wanted to review the corporate minute books of all entities. The lawyer, fairly new to the file, noticed that minutes had not been completed for several years and that corporate filings were not up to date. Tommy had to go back in history and reconstruct what had happened. Tommy was quite surprised to learn of all the annual documentation that was required. It took Tommy and his secretary treasurer a few days to gather this data, going back quite a few years. Tommy’s lawyer developed pages and pages of documents. It took the better part of two weeks to get all signatures required on these documents since his two daughters had moved away, one of the trustees had died and his minority partner had gone through a divorce.
All the corporate matters finally got resolved and now, some 45 days after the original closing date, all seemed to be in order and ready for transaction to close at the next month end.
Luckily for Tommy, Max was reasonable and understanding of the delays. Completing an ownership transaction realistically takes time. If you are thinking of selling in the near future, you might want to jump start the process by having your lawyer run a lien check on your assets, clean up old security registrations and making sure your corporate minutes are up to date. That way you will be one step closer to a “ready, set, go” dealership sale experience.
