DEALER SUCCESSION IS OFTEN VERY DIFFERENT TODAY FROM WHAT IT ONCE WAS
Not that long ago, succession in automotive retail meant transferring the ownership of the business to family members. Many dealers in Canada today are second and third generation auto dealers because of this understanding and fundamental belief.
Those of you who follow this column regularly know that I often label succession issues as ones of ownership, management or both. Succession is nothing more than the orderly replacement of roles. The basic premise to succession is the continuation of what was and is.
Consider ownership of your family store, for example. In many instances dealers want the ownership of their store to continue within the immediate family. If a son or daughter, niece or nephew shows an interest and demonstrates the aptitude, the first instinct is to hold the business until they are ready to take over.
Education is set in motion, perhaps a diploma at the Automotive Business School of Canada followed by a degree from a U.S. or Canadian university followed itself by a stint at the NADA Academy, all before the age of 25.
DEALING WITH CHANGE
But what happens if Buster turns out to be a dud outside the academic world? What then? And what happens if the OEM says NO to your planned ownership and management succession?
Lets assume on the other hand that Buster turns out to be a dealer whizzkid. He’s 26, approved by the manufacturer and full of great operational ideas. Out of nowhere, the OEM wants a relocation and image upgrade that will cost $10 million. Buster has no money and wants and needs to use yours. Back in your day, dealer development would step in and lend you a helping hand. Not today. Dealer development does not exist. It’s all up to private capital.
So here you are at 62, having to come up with a $2.5 million cash down payment and guarantee a mortgage of $7.5 million so that Buster can live your dream.
Unfortunately, the world has changed and quite honestly, your version of the dream might not be possible in today’s dealership environment. Dealership succession does not seem to be as easy or attractive as it once was. So what becomes the new game plan under a scenario of reinventing succession?
Using Buster for continuity, I’ll provide some real life scenarios that I have come across:
• Buster and Dad continue on with Dad’s dream and Dad redefines retirement and investment management. All of Dad’s wealth is tied up in supporting Buster. Buster, in effect, causes the dealership to pay support to Dad in the form of consulting fees, rent and interest. The plan works great as long as Buster runs a successful operation and the cash keeps flowing to Dad (Anyone remember 2009?);
• Dad facilitates a management buy-out where the management team pools their resources, finds a lender with Dad taking back paper in the form of a Vendor-Take-Back for the balance. Buster is part of the management team. Again a successful future operation is key to making this plan work;
• Dad takes on a financial partner, selling somewhere between 49 and 51 per cent and as a result takes some money off the table. Buster’s future is written in the agreement and Buster keeps working at the store. Dad still has 51 to 49 per cent at risk. Again future success is required.;
• Buster finds a financial partner to buy out Dad’s dealership, however Dad retains ownership of the real estate and becomes the landlord. Dad takes all his dealership value off the table and gives Buster “start-up” capital to make his down stroke with his new partner. A little less risky but still dependent upon future success;
• Dad sells out completely and takes all his money off the table. He leaves Buster to his own devices to land on his own two feet. All risk is removed. The risk to Dad of staying financially involved is large.
In many cases today, Dad opts to sell the store and either shares some of the new found liquid wealth with his children or in many cases does not. Many dealers today choose to cash in. With dealer groups in the wings waiting for good stores to acquire, dealers today have an opportunity to be liquid more than ever before. Sometimes the money is just so good that it would be foolish to pass on the opportunity.
The trap however, is that traditional succession thinking can taint your judgment. I have been involved in a few situations in the past 18 months where offers were on the table and the dealer did not know how to handle it.
Old-fashioned succession was getting in the way. The money in these cases was huge and in my opinion the brands were marginal at best and did not warrant the amounts. The premium being offered, when the brand was taken into consideration, was enormous. The dealers struggled with their decision. It literally took a 2×4 across the side of the head to bring them to their senses. In the end, after several weeks of discussions the dealers all decided to sell.
Those former dealers today are on top of the world. No financial worries, no brand nonsense to deal with each and every day, no employee and customer headaches etc.
One has financed a son in a new dealership venture, another financed a daughter into a non-automotive venture and the third gave each of his children a modest seven digit gift and now spends most days day trading, golfing, traveling and having a grand time with his wife and grandchildren. In all situations the stress in life has been reduced and most important family succession has been redefined.
None of them believe they have bailed out on their family succession commitment. Actually they feel quite the opposite. They believe they have stepped outside the dealership stranglehold that they now realize they were caught in and escaped to a place with much more clarity and peace of mind. Everyone is doing what they want to do in life today and are not stuck in the quicksand of doing what Dad decided many years ago, which was to be in the family business.
ASSESSING THE SITUATION
Following in Dad’s footsteps is a noble goal and one I greatly respect and admire. Sometimes those footsteps are not what your kids truly deep down want to do, or perhaps more importantly based on knowing what we know today, are not the steps we would take today if we were in their shoes. For us what were effortless footsteps quickly can become similar to running up a down escalator.
Consolidation has caused a reinvention of dealer succession. The move by the brands to more franchise-type relationships with greater brand control has caused the reinvention of dealer succession. Image program investment has caused the reinvention of dealer succession. The ever-changing customer demands have caused the reinvention of dealer succession. The changing financial markets have caused a reinvention of dealer succession. The Internet has caused the reinvention of dealer succession. An abundance of other opportunities has caused the reinvention of dealer succession.
In short, the world we live in today is very different than the world we grew up in 30 years ago.
Most things we thought would always be, have been reinvented. The reinvention of dealer succession is no different. It is simply part of the natural progression of life in Canada in the 21st century. It’s time to open our minds to this new concept and let go of old ones.
