Planning delivers the “success” in succession.
Francis Lamontagne is the president of Lamontagne auto, a Honda dealership in Rimouski, Quebec. He has four children, ranging from young teen to tender adult age.
He started to work at the dealership, owned by his father, around 1987-88, and signed the papers that would transfer it to him in 1997. Now at 51 years old, Lamontagne is assessing whether there is potential to eventually shift the business to a third generation.
“I have a son who will be 20 years old next month, has completed college, and who is very interested in taking over the business,” said Lamontagne in an interview with Canadian auto dealer. “He does some jobs around the dealership, but it remains to be seen if he has the personality for that.”
Lamontagne is well aware that they are in a prime period to sell the dealership, but is keeping the business in part based on that decision — to see if his son has what it takes to take over when the time is right. And he is not alone in contemplating the future of his business.
According to Brent Tolmie, Senior Manager of Succession Services at MNP, automotive retailers in Canada tend to transition to family, and many conversations around that potential shift are happening now, even as dealership consolidation and the growth of larger auto groups are also a reality.
What that leads to are discussions around structures and processes, and how decisions are made collectively.
“The industry is wrestling with the fact that what was once a family business through more acquisitions, becomes more of a team approach,” said Tolmie. “That’s really where governance comes into play, because I can be a family member, I can work in the business, or I can be an owner. I can be all three. I can be one of the three. I can be two of the three. We can also have non-family member owners (through things like equity).”
Tolmie advises having a conversation and trying to clarify that timeline — to think through all the key positions, the business, and to have an open and honest discussion that is genuinely facilitated.
But the challenge of working through governance and family transition is tough, as it can be an emotional process.
In the case of Lamontagne, it may be a simple case of transitioning the dealership to his son if he proves able, and if not he sells the business. But for other families it may be more complicated — especially where third-plus generations are concerned.
The grandparents may have started the business, mom and/or dad took over and built it to varying levels, and now their adult children are getting involved. However, the grandparents may still have a say, there may be a legacy to be honoured, or the children grew up in the business but did not experience the same type of consolidation and creation of it that previous generations did.
So how can the next-generation put their mark on the business, recognizing and honouring the legacy while also lacking the experience and struggles the previous generations went through?
It all starts with a conversation.
According to Tolmie, the planning phase involves talking practically about what the future looks like, when that future is, and helping to establish a timeline. That is particularly important, as one of the issues around auto dealer families is that there is no clear sense of a timeline in terms of transition — a clear line of sight as to when they will be taking over the business and those chief-style decisions.
That may be partly the case for Lamontagne, who is playing the waiting game as he already knows his son is willing to take over the business but having the personality to manage it remains a question mark.
However, his son will not have to struggle with the expectations of his father, because Lamontagne plans to hand over the reins if it is determined that his son is the next chief, which would be one less concern.
“The biggest flaw of the person in place would be to ask that the next generation or their successor work like them,” said Lamontagne. “I think that’s a mistake. Human beings want to learn, want to grow, but you can’t grow if you can’t try anything.”
Lamontagne’s main concern here is really the if and when of the business transfer. Even so, for other families who have more than one child who is integrated in the business in some way, things may be more complicated — but a conversation around timelines can help set the stage for anyone thinking about the life cycle of their business.
“Generally it’s not a case of not having enough personal assets to retire, but being wise and structuring something that makes sense around the business. And that can be challenged as well,” said Tolmie. “A lot of auto families are dealing with family trusts too, and determining what makes sense in terms of compensation is a challenge.”
Obviously compensation is a sticky subject due to the concept of fairness versus equality. What is fair might not always be what is equal, but there are solutions. Tolmie advises having a conversation and trying to clarify that timeline — to think through all the key positions, the business, and to have an open and honest discussion that is genuinely facilitated. And maybe that means bringing in a facilitator that can help bring some discipline to the thinking process.
Tolmie said there are four standard exits that exist in the industry — one of them being to wind the business down, which he said is often done and particularly in the British Columbia market due to the cost of real estate (the idea of generating more profit by being a commercial landlord).
In larger auto dealer families, there is the option of family transition. And a third option would be to go to market, take the business and sell it to a third party.
“And then sometimes we’ll see mergers,” said Tolmie, adding that “it’s best to think about what you want out of this scenario, what’s best for your family, what makes sense for your timeline, and then look at the business option.”
Mergers and acquisitions
Lamontagne may have been correct in his assessment that now is a prime period to sell the dealership. According to Farid Ahmad, Founder and CEO of DSMA, the mergers and acquisitions (and overall dealership transactions) world is extremely busy, and particularly so in certain provinces.
As an example, 40 per cent of all of its transactions in 2020 were deals that were completed in one province — the Quebec market.
“We’re now up to 900 valuations completed in just Canada. And everybody really is looking to find out what is the real value of their business, because that’s a part of the decision-making process,” said Ahmad. He said Quebec was the number one province, followed by Ontario and the Eastern provinces.
“I’ve never seen so much interest in dealer requests in getting an evaluation on the value of their business,” said Ahmad. “That should tell us something — that dealers are contemplating whether they should fix it, keep it, or sell it. That is really indicative, and that should give people a really strong idea as to what potentially is coming down the pipeline.”
Based on DSMA data, Ahmad said the top five franchises that are turning over are Chrysler (representing 14.2 per cent of their dealerships turnovers), Nissan representing 10.4 per cent, Kia with 8.5 per cent, Ford with 8 per cent, and Honda with 7.1 per cent. These ratios are meant to offer a glimpse of what is happening across all provinces in Canada.
Tolmie said there are four standard exits that exist in the industry — one of them being to wind the business down, which he said is often done and particularly in the British Columbia market due to the cost of real estate (the idea of generating more profit by being a commercial landlord).
Ahmad said the most surprising find was the brand they sold the most in 2020, which was Ford. The second most sold brand last year for DSMA was Chrysler, and number three was Mazda. Number four was split equally by General Motors and Honda.
“If you are looking to expand and you are crystal clear on the brands that you would like to add to your portfolio, and one of those brands becomes available, be aggressive in owning it because the people that own the top brands — for them it’s a seller’s market,” said Ahmad.
He adds that if someone thinks they can acquire a top brand at a cheap price due to the pandemic, “they’re sadly mistaken.”
A private equity opportunity
For Ahmad, there has been a lot of movement in the industry and he does not see it going away anytime soon. It is one of the reasons why DSMA launched an add-on to the company known as Drive Investment Partners (or Drive-IP), the concept being to create the first private equity company in Canada to finance the shortfall of the lack of goodwill being advanced on deals.
He said the add-on has to do with what was happening during the pandemic in 2020, when the automotive banks providing loans and floor plans to dealerships went into immediate restructuring mode. Up until last March, the banks were slowly weaning off advancing a high percentage of the goodwill value that auto retailers were paying for dealerships.
“I suppose what I’m saying is that 18 months ago, getting a 100 per cent financing on the deal was not a big issue if you had a healthy balance sheet,” said Ahmad. “But what started happening over the last 18 months is that the market started slowing down, and banks recognized it and became less bullish on advancing money for goodwill for car dealers.”
He said when COVID became an issue, the banks shut down lending completely and were not looking for new business, but that they kept and continued to support their existing clients.
“I haven’t heard that since 2008, quite honestly,” said Ahmad.
For DSMA, a company that is all about financing and accessing capital for buyers, that was an issue and the large gap that was being created on the lending side of the business needed to be fixed. As a result, they created a new company and division
of DSMA — Drive-IP.
“So we created a consortium structure. Now when the dealer is selling their dealership, we can support an operator,” said Ahmad. “I, the general manager, either of that store or somebody that wants to become a dealer, we can support them financially, helping them do a buy-in or a buyout of a dealership.”
Ahmad said they are able to do this with the consortium of the bank, a private investor, which is always a current car dealer — and drive investment partners also put in funds to establish an agreement that is “a win-win for all parties.”
He also considers this period to be the best time a dealer will ever have in owning their own store, or part of their own store. It would be a win for the private investor/dealer, because they can expand their holdings without taking all of the risk.
DSMA also added a second bolt-on to the company in 2020 known as Dealer Solutions Real Estate, which has allowed them to help dealerships and manufacturers buy and sell properties.
Overall, whether auto retailers are preparing for succession, valuing their stores and considering buying or selling, there remains a lot of movement in the industry and Ahmad does not see this going away anytime soon.
What that movement has forced, thanks to the pandemic and its ripple effects, is a conversation about the life cycle of the business — the future. And that conversation is the basis for creating a more solid transition or sale, as it will set the stage for whatever comes next.
