Succession planning can be complicated and it involves many moving parts, but whatever you can do in advance, do it now.
All throughout history, ownership and management succession have continued to play an integral role in ground-level operations at automobile dealerships.
The same is still true today; even in the high stakes game that dealerships have become, there are still significant opportunities. One could argue that opportunities today are as significant as they have ever been.
Timing is a significant consideration in today’s evolving business environment.
Succession not only encompasses families — it also covers management buy-outs and consolidation. Remember that succession has two key components: ownership succession and management succession. In some instances, it often requires an injection of cash to properly implement a succession plan.
Successor capability is critical. It’s really not just about the money, it’s about operational experience that in the end, convinces brands to support your plan. All too often, I see succession or even buy-sell requests refused because of the lack of an acceptable operator.
All too often, many believe succession is a small dealer issue. That couldn’t be farther from the truth. Dealerships of all shapes, sizes, and complexity share the same rules and thus the same issues.
Today’s dealerships are complex businesses.
As you know, there are many moving parts and pieces, all of which must be simultaneously managed to provide profitable, high-level customer experiences each and every time, every day of the week, year after year. The business is also constantly evolving, demanding a keen eye and continuous financial and emotional investment.
On the other side, families are also complex. Some siblings love the business and want to make it their career and others go in other directions, having no involvement at all. Although this is human nature, these factors place incredible pressure on parents as they make decisions on wills and other investment decisions.
Equal is not always fair and vice versa. These are gut-wrenching decisions that often lead to procrastination and delays in decision-making. They are also often the source of family disharmony and stress. In many ways, it’s the elephant in the room.
Over time, many dealerships have altered that ownership structure to take advantage of income tax changes and/or OEM requests for control. When it comes right down to it, these can present unworkable situations causing real challenges in delivering on fair versus equal ideals. Plans evolve over time, but often ownership structures don’t. Fixing this problem can be very expensive and not tax-efficient at all.
Succession is an earned right, not a birthright. Dealerships are franchises and must adhere to brand rules contained in executed DSSAs regarding ownership transfers and successor approval. Many dealers leave this too late in the game and find it hard to successfully scramble to gain the approved outcome they desire.
All too often, many believe succession is a small dealer issue. That couldn’t be farther from the truth. Dealerships of all shapes, sizes, and complexity share the same rules and thus the same issues.
Dealer groups acquire the privilege to do this many times over, one for each brand location they represent. Dealer groups deal with management succession very early on, as most brands require general manager approval at time of acquisition. The larger the group, the more the complexity. In some groups, managing factory dealer relations is a full-time job. It’s top-of-mind, day in and day out.
All that being said, every dealer should examine their ownership structure, wills, insurance, and OEM requirements regularly to make sure all are still valid, in sync, and continue to deliver the desired after-tax benefits.
Many of us feel that income taxes will rise and federal and provincial governments will begin to claw back some of the billions of dollars that have been spent, unexpectedly caused by the COVID-19 pandemic. Now may be a time to correct sins of the past, and also prepare your dealership or group just in case those taxes do rise.
The depth of your organization, be it family or professional management, should be on constant watch by dealers. Unforeseen events do happen. And they happen when you least expect them. They can have a devastating effect on day-to-day management and long-term ownership.
These events do not always happen exclusively to the founder or older generation, but can also happen to potential successors and their families. This changes the fabric of your organization overnight.
Sure, insurance can provide some necessary liquidity, but more importantly, it’s the bones of your organization that will hold things together. Having solid bones is not just smart business, it’s smart succession planning.
Timing of implementation is important. Pulling the trigger on your plan means having all the elements in place. The plan has several elements that can be implemented at different times. It’s like a continuum. Elements like will, powers of attorney, and life insurance can happen quickly.
Other elements such as ownership transfers can take a longer period of time. Third party approvals, successor preparation and income tax maneuvers can take time. Dealership valuations, real estate appraisals, holding companies and family trust creation, shareholders’ agreements, and family participation plans all will proceed at differing rates.
Often trying to get everything nailed down before succession activities begin is a recipe for delays. Getting something in place is what’s important. Unanticipated events won’t wait until you’re 100 per cent ready. Get it done now — or what can reasonably get done. If needed down the road, elements can always be amended or altered.
Involving your successors in the planning is as critical as knowing and documenting what you and your spouse want to happen in the future. After all, you will in many ways be changing their life and asking them to step up and operate the business for the decades ahead.
This is not something you can do solely yourself; unless you have the in-house expertise, you will need to engage professional help. You will need legal, accounting, tax, insurance and strategic expertise on your team. You will need to involve your brand to ensure there will be no surprises or delays on the road to execution.
Many of our personal affairs are complicated. I know it’s a cliché, but no two situations are the same. That’s because people are different, have different marital and family dynamics. Also, brands can behave differently and change over time as their leadership changes. And successors do alter their plans as well.
Succession is not easy. In fact, it’s quite complicated. This complication does not change once your plan is completed.
Succession is not easy. In fact, it’s quite complicated. This complication does not change once your plan is completed. It’s always a wide-open book, as circumstances change, anticipated timing changes, and rules and regulations change. The only time the complications stop is when you sell your business and convert your wealth into cash.
Being aware of the ins and outs of succession planning might seem daunting, but taking baby steps starting today will ease the burden and keep the wheels rolling.
