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Dealerships have emerged stronger from the lows of the recent recession, but dealers can take key steps to optimize their success in 2013.

Six Ways to Position Your Dealership for Success in 2013

  • 12/4/2012

Six Ways to Position Your Dealership for Success in 2013

by Scott Gorden

A new year is often associated with a fresh start, which makes now the perfect time to take an overall look at your dealership and your business plan for 2013. What should you focus on, and what impact are you hoping to make in the current marketplace?

Before you answer — consider what you’ve experienced since the start of the industry downturn in 2008 and the changes that have taken place since that time.

The dealership industry continues to rise in the United States. Dealers have seen steadily increasing profit levels due to a sharp focus on expense control, an improvement in operational efficiencies, and a significant rebound in overall vehicle sales levels. Although some dealerships are continuing to consolidate, those that plan for future succession and have effectively managed operations through the downturn are in an excellent position to grow and expand their business.

The industry has emerged stronger from the lows of the recent recession, and there are many new opportunities for innovative and proactive dealers who can adapt in the current environment. Below are some key steps you can take to prepare for the new year.

Evaluate your business model

As new vehicle margins shrink from competitive market pressures and parts and service volumes slide due to higher quality vehicles being built, dealers are looking for new ways to grow their business. Two key areas to focus on to grow your business and profits include your finance and insurance (F&I) department and used vehicle operations.

An effective F&I department should generate at least $750 in gross profit for each retail vehicle sold. In comparison, the public company dealership retailers are generating approximately $1,000 per retail vehicle sold.

Profitable used vehicle operations are critical to successful dealership operations. Used vehicle margins are generally stronger than new vehicle margins, and the number of used vehicles has increased in the last couple of years.

Create a reinsurance company

Many dealers have created reinsurance companies over the last five years to take advantage of higher quality vehicles being built and the tax advantages available to a properly structured reinsurance company.

A key reason reinsurance companies have become more attractive to dealers is because loss ratios have significantly improved as vehicles are built better, which has raised the profitability of the reinsurance entity. In addition, reinsurance companies that have less than $1.2 million in annual premiums are able to elect to be taxed on investment income only, and not on the underwriting profits of the reinsurance company.

Address increasing pressure from manufacturers

As dealership profitability levels have rebounded, manufacturers have become much more aggressive in their demands on dealers. Most of the demands involve expanded facility requirements, greater market sales penetration levels, and higher Customer Satisfaction Index (CSI) scores.

Many dealers are faced with major investment decisions that may not grow unit sales volumes or improve customer satisfaction scores, but manufacturers are forcing dealers to make tough business decisions in a challenging retail environment.

However, you can maintain a positive relationship with manufacturers by responding to all of their sales performance communications and actively monitoring your vehicle allocations (units requested vs. allocated) in the turn-and-earn allocation system. In addition, since manufacturer influence has steadily expanded, you should get involved with your state dealer association to make sure your state franchise laws adequately protect your dealership.

Develop and maintain fraud prevention controls

As the financial performance of most dealerships continues to improve alongside the economy, the strength of your internal controls has become more important. It is much cheaper to implement a good series of internal controls and external reviews than to deal with lost revenues and high legal fees related to fraud. Dealerships need to continually evaluate the structure and effectiveness of their internal controls to limit the opportunities for fraud.

Plan for health care reform law changes

With the recent re-election of President Obama and virtually no change in the control of the Senate and House of Representatives, it is crucial that you understand the Patient Protection and Affordable Care Act and its impact on your dealership.

There are key provisions in the law from a compliance, operational, cost, and tax perspective that will affect your dealership. These provisions take effect in 2013 and the health care coverage requirements are effective in 2014. Take advantage of resources available to help you prepare for health care law changes.

Understand and improve the value of your dealership investment

Focusing heavily on day-to-day profitability and business metrics is critical to your dealership’s success. But how often do you step back to understand what value you have in your business, and more importantly, how do you increase and protect that value?

Look at your business in a different light — focus on the key valuation drivers that impact what you consider to be the most important asset on your personal balance sheet. You may want to hire an independent advisor to help you with this process.

Proactively planning the future of your dealership and communicating your key strategic priorities to your employees will give you a competitive edge as the industry continues to grow in 2013, and beyond.

Scott Gorden, CPA, Managing Partner, Dealerships or 612-376-4751