Preparing for transition
Succession Planning: The First Steps for Dealerships
by Terry Werner
Many business owners know they need to make formal plans for a successor, but planning can easily take a backseat to the urgency of managing people, credit, cash flow, and daily operations. But with more and more dealers in or approaching retirement, succession planning must become a priority.
Most dealerships are family owned and operated — some for generations — and have had a substantial impact on their local communities over the years. In addition, many of these dealerships are smaller, and therefore highly dependent on their owners to manage day-to-day issues.
Unfortunately, these are often the same dealerships that have no succession plan to prepare for future leadership, ownership, and management once the owner retires or is unable to run the business.
Most dealers have similar challenges when they start the succession process:
- Avoiding selling to a third party while still providing for the welfare of trusted managers and employees
- Developing the next generation to manage and lead without being personally involved in the business
- Incentivizing key employees to remain through an ownership and management transition
- Guiding the long-lasting legacy of your business for the community, family, and employees
- Knowing if you have the finances necessary to maintain your lifestyle, including hobbies, activities, and daily expenses, and whether you have provided for your spouse and family
How do I start?
Although many dealers prefer to pass the business on to family or staff, most family business transfers ultimately fail. This is often due to a lack of trust and communication between the owners and successors, and the successors not being adequately trained with the right management skills.
Succession planning starts by communicating with those you know and trust. Start the process by talking to family, staff, and advisors who can objectively discuss your vision for the future — for yourself and your company.
Once you have shared your ideas you can formulate a plan by focusing on the following steps:
- Identifying financial conflicts:
- Anticipated value versus the real value of your company
- Personal needs after retiring
- Management’s acceptance of risks associated with a change in ownership
- Credit capacity of the company, and the impact on operations after the transition
- Deciding which family and/or key manager(s) you want to be part of your ownership and management succession plan.
- Making sure successor(s) understand the responsibilities and risks associated with their role. Alignment of all of the stakeholders regardless of their role is essential for your vision to be realized.
- Evaluating your successor owner/manager’s dynamics in anticipation of how he or she will respond to a change in management.
- Assessing the near- and long-term development needs of the company.
Assess your dealership's value
Evaluate how the concepts below affect your dealership's future, and what you need to do to sustain the value and operations of your enterprise.
- Franchise value — What is your franchise's value for your market? If your franchise is a hot commodity now, will it have long standing value?
- Facility — Is your facility up to factory standards or is substantial investment necessary to meet franchise requirements?
- Financial performance — What is your return on investment as an operating dealership as opposed to investment earnings on the after-tax proceeds if the business is sold?
The last question is often the key decision if a sale is contemplated. Dealers can be seduced by high multiples and what appears to be irresistible sale offers. What often happens, however, is dealers have difficulty getting the return on investment necessary to maintain their current lifestyle.
For example, assume your dealership is making $1 million a year (after your reasonable salary of $300,000). You may have a buyer offering five times earnings, which combined with your net worth puts $8 million after tax in your pocket. You would then need to have an investment return exceeding 16 percent to maintain your lifestyle.
|Dealership Sale Example|
|Annual dealership net income||$1 million|
|Your annual salary||$300,000|
|Sale offer||$5 million|
|Your net worth after sale||$8 million|
|Required investment return to maintain your lifestyle||16 percent|
Depending on your other retirement planning (or your stage of life), this may not be an issue, but retired dealers often find this problematic.
Every retirement situation is different. Some dealers are ready to say goodbye and enjoy retirement. Others are miserable without the thrill and challenge of being a dealer. Making an assessment of where you fall on this scale is critical to a happy life and a sound succession decision.
Additional psychological factors involve family. Quite often, dealers just can’t pull the trigger to let their son or daughter take over. While the founding dealer grew up selling and worked his or her way to the top, the second generation often has been groomed in a different manner. Despite college degrees, dealer academy graduation, and working every job in the dealership, it is still often difficult for dealers to turn over the keys.
A struggle often occurs because too many family members are involved, some working in the dealership and some not. How to divide up the wealth and power can be quite a challenge. If a sale to third parties is contemplated, an added complication is the possibility of putting several family members out of work.
Be realistic and flexible
Be pragmatic about your plans for ownership and management succession — not everything will happen exactly how you envision it, and you will need to stay flexible.
Remember, you don’t need to execute a plan all at once, but by setting interim goals, you can have a solid plan in place before you’re ready to pass on the business. The sooner you start discussing your succession with those you trust, the sooner you can feel secure about your company’s legacy and your personal future.
Terry Werner, Partner, Dealerships
terry.werner@CLAconnect.com or 314-925-4308