Written By: Alysha Webb
Acquiring a new car dealership is a major decision that involves much more than just assessing current and future market conditions. Legal and tax implications also play a significant role and should be carefully considered before making a move.
In our recent webinar, “Preparing to Buy a Dealership: Legal, Tax and Market Insights,” we explored these key factors and shared practical advice for anyone thinking about acquiring a dealership. The discussion featured our own Alan Ginsberg, Partner and CPA, Charles Gallaer, Automotive Attorney at ArentFox Schiff, and Faris Syed, Founder and President of buy sell advisory firm SAR Partners.
Building the Right Advisory Team
“This particular industry has a lot of inside baseball, to use that term, that you really need to know to be able to navigate a successful transaction."
The panelists agreed that it’s crucial for buyers to assemble a team experienced in the complexities of the retail automotive industry to guide them through the acquisition process.
Not doing so can cause unnecessary problems, Gallaer cautioned.
“This particular industry has a lot of inside baseball, to use that term, that you really need to know to be able to navigate a successful transaction,” he explained. “And that goes for not just the broker but also the accountant and the attorney.”
For one thing, the retail automotive industry is highly regulated, Gallaer noted, and the laws and regulations affecting a transaction vary from state to state. Each manufacturer also has its own requirements.
Those two elements alone are “a huge, huge factor that you have to deal with in any type of transaction that you’re doing for a dealership.”
Given the differences in state regulations, working with a team that has national experience, rather than a local or regional broker, CPA, or law firm, can be extremely helpful, especially if you’re acquiring a franchise in a state where you aren’t based, Gallaer advised.
“You’ll see folks that are a little bit more region specific, and that’s great to use these folks if that’s the region you want to be in,” he said. But it’s very important that the team, especially the broker, is in the markets where you want to make acquisitions. “It’s critical that they have experience in those markets,” Gallaer emphasized.
Every transaction depends on gaining the manufacturer’s approval, and a single misstep can result in the manufacturer exercising its first right of refusal on the deal. To avoid that outcome, sellers need to understand what issues could trigger the dreaded ROFR.
A team with specific automotive experience will be familiar with each manufacturer’s unique requirements, Gallaer explained.
“That’s a huge, huge factor that you have to deal with in any type of transaction you’re doing for a dealership,” he said. “What is it going to take to get the OEM’s approval?”
The manufacturer may also require expensive facility improvements, which can significantly increase the cost of the deal, Gallaer added.
From LOI to APA
"Nobody wants to pay X amount for something then come to find out it’s actually worth a lot less.”
Some of these issues may be addressed in the initial Letter of Intent, which can be binding or non-binding, Gallaer explained. Having a team that can determine which provisions are binding is key, he added.
After the actual contract, known as the Asset Purchase Agreement (APA), is signed and financial due diligence is underway, the team must ensure that each party’s responsibilities are clearly documented, so everyone understands the process, Gallaer noted.
“As the buyer, your goal is to make sure that whatever you’ve negotiated for is what you’re getting,” he said. “Nobody wants to pay X amount for something then come to find out it’s actually worth a lot less.
“So again, having the people in place that are going to help you through the negotiation process, doing your due diligence, getting the contract signed and knowing what your rights are and having those clearly articulated in the contract, that’s critical.”
The APA should also spell out a seller’s post-closing obligations. “Does the seller just take the money and, you know, they’re off in Tahiti or Puerto Rico or wherever it is?” Gallaer asked.
It is best if some form of indemnification continues after the closing, he added, because what happens “if there’s a bunch of people that are waiting after the closing at your front door saying, hey, I was ripped off by the seller.”
While the buyer may protest that it was not their fault, it is now their problem. “Do you have different mechanisms in place to protect yourself from those types of unforeseen things that come up post-closing?” he asked.
Key Legal Risk Areas
“These are the kind of things that you have to look for because those are landmines that unsuspecting buyers can get tripped up on thinking that there's a real estate component that's all been satisfied, but in fact it's not.”
Here are some key legal risk areas for a buyer, Gallaer explained:
- Franchise obligations: A manufacturer’s franchise “obligations” can complicate a poorly structured deal. The laws governing what a manufacturer can and can’t do as part of the review process for a buyer are highly state-specific, Gallaer noted.
- Real estate and site control: It’s essential to understand the real estate component of a transaction. All manufacturers include real estate-specific requirements for approval, such as a minimum number of parking spaces or lot size. It’s also critical to know whether the seller owns the property or leases it. If leased, what are the terms? Can the lease be assigned to the buyer? Ensuring the seller has proper site control is very important. “These are the kind of things that you have to look for because those are landmines that unsuspecting buyers can get tripped up on thinking that there’s a real estate component that’s all been satisfied, but in fact it’s not,” Gallaer warned.
- Employment and workforce transition: These requirements vary by state, and federal laws may also apply. Are you going to retain employees? Will they move to another seller-owned dealership?
- Compliance: This umbrella term covers many areas. Is the dealership compliant with all F&I and data privacy laws? Are all computers running legally licensed software? What intellectual property is included in the sale? While some of this may surface during due diligence, “you don’t really know until you get in there where the skeletons are,” Gallaer said.
Ensuring the purchase contract addresses all of these factors helps pave the way for a smooth closing.
An Accountant’s Perspective
“You want to make sure the numbers you’re seeing are the numbers you’re actually getting. It’s not unusual for a factory financial statement to reflect numbers that might have stories behind them.”
Doing thorough due diligence that goes beyond the surface numbers is one of the most valuable skills a CPA experienced in the dealership business can bring to the table. “You want to make sure the numbers you’re seeing are the numbers you’re actually getting,” Ginsberg said. “It’s not unusual for a factory financial statement to reflect numbers that might have stories behind them.”
Ginsberg advised digging into a dealership’s balance sheet to ensure it reflects the actual situation, which means examining the nitty-gritty details. Are any parts included in the sale new, in their original boxes, and fully returnable? What condition are the fixed assets in, are they still usable, “or have they been lying around collecting dust?” he asked.
How the purchase price is allocated between goodwill and fixed assets is also crucial, as it has major tax implications, Ginsberg noted. Buyers should also consider potential reconditioning costs for any used inventory. “How much are you going to have to pay to make that inventory sellable to the end customer?” he said.
It’s also important to ensure sufficient working capital, which can vary depending on the dealership, and to have access to additional capital if needed, Ginsberg added. The tax structure of the organization should be considered as well. “Depending upon what state you’re operating in, you might want to form either an LLC or an S Corp,” he said.
Ginsberg recommends using a checklist to keep track of the many financial issues that must be addressed in a dealership purchase. You can access our Dealership Due Diligence Acquisition Checklist to help guide the process.
The Macroeconomic Picture
“We live in an up and down situation all the time, but the dealers, they adapt very quickly.”
No buy-sell transaction takes place in a vacuum. Faris Syed of SAR Partners discussed the current buy-side market, noting that interest rates, manufacturer pressure, and tariffs all influence deal structures. However, manufacturer pressures are always present, and SAR Partners hasn’t seen much impact from tariffs yet. As for interest rates, “we live in an up and down situation all the time,” Syed observed, “but the dealers, they adapt very quickly.”
He noted that more deals are coming to market lately, but fewer are actually reaching the finish line. Reasons vary. One issue is that some sellers still expect their dealership’s valuation to reflect the go-go sales of 2020 and 2021. Buyers, instead, are looking at post-COVID and pre-COVID numbers from the past six years to make an offer.
Others prefer to focus on the past 24 months. “It’s a mixed bag and we accommodate that as well. We go back to the sellers and let them know, hey, this is what the expectation in the market is,” he explained.
Buyers are pursuing acquisitions for various reasons, including growth, consolidation to achieve economies of scale, or succession planning, Syed said. The key metrics they track are profitability, absorption rate, and return on investment. Many also look for upside potential in a possible acquisition, such as underperforming used car operations or service lane absorption rates.
The best preparation before seeking an acquisition is building the right advisory team, Syed emphasized. “I think your conversation starts with your CPA,” he said, noting that dealers often work closely with their CPA and benefit from someone familiar with their dealership. He added that it’s important to work with a CPA who has automotive industry knowledge.
“They can give you a very good view of which dealership is the right choice for you” to acquire, Syed said.
Closing Thoughts
Successfully acquiring a dealership requires careful planning, thorough due diligence, and a team of advisors who understand the nuances of the automotive industry. By assembling experienced professionals, addressing legal and financial complexities, and evaluating market conditions, buyers can navigate the acquisition process with confidence. While each transaction is unique, following these best practices can help ensure a smooth process, minimize risk, and position the dealership for long-term success.
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