OUR THOUGHTS ON:

Plan Now for Changes That May Impact Your Dealership

Automobile

By Paul Matvey

It is impossible to overstate the magnitude of the current economic crisis or the impact that it has had on automobile dealers. Whether you are aligned with a manufacturer in bankruptcy, considering bankruptcy for your dealership, or with a domestic or foreign manufacturer struggling through the downturn, you need to be prepared to react to the changing economic climate and formulate a strategic plan so that you are prepared to move quickly and appropriately.

Some general questions and considerations that you should address to structure your strategic plan should include:

  1. What are my rights and obligations under the terms of my sales and service agreement(s)?
  2. What are my rights and obligations under the terms of my floorplan lending agreements?
  3. What are my terms and obligations under my commercial loan agreements?
  4. What are my terms and obligations under my vendor contracts?
  5. What are my obligations to terminated employees?
  6. What asset protection actions should I be considering, and what protection from creditors should I be prepared to initiate, including bankruptcy?
  7. What are my terms and obligations for service contracts and dealer warranties?
  8. What are my obligations regarding state licensing requirements?
  9. What are the tax consequences associated with modifications or terminations of my agreements, and what steps should I take in order to protect myself from tax consequences?


Although the answers to these and other questions will become clearer as events unfold, there are some steps you can take now to prepare yourself to respond to these events and to make the right decisions..

Start now by gathering and organizing all of your dealership’s legal documents and agreements. The following is a list of common dealership documents you will need:

  1. Manufacturer Agreements
    • franchise sales and service agreement
    • site control agreements
    • sign leases
    • other equipment leases
  2. Floorplan lending agreements
  3. Commercial loan contracts and agreements
  4. All other debt agreements (shareholder, employee, etc.)
  5. Equipment lease contracts and agreements
  6. Real estate contracts and lease agreements
  7. Warranty contracts and agreements
  8. Vendor contracts and agreements
    • DMS
    • Telephone
    • Computer
    • Various maintenance
    • Website
    • Used vehicle estimators
    • Lead providers
    • Advertising (including web and Yellow Pages)
    • Uniform supply
    • Insurance
  9. Utility agreements
  10. Employee agreements and contracts
  11. Employee group benefit plans and contracts

Now that you’ve compiled these documents, you can begin to planning for the various ways that your dealership will address these issues:

Factory Buy-Back Obligations
Factory buy-back obligations will vary based on each manufacturer’s contract and on the economic climate and court’s approach. However, regardless of your manufacture’s obligations, you need to address this area. If you haven’t already, try to reduce your overall inventory. Turn as much inventory as possible into cash. Target the sale of older-model-year new vehicles and demos with mileage over 100 to prevent a possible disqualified vehicle if factory buy-back is an option. Additionally, stop all use of employee demos on new vehicles to limit mileage. For parts inventory, make sure your parts department is current on returnable parts. You don’t want to be caught with parts that are disqualified because they were not returned within the appropriate time frame.

Other Agreements with the Manufacturer
Site control, equipment and sign leases are typical manufacturer side agreements. Take steps ahead of time to ensure that these leases can be or will be terminated. Carefully review your manufacturer agreements or discuss them with legal counsel ahead of time to minimize your exposure.

Vendor Contracts
Vendor contracts can be a problem area when closing a dealership if proper planning is not taken. Review contracts for term expirations and other requirements. Be prepared to contact vendors to cancel of contracts when appropriate. If a contract cannot be cancelled, carefully review the contract language for other ways to reduce the contract liability. For example, you may not be able to cancel a contract, but you may be able to limit the amount of purchases or usage of the product to reduce the liability. Additionally, talk to department managers to make sure they are not currently entering into any contracts (such as uniforms) that you are unaware of.

Retail Finance Dealer Agreements, Service Contracts, Dealer Warranties
Plan ahead for what will happen under your retail finance agreements and service contract agreements if your dealership closes. For example, will your finance company pay you a fixed percentage of your reserve account immediately upon closure, or will you be required to wait until maturity to receive any remaining reserve? Will the finance company or another third party offer a “settlement” price to take over your chargeback liabilities? A closed dealership may not want to manage or account for that liability after the dealership closes. For dealership warranty products, consider and plan for an arrangement with an established dealer or repair shop to provide those services once your dealership closes.

Licensing Matters
Ohio requires notification of dealership closures. Plan ahead for when and what will need to be submitted to the DMV and other state agencies.

Insurance Considerations
Plan ahead by contacting your insurance providers to discuss what coverage changes you will need to make if your dealership closes. Even if the dealership closes, you may need to retain some coverage may need to be retained for possible future claims against the dealership or its owners.

Employee Considerations
Plan ahead for issues involving employee terminations. In addition to federal and state laws that may require advance notification for employee terminations, you and your employees will have many questions regarding health care coverage obligations and retirement and pension monies. Speak to your experts in this area to help prepare you for actions that will be needed.

Employee Notification - Special attention will need to be given to the requirements under the federal Worker Adjustment and Retraining Notification Act (WARN) Act regarding required 60-day advance notification to employees and state and local agencies for employers with 100 or more full-time employees. The WARN Act stipulates that notice must be provided in the case of a reduction in workforce of at least 50 employees and 1/3 of the workforce, or at least 500 employees. Review all the requirements under this act to ensure that you will be in compliance.

Health Care Insurance - Dealerships facing closure will need to determine if they will have any continued liability under COBRA for terminated employees. Single point dealerships may be able to terminate their plans and avoid the COBRA liability; however, multipoint dealers closing only one location may have to continue their health care plan and provide COBRA coverage to terminated employees.

Retirement Benefits - Dealers and employees will have questions regarding what will happen to their retirement funds. Planning ahead by bringing in a benefits expert to answer questions will alleviate some anxiety in this area.

Tax Considerations
Restructuring or closing a dealership can significantly impact the dealership’s and its owner’s taxes. One significant area of concern is the potential LIFO recapture gain when the new inventory is gone. Another is the potential gain on the liquidation of the dealership if it holds appreciated property and distributes that property to its owners. Plan ahead and speak to your tax advisors regarding ways in which you may be able to prevent or lessen the impact of these gains, and also plan for any other tax consequences that you may encounter. 

 

Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purposes of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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