Dealership Succession Planning: Start Today to Secure Tomorrow

January 18, 2021 | Article

Succession planning is an essential business activity for dealer owners, whether you own an auto or truck dealership, implement dealership or heavy equipment dealership. This strategic approach is essential to estate planning and helps ensure sustainable business continuity after you’ve left the dealership business, be that through retirement, an unexpected life event or even death. A documented, approved and well-understood plan increases the likelihood the transition will go to the successor you choose and happen how you want.

There are many challenges all dealer owners have in common in terms of succession planning. Here is some guidance and best practices for moving forward on your own transition plans.

When starting the planning process, it may help to speak with professionals in this field, as succession planning is multi-faceted. The advisors who you consult with on your transition should be knowledgeable in accounting, estate planning, family dynamics and income tax planning. Some of the questions that dealer owners commonly have regarding succession planning include the basic concerns:

  • Why is it so important?
  • Where will I find the right advisor?
  • When should I transition?
  • Who should be my successor(s)?
  • Will I be ready to relinquish control?
  • What am I going to do with my life after I am out?

When Should Dealers Start Succession Planning?

The best time to start succession planning is the day you open your business. Otherwise, the second-best time is right now. Since formulating a transition strategy can get complex, and some dealers’ decisions may be rejected by franchisers, financers and even employees, it pays to be proactive in order to avoid or at least minimize unpleasant surprises. In addition, you never really know what the future holds, and you want to make sure to secure your family and/or management, as well as employees with a solid plan to carry out should something happen to you. Planning ahead also gives you ample time to identify and prepare your successor for a smooth transfer, which they will also certainly appreciate.

It’s hard to turn your focus to the future when the day-to-day aspects of running a business remains busy, not to mention the underlying economic uncertainty. There are several ways dealerships can keep their footing amid disruption like the COVID-19 crisis.

Why Might Dealers Procrastinate Their Succession Planning?

Dealers have many reasons for avoiding succession planning. Certainly, running a dealership in itself is very complex and time-consuming. It requires focused attention daily, oftentimes even hourly. Finding time for any type of additional planning can be a challenge. However, it is critical to avoid the trap of being too busy working in your business to work on the business. 

Considering how active the dealer owner role is, the idea of retiring could be the farthest thought from their mind.

Owners also worry about the loss of income after transitioning their business. They’re often concerned they’ll set themselves up for a cash-strapped retirement, and they don’t want to face that burden, so they try to avoid it by not taking action at all.

It can also be challenging to find a successor who fits well with the current workforce and who can fill the owner’s shoes. This can happen even in a family-owned business if the owner doesn’t have confidence in their child(ren)(s) interest, aptitude and ability.

Finally, we find many dealers hesitate to plan for succession because it means facing their own mortality. People tend to struggle with and procrastinate their exit and estate planning because they involve things related to end-of-life, incapacitation and death, which are difficult issues for anyone to face.

Special Considerations for Dealership Succession

Dealer owners face unique circumstances that other business owners might not have to consider, and even these vary from one type of dealership to another. They tend to be more relationship-driven and often must adhere to regulations in terms of succession planning. That is why it is so important for them to speak to the right, experienced advisors.

It can be personal. Overwhelmingly, dealerships are relationship-driven. They tend to be family-owned, passed down through several generations. Beyond family, dealerships tend to play important roles in their communities. Loyalty to specific dealerships is often ingrained in the local psyche.

It can be heavily regulated. Franchise dealerships must comply with state franchise statutes and franchise agreements that include rules for succession plans. Many loan providers and financers also have succession planning rules and requirements.

Decisions can be rejected. In franchises, dealers usually must get factory approval for successors and sales. A franchise may reject your successor. If you want to pass a dealership on to management, the franchise may reject that. Additionally, equipment franchises often have restrictions on third-party sales.

Resources may be limited. Used car dealerships and other independent dealerships may not have to deal with the restrictions and regulations of a franchiser. However, they do have to consider their financers’ and vendors’ expectations, as well as employee and community expectations. These dealerships tend to rely more on those resources, and they have less support than franchise dealerships.

What Exit Options do Dealer Owners Have?

Pass On to Family
Passing your business on to family can be the most obvious, yet challenging option because of the family dynamics involved. Some family members might be more active in the business than others, forcing you to make difficult decisions. It’s not unusual for dealer owners to bring in a family business advisor to help them manage these decisions.

For example, spouses might disagree about distributing ownership. One might want to give ownership to all children equally despite their involvement or capabilities. And siblings themselves may want to buy each other out, even involving non-relatives.

Once you’ve chosen a successor, the process of preparing a family member for an ownership role could take years. You’ll want to gradually increase their responsibilities to the point of overseeing several locations where applicable, so they’re prepared to take over even though you’re still the dealer on record. If you’re part of a franchise, the factory may require them to attend a dealer school to ensure they’re capable and trained sufficiently.

In terms of finances, your children may not have adequate money to buy you out. You’ll need to consider other alternative options that make it manageable and will also lessen your tax burden. You’ll likely have to carry it back or take a gifting opportunity.

Management Buyout
A management buyout might be an attractive option for you, though these aren’t as common as family succession. However, there are a few potential challenges to this choice. First, management isn’t likely to have the money or financing to buy you out, so you may have to carry some of the purchase price.

Second, if you’re part of a franchise, the factory may not approve a management buyout.

Third, you must be sure you can depend on the management team to run the dealership successfully enough to pay you for it. If you’re relying on that income as part of your retirement planning, you will need to determine if you are willing to take on that risk.

Sell to Large Dealership Group
The upside if you sell your dealership to a large regional dealership company is that they’re likely to have the financing necessary to buy you out, so you can cash out entirely. Plus, considering their size, they’re probably a reliable and profitable operator that the factory will be eager to approve. However, selling your business doesn’t guarantee financial/job security or a good culture for your employees, and it could even negatively impact your community.

Sell to Publicly Traded Company
A final exit option for dealership owners is selling the dealership to a publicly traded company. Publicly traded companies are likely to be good operators and receive any necessary approvals. They’ll likely ask you to take stock in their company in exchange, but you can ask to be cashed out instead—although, this option isn’t as common today as it was 10 years ago. In addition, you would undertake risks similar to those that come with large regional dealerships in terms of the possible adverse effects to your employees and community.

When the Decision is Made For You
Dealers who would prefer to pass their business on to family or their management team are unfortunately often forced to sell due to financial constraints. For example, their franchise may enforce standards and updates that they can’t afford. Or they might not be able to pay the estate tax resulting from the death of the owner. Generally, every estate plan and every succession plan comes with its own tax implications.

You want to have control over what happens to your dealership, employees and community after you’re ready to transition. When developing your dealership succession plan, you’ll want to ensure your decisions are honored to protect what you’ve built.

Dealer owners are often searching for ways to increase the value of their dealership. There are several methods for accomplishing this, primarily focused on pretax earnings and the Blue Sky multiple. Watch this video as Eide Bailly’s Dealership Industry CPA Jeremy Jennings answers a frequently asked question about how dealer owners can increase the value of their dealership.

How to Design Your Dealership Succession Strategy

1. Build your team. To start building out your succession plan, you must first create a planning team. This team might include your CPA, financial planner, estate planner or business attorney, insurance representative, any necessary business counselors or advisors, and relevant family members and/or key management, including your chosen successor, once you’ve determined who this will be. Your team might evolve to include (or exclude) certain individuals over time.

2. Develop your crisis plan. Next, you must develop a crisis plan. Your crisis plan should outline next steps should something happen to you, the dealership owner, unexpectedly. It assigns a management team and outlines responsibilities, and it also includes pertinent documents like loan information and other financial resources.

3. Align plans. You must also align your estate plan with your succession plan. Oftentimes, great estate planning doesn’t equal great succession planning. For example, your estate plan may give ownership of your business to all of your children equally—even those who aren’t involved or interested in the business. This could be detrimental to succession planning.

4. Start training. By this point in the process, you’ve likely identified your successor or your plans to sell. For a successor, start the training process and integrate them into dealership operations. If they’re already involved, gradually expand their responsibilities with the goal of preparing them to take over entirely. You want them to understand the ins and outs of your business so they’re able to carry on the relationships you’ve built with employees, the community, the factory and any relevant third parties.

5. Document everything. Documentation is key to every step of this planning process and beyond. To give your successor a guidepost for business success, it’s helpful to document a strategy they can follow even years after you’ve exited. Your years of experience will greatly inform this strategy and can help you feel more confident in the transition.

Looking for more details on building a successful exit strategy? Check out our comprehensive exit planning guide.

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