The Three Principal Elements of Auto Dealership Succession Planning

In the most recent two years, I was asked to help in two separate matters involving dealer family succession plans that went wrong after the founding dealer passed away. It points out that even a carefully planned and executed ownership transfer plan may seem fine on the surface but sometime later a simple defect can come to the surface and disagreements boil over.

In both situations the dealer’s succession planning failed in one or more of the three distinct elements. Succession planning is an integrated planning process that over time enables three future informed decisions.

• Wealth Transfer Plan – the transferring of business ownership through gift or sale, at what price
• Management Succession Plan – the empowering of new leadership
• Ownership Control Transfer Plan – the transferring of voting control of the business, to who and at what price

Effective succession plans typically integrate and synchronize with other key owner and business plans.

Selling an auto dealership isn’t like selling a car. While the sale of a car is usually straightforward, when the owner of a dealership interest wishes to sell or transfer his or her interest to family members it can be a very complex transaction complicated by issues unrelated to financial and legal matters

Transfer of wealth is the transfer of some ownership and the attributable financial benefits. In one of the above-mentioned situations, the new controlling family owner decided to change the dealership distributions practice causing financial hardship to another owner. The founding dealer could have prevented this problem by having an ownership agreement in place defining the distribution policy and other controlling vs. non-controlling common friction points. Simple, but critical when there are multiple owners and the founder is no longer making the decisions.

Both of two situations had a common problem I see often. There was confusion about the appropriate purchase price to be paid if a family member decides to sell. The founder should make this decision and the shareholder agreement is the vehicle to enforce it. Should the price be the pro rata share of the market value of the business as a whole or something less? Many owners do not realize that fair market value of non-controlling interests is almost always significantly less than the subject ownership interest’s pro rata share of the market value of the business as a whole.

Fortunately, one of these two situations seems to be headed to a mediated settlement. Albeit with likely attorneys’ fees more than $750,000. Unfortunately, for the other situation the trial was recently completed, and the decisions will now be made by the judge. The attorneys’ fees in that matter will likely be more than $1,000,000.

Our expertise includes decades of successful structuring of automobile dealership ownership agreements and we are available to speak with you about plans you may be considering.

Please call us at 612-294-8730 and we will be happy to arrange a completely confidential conversation about your situation.

Auto Dealership Succession Planning

Bryan Parker is a seasoned dealership expert that is also a CPA, MBA and accredited in business valuation. Because auto dealerships are so different in their financial and operational structure than most other businesses, industry business valuation and succession planning experience is imperative. Please contact us if you have any concerns or needs relating to our dealership services in the areas of profitability enhancement, business valuation, succession planning and litigation financial analysis and expert opinions.