If you are an auto dealership owner contemplating selling one or more of your locations, there are several steps you must take before you even pick up the phone to call a broker. Being prepared ultimately will make the transaction smoother.
If you were buying a dealership, you would have performed thorough due diligence before acquiring another location. Despite that, any weaknesses become apparent only after you take over operations. The back-office accounting operations and paper flow at your dealership are among the things that will stand out if your office manager or controller is not able to provide you a dealer financial statement within 5‑7 business days after the end of the month.
Who to Call First
The first call should be to your manufacturer’s representative. Discussing the intention to sell will make the dialog easier before finding a potential buyer. Understand the manufacturer’s requirements to accept a potential buyer as a franchisee and the steps in the approval process and the timing (for example, getting a transaction approved late in the year is very difficult because of the holidays. It’s not unusual for a manufacturer to provide a qualified buyer with certain incentives such as favorable loan terms or even a subsidy to purchase under certain circumstances.
The second phone call should be to your CPA, who will help you compile the financial information a buyer will want. If your accountant does not have experience with buy-sell transactions and dealership valuation work, you should find one who has had experience with dealership transactions. Likewise, having an attorney who has closed on dealership transactions will make the transaction much smoother.
Documents to Prepare
Your CPA, broker, and attorney will ask you for many records, so start assembling them early so you can share them as needed. Typically, you will need to provide monthly dealer financial statements for the past two fiscal years, the most current year-to-date period, and the year-end accompanying schedules for all key accounts including receivables, inventory, warranties, etc. If you have audited or reviewed financial statements, you should have those available as well as tax returns for the business for the past three years.
The next thing will be to identify, with the help of your controller, office manager, and general manager, items that are “one-time” or non-recurring income and expense items such as manufacturer’s facility incentives, litigation settlements, or gains from real estate or other assets. If you own multiple locations, be prepared to explain how shared expenses between locations or management fees from a management company that performs administrative tasks or has certain costs centralized (legal, insurance, etc.) impacts the continuing operations of the location that will be sold.
Evaluate your staff to identify employees who are paid higher-than-average salaries (family members, long-tenured employees, high performers). Your buyer will ask for a list of employees and their position, pay, etc., so be ready to answer this question to make the due diligence part of the transaction go smoothly.
All these non-recurring charges, allocations, and other items must be identified to arrive at the true operating income of the location. This analysis is often used to calculate the portion of the sales price known as “blue-sky” or goodwill. While there are factors outside earnings that impact the blue-sky amount, it is almost always a number that is a function of normalized earnings.
Don’t forget about the impact of recapturing the LIFO reserve, depreciation recapture, and other taxes that eat into your net cash to be received upon closing such as bulk sales tax. That includes fixed assets and leasehold improvements. Having a physical inventory performed by an independent third-party and tagging the assets can make the transaction go smoother.
The buyer and seller must agree on the allocation of the purchase price among the various asset classes included in the transaction. The allocation of the purchase price between asset categories will ultimately dictate how much of the overall gain is ordinary versus capital for the seller, as well as the timing of the write-off of the assets purchased for tax purposes for the buyer.
Therefore, it is important for both parties to consider the tax implications of this allocation. Both buyer and seller must include a Form 8594 (Asset Acquisition Statement) with their respective tax returns and both versions should agree. This ensures the tax treatment of the transaction is handled consistently by both sides.
You also want to ensure you and your tax advisor have taken the tax basis of your ownership interest into consideration when determining the overall tax strategy. What you want to try to avoid is recognizing capital gain from the sale of goodwill and real estate in one year and having a capital loss from basis in excess of proceeds in a future year when the company is formally liquidated.
Proper planning will help maximize the ability to recognize both the capital gain from the transaction and the capital loss upon liquidation within the same year. It is imperative you discuss this with your tax advisor to ensure a proper plan is in place.
Once you’ve identified a buyer and a deal is imminent, the work doesn’t stop there. As the closing of the transaction approaches, there are several steps you need to take to make the closing and the transition smoother, including:
- Plan your communications with employees. There will be apprehension about a change in ownership. Get a step ahead by informing the employees once a deal has been reached.
- Monitor your vehicle inventory levels and start adjusting as needed.
- Make sure your accounting office is keeping up with posting of deals. A clean inventory schedule is easier to deal with as the status of which cars are being sold and which are still on the lot will be easier to track during the closing.
- Have your back-office verify it has MSO for all new vehicles and titles for all used vehicles, with any exceptions noted with the status on obtaining the title (or MSO).
- Perform a parts inventory. Prepare your parts department for the inventory count by segregating any parts, such as those that are obsolete, that will not be part of the purchase.
The devil is in the details. Proper planning and having the right professional team in place will help facilitate a smooth transaction. There are many other considerations as a seller you need to consider, such as putting a price on your dealership based on the attributes that make your store unique, so make sure to talk to your trusted business advisors before closing the deal.
Written by Juan Pena and Allen Westergard. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com