Selling a dealership takes, on average, a minimum of six months and that is based on the assumption that your business is sale ready. During this period of time there are a few things that you should be prepared for.
What to expect
Selling a dealership is like moving, it is lengthy, emotional and a complicated process that you hope to only do once. You will have to mentally prepare for the difficulties that lie ahead as you part with the brands you represented and deal with the loss of comradery with your fellow dealers.
As a dealer you are used to being the boss and in control of all situations. This will not be the case when you become a vendor. Be prepared to go through a period of disruption as you go through the process of a deal, due diligence, and then through to the Original Equipment Manufacturers (OEMs).
Let your advisors deal with the fluctuations involved with negotiations as their value is to manage the strategy, always keeping an eye on the prize. This will give you the freedom to remain focussed on the bigger picture (your exit).
Get your head in the game
There are two mindsets that are critical to a successful deal.
- Think win/win
- Don’t fall in love with the deal
As dealers are traders, it’s not surprising that many enter a transaction with a win/lose attitude. This attitude will not get you across the line when it comes to completing a deal.
Dealers who seek for the vendor or purchaser to “lose” are known to fail, as well-advised people in the industry enter deals based on the benefits it will bring to them. So, the chances of entering a deal that will only benefit you is unheard of.
Keep level headed because as a retailer of homogenous products your business isn’t a cure for cancer and will not be treated as though it is.
Don’t fall in love the deal
Falling in love with the deal happens, its human nature. The end of a lifetime of work is being realised and it is now time for your retirement from the industry to begin. It is important that you don’t start the party until the money is in the bank.
If the purchaser senses that you have fallen in love with the deal, they may pull back on money during the final negotiations. Often buyers use this to withdraw from the sale, only to return so that they can leverage your emotions to restart negotiations in their favour.
To avoid this, vendors should take a back seat during the negotiations phase and let your advisors handle the intricacies until the transaction has reached the contractual stage.
Be realistic about the outcome
Before going headlong into a sales process, the best thing to do is to complete a full review of final sale transaction under a number of scenarios.
Steps to do this are:
- Complete a review of all the general ledger accounts of the business to ensure there are no surprises in the balance sheet
- Prepare the P&L based on this review
- Identify all relevant normalisations to set the normalised profit
- Conduct a Dealership Net Assets calculation based on the industry accounting treatments for the various buy/sell assets and liabilities.
- Complete the above Net Assets calculation on a worst case, probable case, and best-case scenario.
- Set the goodwill range based on a worst, probable and best-case multiple scenario.
- Prepare draft settlement statements (after tax), on the worst, probable and best-case scenarios.
This should provide you with a clear picture on the final cash position post sale under the three scenarios, so when the negotiations occur, it’s very clear where the final position will finish up before accepting any offers.
Agree your property scenario before commencing
Having the purchaser agree to rent your property on a 10 by 10-year lease at an 8% yield is a thing of the past.
Current buyers are cashed up and property experts, they will pick and choose the properties they want to buy versus rent. Most of this will be geared around alternate use strategies the property offers them and the relevance the long-term piece of real estate will have to the new model of operations.
Given the low buyer pool, it is likely that buyers will walk away from a deal where they can’t acquire the real estate they want however, they are prepared to pay for businesses where they can strategically purchase real estate.
Property prices and rentals will be based on independent valuations. As the vendor, your job is to be flexible on what you will sell or rent and be realistic about values. Being part of the independent valuation selection process is critical and ensuring you jointly brief the valuer with the purchaser is critical to ensure the methodology used is correct.
Fix your problems before selling
Selling the “dream” to a purchaser is one of the hardest parts of any deal.
More often than not, we are asked to sell a dealership that has been haemorrhaging money in certain parts of the business, for various reasons. Although we are told by the seller how to fix the issues, so our Information Memorandum (IM) and price should reflect the “fix” and therefore the “better result”.
Put yourself in the purchaser’s shoes, would you feel comfortable inheriting a problem, that requires you to fix and also pay for the pleasure of fixing it upfront?
Of course not, so as a result this immediately puts you on the back foot in terms of any negotiation.
Often it is a property problem (priced too high/wrong location), a personnel problem (poor quality people on high incomes) or a stock problem (in the current market, not likely an issue).
No matter the problem, it’s yours to fix.
We recommend taking an extra six months to fix any problems and offer a profit scenario that reflects the current operations. Even though the past results may show poorly in the IM, if you fix the issue and can show a few months of turn around results, it will be much easier to sell profitability.
Understand your OEM reactions before starting
Definitely don’t tell the OEM’s before or even during the sale process.
They can’t help but impact your deal in some way, whether it’s vigilantly selecting preferred candidates who will use this knowledge to hammer you on price or finding new hurdles for the purchaser to jump over.
It’s not intentional, but they feel they have a right to be involved in the sale of your business, when in reality all they are being asked to do is facilitate a transition of one dealer to another based on legislated qualification criteria.
As it is best not to involve them, it’s imperative that you know exactly what they will want from the new owner.
Therefore, it’s important to look at the requests they have made of similar franchised operation transactions that have taken place in the last twelve months. Understand what requests for facility upgrades or Customer Satisfaction Index (CSI) improvements they have currently made but may not be pushing at this point in time.
You will also need to understand what plans they have for Agency model roll outs or postcode changes in PMA’s.
Additionally, you should understand what type of purchasers they will never approve such as competing brands, market share caps, past history, listed publics. Spend the time to eliminate from your buyer list the purchasers that just won’t be approved without a fight.
Your IM needs to thoroughly explain what requests or requirements you believe the OEM will expect from a new entrant.
Nobody likes surprises, particularly the OEMs, so you are better off selecting suitable candidates who understand what they are in for.
Prepare a very detailed Information Memorandum
Spend time to get this right.
Apart from being an information document about the business, it is also a sales document, so it will need to factually detail the key selling points of the opportunity.
Make sure all of historical data is correct and avoid too many normalisations of history to paint a rosier picture.
The more you extrapolate, the more you are relying on people’s faith in drawing a similar conclusion, so keep it accurate and watertight when it comes to due diligence.
Apart from the historical data for financials and market shares, important items to put into an IM are:
- PMA demographic data: Detail where the PMA or PMA’s are going, the income levels, population growth and how this will impact the cars you sell.
- Infrastructure data: There is a lot of national infrastructure being completed, so try to explain how these will impact on your business, particularly how it impacts the ease of doing business with you.
- Model data: Details of new model releases over the next few years
- Brand opportunities: What brands are not represented in your PMA and what other dealerships may be available within your PMA to add to the stable.
- Unique features of your dealership: This could be your unique Customer Relationship Management (CRM) processes and systems, digital tracking strategies for customers, integration of various supplier systems into your DMS to track customer interactions, workplace arrangements like split shifting in service to maximise open hours.
Your preferred property position should be clearly stated in the IM and estimates of sale/ rental values based on an included independent report. This should correlate back to the normalised profit, and it’s even better if your rent request equates the current rent being charged.
Your requested offer for goodwill and net assets should also be clearly detailed in the IM and supporting justification of the goodwill number should be included and the valuation methodology for buy/sell assets/liabilities.
There is a school of thought that issuing a priced IM may limit the amount someone is prepared to pay for the business. History has shown that dealers rarely under-price their businesses and, in most instances, the final selling value is lower than the IM pricing. It is better to set expectations early on about what you are after and support it via the IM. This will deter you from receiving insulting offers on your unpriced IM.
Details in relation to your understanding of the OEM position on current requests outstanding, possible requests on application and their preferred dealer type should be fully detailed.
Finally, a proposed timetable to completion should also be set out, so everyone is aware of key dates in the process.
Prepare for due diligence early
A common mistake is starting to prepare for due diligence only when you have an offer on the table.
It is recommended to have the due diligence data room set up before releasing the IM. This has the benefit of identifying early on what issues may arise on a deeper assessment of the due diligence material and ensures a clear cross reference back to the IM. Remember to use the buyer’s enthusiasm in your favour by getting the pointy end over with quickly before their momentum slows down. This will help move the process along quickly once you pass the offers stage.
A quick game is a good game – the process
A quick game is a good game, time in the market erodes value and increases loss of confidentiality. Your aim should be to get a deal done before it becomes everyone’s business.
Form an A-list and a B-list, based around suitably and likelihood of completion. The goal is to first approach those on the A-list and if there are no positive outcomes then subsequently move onto those on the B-list.
Give people sufficient time to review the IM and ask some basic questions before asking for written Non-Binding Indicative Offers (NBIO).
It is common for purchasers to want to complete due diligence before they make an NBIO. To avoid this, keep the NBIO process short and sharp (a couple of weeks is ideal).
Once all NBIO’s are in, make a quick call to those on the short list, where possible keep it to three prospects.
Give each party a month to complete due diligence (hence the reason why you should be prepared from the onset), put all of your energy towards it and answer questions in a timely manner.
Once all the due diligence is complete, weigh all the parties up on the following basis:
- Financial outcome
- OEM acceptability
- Team and management ‘fit’
It’s not all about the money and sometimes it is in your best interest to settle for less money if the trade-off is an easier transition with the OEM’s and the team.
Once you have decided on a buyer you will transition to contracts (which should have already been prepared and due diligence), keeping the conditions precedent to a minimum.
Prior to settlement you still own and run the business, you are in caretaker mode and the contract will have certain conditions that you will need to meet.
Do not fall in love with the deal, even at this stage.
You will still have board approvals, Foreign Investment Review Board (FIRB) approvals, OEM approvals and financiers’ approvals to clear. Deals can sometimes fall through, although by preparing and presenting all of the details upfront should reduce this risk.
Settlement day can be difficult, and it is recommended to avoid being present during this, especially as settlement is the opportunity for the purchaser to pull a few dollars back through stock valuations and other last-minute issues – this happens in every deal. Again, leave it to your advisors and your team who will have a directly contact you to get your sign off.
Finally, it is important for you to keep everything in perspective, you have more than likely been paid millions of dollars in goodwill and property values, do not get caught up over the last $20,000 in used car valuation. If both parties walk away happy it is a great deal for everyone – this is the win/win.
Make time to thank your team, they have made your sale possible and should be thanked appropriately for their part in the outcome.
Once it is all done, move on, find a passion and enjoy your hard-earned reward.
It is imperative that you get the right advice from the outset, choose your advisors wisely to ensure the process is watertight and that you are in the driver’s seat for a successful outcome.
If you are interested in selling and you do not know where to start, or you want to leverage off our extensive experience preparing dealerships for sale please get in touch.
Article first published in Go Auto on 5 March 2021