Over 340 people attended my NADA workshop dedicated to the current buy/sell market. Based on that attendance level and the confident mood at NADA, it appears deal making is back. So, if dealers are in deal mode, why aren’t we hearing about more buy/sells? Presidio’s recent conversations with both buyers and sellers lead us to believe there is a supply/demand imbalance in the market today. There are currently more buyers than sellers.

Why is this? First, let’s look at the buy side. We at Presidio believe the increase in the number of dealership buyers is driven by the following:

• Access to capital: Buyers, particularly large groups, have increasing access to capital both from the credit markets and their own cash flow. Many groups are experiencing record profit levels, providing liquidity for acquisitions and enabling the support of increased debt levels. Furthermore, buyers are interested in locking in low interest rates today, with the expectation that they will rise in the future.
• Earnings growth expectations:  Even with today’s record earnings (see Chart 1), many expect profits to rise further as auto sales grow. Buyers are more confident buying into a growing market with the expectation that the seasonally adjusted annual sales rate (“SAAR”) may reach 16 million in the not too distant future, a 25% increase from 2011’s sales rate.
• Expanded shopping list: With the shift in market share, leading buyers have expanded their shopping list beyond Toyota, Honda, BMW, Mercedes and Lexus. Many are now interested in at least 10 franchises, including Korean and domestic brands.

Chart 1 NADA Average Dealership Earnings and Net to Sales Margin (2003 to 2011) Source: NADA Industry Analysis

Clearly, buyers have good reasons to be bullish. So, where are the sellers? Sellers are hesitant to come to market today for several reasons, including some listed below.

• Survivor syndrome: As Chart 1 so clearly demonstrates, dealers are finally enjoying the fruits of their labor. After three very difficult years, profits have rebounded. Some dealers are putting off a sale because they are enjoying the industry once again and they don’t feel an urgency to exit.
• Expected future growth in blue sky values: A number of dealers have told Presidio they intend to sell within the next two to three years. This timing is driven by their expectation of record or near record profits in the next few years, which they expect will translate into big blue sky.
• Expected future real estate price improvement: Now that commercial real estate prices have stabilized, some dealers are hoping that values will rise in the near term, making up for some of the value lost during the credit crisis. They believe the longer they wait to sell, the more their real estate value will rebound.
• The challenge of leaving the dealer lifestyle: Most dealers dedicate their lives to their businesses and their lifestyles reflect this dedication. Often, their friends, family, travel and free time are related to the car business in one way or another. Some aren’t ready to leave the “dealer life”, even if it is the financially prudent decision for their family and estate.

While some of these reasons may ring true, they are not necessarily great reasons (or excuses) for a seller to wait. As we know, timing is everything when it comes to selling your business. Today, we are in a rare and likely short-lived period in which dealership demand outstrips supply.  This creates a strong seller’s market, particularly for successful franchises in good locations.

Economics teaches us that when demand outstrips supply, prices tend to go up. The same economic theory tells us that these types of markets do not last for long. Once sellers see transactions close at premium prices, more sellers enter the market, creating a market equilibrium in which supply meets demand. Sellers then lose some of their edge on the market, as buyers have more acquisition opportunities from which to choose.

Presidio expects the market to reach this type of equilibrium sometime in 2013/2014, when a number of sellers have indicated they intend to enter the market. Once we have reached equilibrium, Presidio expects the supply of dealerships for sale to continue rising, potentially surpassing demand, for the following reasons.

• Ageing dealer body: Many dealers are at, near or past retirement. According to the Pew Research Center, 10,000 Americans will turn 65 every day for the next 18 years.  This demographic shift will drive many dealership sales.
• Facility upgrade requirements: While NADA and state legislatures are making a valiant effort to stave off manufacturer’s image requirements, image facilities will push more and more dealers to sell, rather than take on an expensive real estate project.
• Rising taxes:  The long-term capital gains rate could increase in the near future, particularly on the wealthy. This may push a number of dealers to sell. (For those that are holding out for a larger blue sky number, consider that some of that blue sky could be eaten up by a future tax increase.)

When more sellers enter the market, we will be reminded that our industry has a relatively limited number of deep-pocketed buyers. Many dealerships and dealership groups are very expensive assets to acquire and require a great deal of capital, even when debt is available. Manufacturers’ limitations both on who can acquire a dealership and how many they can acquire, create a barrier to entry that limits the number of buyers. This structural limitation on the demand side of the market ultimately will put pressure on prices.

In closing, dealers understand the effect of supply and demand on vehicle prices; it is time to apply this understanding to dealership prices. When there is less supply and more demand for dealerships (today), prices tend to go up and the seller has many options. When supply meets demand or even worse, supply exceeds demand, prices tend to go down and the buyer has many options. It’s pure economics! Plan your exit accordingly.

More so than in many, many years, Bass Sox Mercer has been fielding calls from dealers complaining that they can’t get a sufficient number and mix of vehicles to be competitive in their market. These complaints go beyond not having enough of a temporarily “hot” model. The dealers contacting our law firm report that they can’t obtain enough of almost every model offered by their manufacturer. These dealers range from Chevrolet dealers to Volkswagen and Audi dealers to Volvo dealers.

Anytime that production capacity is limited the manufacturer becomes a king-maker. There will be winners and there will be losers. With limited available allocation, it is inevitable that certain dealers will be favored over others. Even assuming the manufacturer applies their base allocation system fairly, there are a significant number of vehicles that are handed out to dealers at the sole discretion of local or regional representatives. We have found that the smaller the dealer the less important they are to their manufacturer representatives. As a result, it appears to be the larger volume dealers who are favored with allocation.

For the VW and Audi dealers who are not large volume dealers, allocation has suffered over the past two years as the vehicles in those brands have become increasingly popular. These dealers have been thrown into a vicious cycle of not having a sufficient mix of vehicles available for their customer to purchase, then falling below required sales performance levels to, ultimately, receiving a letter of termination for failure to perform under the sales obligations of the Dealer Agreement. We currently have both VW and Audi clients that have either received a termination notice or are under threat of termination for an alleged failure to sell enough new vehicles. The absurdity of VW and Audi’s position is that the dealer sells their new vehicle inventory as fast as they receive them only to be allocated less than a sufficient amount of vehicles to replenish their inventory. As a result, these dealers are being asked to sell more vehicles than VW and Audi are willing to supply.

Manufacturers routinely hide behind the mantra that all dealers are “treated equally” under the turn-and-earn allocation system. However, when a dealer doesn’t receive at least as many vehicles in allocation as were sold in the prior allocation period something is terribly wrong. This is the situation that many VW and Audi dealers now find themselves. For a few of these dealers, the replacement allocation has been reduced to a mere trickle. We have one Audi dealer that has three vehicles total on their lot with no more vehicles due from the manufacturer for two months. For dealers in this situation, it becomes a fait a compli that they will simply die on the proverbial vine if not terminated sooner by the manufacturer.

Dealers who find themselves in this situation should immediately retain experienced motor vehicle franchise counsel to make a legal demand on the manufacturer to provide the dealer with more vehicles or else be responsible for the damages which result when the dealer is forced to go out of business.

Other dealers, such as Chevrolet dealers, are in the category of being short in some, but not all models offered by the manufacturer. Although these dealers have not reached a point of threatened viability they are, nevertheless, losing an unusual amount of customers as a result of not having sufficient inventory. These same dealers are also having their sales performance calculation negatively impacted by the lack of sufficient inventory. Dealers in this category need to keep the pressure on the manufacturer to provide more vehicles. Dealers should be specific about which models they are short on and do so in writing. Having this paper trail will not only put pressure on your manufacturer representative to treat you fairly on allocation, but will protect you from allowing the manufacturer to capitalize on allegations of sales performance deficiencies.

For Volvo dealers the situation is very different. We have been told that few, if any, dealers have sufficient vehicle inventory. Instead of providing United States dealers with vehicles, Volvo has chosen to divert their vehicles to countries like China. Although Volvo doesn’t appear to be showing favoritism amongst its United States dealers it is nonetheless potentially in violation of a number of state franchise laws and Volvo’s own Dealer Agreement for depriving dealers of a sufficient quantity and mix of vehicles to allow them to be viable. When entering into dealer agreements with its dealers, Volvo became obligated to provide those dealers with enough new vehicles to sustain dealership operations. That does NOT mean that Volvo has to create production capacity that it does not have but what it does mean that it must provide its U.S. dealers with enough vehicles out of what is actually produced to give those dealers a chance to survive. Right now Volvo dealers are struggling just to keep the doors open. They don’t have enough Volvo vehicles of any type to cover their dealership overhead.

The Volvo situation may be ripe for a class or mass action by all United States dealers arguing that each has been adversely affected by Volvo’s failure to meet its obligation to provide a sufficient number and mix vehicles to those dealers. The benefit of such an action is that no one dealer is sticking their neck out in battling the manufacturer and no one dealer is bearing the cost of the fight. There is strength in numbers.

One final note. As soon as dealers see a pattern of limited allocation and long before dealers reach the point of threatened viability, you should print and retain copies of any allocation reports available which show the allocation to your dealership as compared to other dealers in the zone or region. These reports are critical in countering the manufacturer’s argument that the turn-and-earn system is fair and equitable. Generally, however, the manufacturers do not maintain these reports and, thus, they are not available at a later date through the discovery process when the dealership’s attorney will need them.

The Addendum has the dealer agreeing that their performance in one of the above-described areas is “deficient” as required by the Dealer Agreement and then sets a specific level of performance that the dealer agrees to obtain by a date-certain. The Addendum is not merely a “notification” of the dealer’s alleged failure to comply with the terms of the Dealer Agreement but is a binding legal agreement. As a result, dealers should think long and hard before signing the Addendum.

In many cases it is not reasonable for a dealer to be expected to meet a certain sales performance, customer satisfaction or facility requirement. As applied to dealers performing below the Regional average sales penetration, the sales performance formula used by Mercedes-Benz may be faulty due to allocation issues or the unique nature of the dealer’s market. Likewise, we know that in many cases the customer satisfaction survey process is not reliable and the Autohaus facility program is not viable for some dealers.

While the Dealer Agreement sets general performance requirements for the dealer, the Dealer Improvement Addendum is very specific as to what the dealer is agreeing to accomplish to correct the alleged deficiency. If the dealer fails to reach the performance level by the date agreed to, Mercedes-Benz will have a greatly strengthened hand in arguing the dealer is in violation of its Dealer Agreement. Agreeing to the terms of the Addendum could severely limit or entirely eliminate the dealer’s argument that these requirements are not reasonable under the dealer’s specific circumstances.

The alternative to signing the Addendum is to respond to Mercedes-Benz in writing explaining why the performance standard(s) listed in the Addendum is unreasonable as applied to the dealer’s specific circumstances. Dealers cannot be forced to sign a Mercedes-Benz Dealer Improvement Addendum including terms with which they don’t agree.

Dealers receiving a Dealer Improvement Addendum should seek experienced franchise legal counsel before executing the Addendum.

General Motors hides the PEA (Again)

I wrote in my December 2011 column in Dealer magazine, “GM’ 6/11 CYTD Dealer Retail Sales Performance Review” concerning General Motors’ Sales Performance Reports sent to dealers in the fall of 2011. I pointed out that dealers should consider responding to any report criticizing their performance by pointing out the various issues out of the dealer’s control, which negatively impact their sales performance. One of the most pressing issues for some dealers is a lack of available vehicle allocation.

I described in my column that General Motors was, for the first time in quite some time, providing detailed allocation information on the Sales Performance Report by vehicle model which could be used to demonstrate that the dealer was not receiving the number of vehicles necessary to equal the number of vehicles General Motors is saying the dealer must sell to be sales effective.

Well, General Motors willingness to be honest and upfront with its dealers about the number of vehicles allocated to the dealer by model was short-lived. As of the September calendar-year-to-date Sales Performance Report issued in early January, General Motors is back to playing “hide the pea.” The allocation report has been removed from dealers’ Sales Performance Reports.

Despite General Motors return to playing games with its dealers, dealers should continue to closely monitor their allocation requests, actual allocation and any allocation turn-downs by the dealership so that those numbers can be used in responding to a Sales Performance Report alleging that the dealer is deficient.

Nissan dealers required to agree to incentive rules

In response to a wave of incentive chargebacks against Nissan dealers which resulted in a number of challenges to, and protests of, those chargebacks, Nissan has sent dealers a very important change to it sales incentive program rules. Dealership personnel will not be able to access new program rules without either the dealer principal or the executive manager first “accepting” the terms of the incentive program. The acceptance of the rules allows the dealership six months of access to the system, or until the rules are changed, before the dealer principal or executive manager must again enter the system and accept the terms of the program.

Why is this news?  This change to the way in which the incentive rules are accessed will place a heightened burden on the dealership to abide by the claims submission procedures. The dealership’s dealer principal or executive manager will no longer be able to argue that they were unaware of the details of a particular incentive program in challenging a chargeback for a failure of dealership personnel to comply with the program rules.

The express acknowledgement by the dealer principal or executive manager could also cause serious problems for the dealership if fraud is alleged in the claims submission process. All dealer agreements, including Nissan’s, state that if a dealer is found to have committed fraud in its submissions to the manufacturer, the franchise can be immediately terminated. Historically, it was difficult for a manufacturer to argue that the level of fraud involved in false claims reporting permitted a termination of the franchise because fraud generally requires “knowledge” by those approved to operate the franchise.

We fear that Nissan could use this new rule requiring the dealer principal or executive manager to accept all program rules to meet the requirement of “knowledge” in the situation where a rogue dealership employee was submitting false incentive claims. In that case, Nissan could move to terminate the dealership’s franchise rights. As a result of this concern, Nissan dealers should insure that the dealership personnel responsible for submitting incentive claims are intimately familiar with the incentive program rules and that the dealership self-audits its claims from time to time to prevent intentional or unintentional false claim submissions.

With estate planning getting kicked into high gear, the topic of trusts has been front and center and the thought of making gifts always brings up the subject of maintaining some form of control over how these gifts are dealt with. Generally, I am an active participant in this debate because trusts of all sorts and sizes are important tools in the business succession planning world. To that end, I am commonly accused, mostly by attorneys, of trying to do too much with a trust. I may be guilty as charged, but can you give it up for a little out-of-the-box creativity?

Overall, I believe that dealers are underserved by the average attorney and accountant who take a boilerplate, minimalist approach to the development and application of a trust. I believe that in the absence of an extraordinary attorney or experienced, persistent, out-of-the-box planning facilitator, the average trust falls woefully short of its potential to provide prudent asset management for all forms of estate assets, including the family-owned dealership.

So, why limit the fun to just the few with whom I have the privilege to advise and debate? Allow me to share with you my Time-tested Trust Axioms regarding this critical component of business succession planning:

1. If you have an interest in maintaining control beyond the gift transaction or grave, a trust is in your silver bullet.
2. The use of a trust is appropriate because access to and enjoyment of assets that were not earned through one’s own hard work and sacrifice can make the sane act crazy.
3. The trust is imperative: everyone is not gifted with maturity, self-discipline, knowledge and experience required to prudently manage significant assets.
4. If you don’t care what happens to your assets, including your business, you don’t need a trust.
5. If you don’t trust that your spouse or children will do the right thing with your assets after your death or gift, you need a trust.
6. There is no technical qualifier/criteria/requirement for a trust and no right or wrong motive or reason for creating a trust.
7. Trusts are personal asset-management and control structures that have the versatility to fulfill your personal goals, needs, desires and idiosyncrasies.
8. In the event of disability, a trust can help avoid the mother of all hassles — guardianship.
9. Generally, those who need a trust the most are those who resist a trust the most.
10.  All trusts should be developed with the expectation that at some point they will become irrevocable.
11.  Irrevocable trusts should always have provisions that make them revocable; otherwise they will predictably outlive their usefulness.
12.  Murphy’s Law should dominate trust logic: “if it can go wrong it will”. Therefore, trusts should address as many contingencies as practical.
13.  Trusts require a trustee who is trusted to fulfill control and management expectations.
14.  A trust is an unfortunate place for the control of a business to rest.
15.  A legal trust document rarely tells the whole story as to how the grantor wants the assets managed. A “letter of wishes” from the grantor to the trustee(s) should bridge the gap between the “trust management instructions” and the grantor’s “let’s get real” asset management and cash distribution goals for the beneficiaries.
16.  Manufacturers do not like trusts, but they have learned to accept them if structured properly and if the trustee goes through the motions to become an “approved shareholder.”
17.  All trusts should empower the trustee with the ability to hold beneficiaries accountable regarding drug/alcohol/gambling addictions, moral character and work ethic. Be selective – only engage trustees who are willing to assert the required accountability.
18.  Attorneys and accountants by training are not qualified trustees. Qualification as a trustee comes from financial management experience beyond having a license to practice law or accounting.
19.  The most important benefits of banks as trustees are deep pockets and immortality. The greatest liability of banks as trustees is talent turnover due to innumerable reasons, but most prominently, hiring cheap.
20.  Banks are qualified trustees for bank accounts and securities; acknowledging this, they are prone to convert any other asset into bank accounts and securities.
21.  Effective trusts require skepticism that demands that successor trustees are provided if the initial trustee is unable to or will not serve.
22.  Someone should always have the power to replace the trustee.
23.  Beneficiaries should not receive a principal distribution until they have been taught the principles of asset management and received on-the-job training by serving as a co-trustee for a sufficient amount of time in order to understand the basics of financial management.

There’s a lot at stake in business succession planning. Unfortunately, there are asset management and control issues beyond the gift or grave that appropriately generates concern and oftentimes impedes the business succession planning process. A trust is a very versatile and powerful planning tool and the details of your trust will reflect your perspective of this responsibility. Hopefully, these Time-Tested Trust Axioms will provide practical help with this important aspect of business succession planning.

The common excuse for dealership complacency is: “Well, this is the car business.” If you break this slogan down, what you get is: “Yes, we are a corporation with a P&L statement, balance sheet, HR department and sometimes shareholders to report to along with all the assorted corporate stuff. But when it comes to disciplined accountability, engaged employees, solid leadership and developing a Seal Team Six of our own, well, you know, this is the car business.”

Spoken like it’s a hall pass for not being in class. We all know, stupid is not illegal, but it sure is expensive! Average is everywhere because it is typically brainless. And, one of the biggest problematic issues facing many average or below average dealerships is ‘ignorance arrogance’ when it comes to management actively seeking ways to improve and grow the business and their employees.

Some just know it all (ha) and as a defensive mechanism, become arrogant when presented with new leading edge principles, which confuse their ‘rule set’ experience comfort zone. The damage arrogance creates in the work place is boundless. Arrogance creates a blind spot and overlooks things that can help you, your people and the dealership grow to greatness. Total all unit sales last month then divide that number by the number of sales people you have. The ‘average’ sales person in the car business sells roughly 10-12 units a month. So, where do you and your store stack up? Below, above or average? If it is the first or the latter, you need to refocus on some improved agenda items or simply remain average or below – C, D or F. You wouldn’t want your kids coming home with those grades, so why settle for the same for your business legacy? Time to shoot for the A and B grades.

To get you on the honor roll, a few new agenda items to check out in your store are as follows:

Be a visionary

Business gurus continue to speak about the importance of visionary leadership in any business. Why is it this industry largely doesn’t grasp the same concept that successful companies embrace regarding adopting a corporate vision for growth? Ready, shoot, aim seems to be the mantra. This will give you progressive deterioration if left unchecked along with high attrition, lost deals, lower profits, team disintegration and wandering people lost in the desert waiting for their next job. Put on a new pair of glasses and enhance your vision by taking your team to new heights of skill achievement. Do not confuse short term motivational ‘rah rah’ locker room sessions, product, certification or technical skills with team development enhancement.

Having vision is the cornerstone for true leaders because they cast out their sight way beyond the reaches of mediocre shortsighted managers who wait for opportunities and/or problems to present themselves before they act. These are the fixers and they usually bring people down with the store. Too little, too late. No, true leaders reach out to the future and envision ideas for business getting better, their team getting stronger and envisioning a dealership synergy that bonds the team together like Bondo. This is when everyone looks in the same direction instead of each other.

We must visualize our store and our people growing to the fullest potential. Then, constantly begin seeing the improvement areas to take them there every hour, everyday, every week, every month and every year. Your reward for this ‘corporate approach’ to running your business will be rewarding in so many immeasurable ways. The galaxy of opportunities will surprise you.

Plan for growth

The importance of planning is critical for true growth. You know, major league baseball players make millions of dollars but still get into the batting cage, work on pitch techniques and take grounders or fly balls to improve their skills almost every day in and off season. They don’t wait for the big game to mess things up due to lack of conditioning. Instead they recognize the planning importance to practice, practice and practice. If you notice big league ball player at the plate invariably you will see no two stances the same. Why? Because each individual is just that, an individual. What works well for one does not work at all for another. Similarly, your entire team: sales, service, parts, F&I, admin. Everyone is an individual and their skill sets are in most cases different from one another. Therefore we need to identify strengths and weaknesses in each then capitalize on the strengths by feeding and developing those strengths. Sure we have to conduct broad training as a group but the batting averages go exponentially up when someone can interview your employees, identify individual strengths and weaknesses and develop a ‘tailored’ training program (like BP in the batting cage) for each individual. Most, pro ballplayers if not all of them, have personal trainers to fine tune individual abilities even further. But many managers are too busy counting deals, complaining about gross profits and then beating up the team for failing to fulfill the aforementioned instead of utilizing their leadership talents to identify better ways to grow the business and the individuals they serve.

Think differently

“Great leaders and salespeople have an edge because they are able to let go of obsolete ideas.” –Donald Trump

Donald gets it and refuses to be pulled down by old school paradigms, which are often perpetuating the continuing madness of diminishing business and customer dissatisfaction in our industry. Everyone is saying the same things. Most web sites look the same. And, most dealers do nothing to create differential from their competitors or improve the skill sets of their sales and management team to promote solid leadership. Nothing limits achievement more than small thinking! When you start your car you should know the direction you are heading. Therefore, let your passion pull you forward and your planning give you direction for processes and development programs which endure the down times and prepare you to capitalize in the up times.

It takes time and effort to heal a sick or wounded dealership work environment. In laying the groundwork one must first recognize that a commitment to making improved changes is most important. Without this nothing happens and everything defaults to ‘business as usual’ very quickly and you lose credibility. I do not agree with the notion that in order to create an improved effective change in the way you do business takes a long time. In fact it can occur very quickly given a few cornerstones like empowering your people, sharing the plan with the team and providing them with economic news results as they occur. It enlists everyone in ownership of the initiative. When they are made a part of the initiative vs. being told what to do it sparks their ‘belonging senses,’ which in turn provides them with engagement in the position they hold. Disengaged employees cost you money, momentum and negative vibes which radiate throughout the store. So, give them the good stuff and watch them soar.

Empowerment should be a part of your overall business strategy. Secrecy breeds fear and worry. It sends a signal to your people that you do not trust them or think they are incompetent in absorbing the information. Next is investing in your people by investing in their skill set development, which ultimately makes you more money (duh). Spending money on your people over an extended time frame says to them “you are important to me and a valued asset to this organization.” The moment you clearly recognize that you really do achieve a competitive advantage through your people when they become ‘engaged employees’ everything else falls in place very nicely. Loyal customers are incubated through loyal work forces who are exhibiting the new relationship building techniques which energize them towards professional customer-centric selling skills.

Timing

A dealership can, unlike the Titanic, turn things around for the better much faster than most actually believe. How many times have you seen a sports team way behind in the game only to shock everyone by coming back strong when the chips were down to win the game? The patience element comes into play because you have to first give your team constant encouragement and pasture running room to build their skills and then continue allowing them to build them. Like a race horse, if you corral them their unused organs atrophy and never run again because you crushed their spirit. I have found that almost every sales consultant I have ever spoken with would eagerly accept the opportunity to grow and be challenged through affective new sales training strategies. Sadly, most never receive it as they wait for the next job opportunity.

No dealer or GM starts out intending to build a lousy store culture, or even just an average one. Would you get excited about going to an average restaurant with average food and service? How about hiring an average heart surgeon for your critical required operation? Maybe, but most people I know look for the best. Most dealers would like their team’s productivity to be born out of passion for the job and team synergy. Yet in this maddening marketplace, many dealers drastically fail to see the value they (and the team) can receive from well-conditioned, prepared and trained people. About the timing, I guess the question you must ask yourself is when do you want to see and experience a positive difference? If later or next year is ok then that is your mission time horizon course of action. If you want to make it happen right now then now is it. Now is always better than hemming and hawing around “until next quarter” because the stores that choose to implement now will blow right past you. Start a new agenda at the beginning of next month. Start your commitment plan for doing so now! The job never started takes the longest to finish. The biggest reason for failure to succeed is never starting. Just don’t get fooled into thinking like so many in waiting for the preverbal vacation spot – Someday Isle. Yea, someday I’ll start something new around here, someday I’ll look in to some new methods, someday I’ll train my people in new measures for success, etc, etc, etc. For most, someday isle never comes. Be the entrepreneur you are intended to be and do it now. Your people are looking to and at you for the fresh air to begin to blow. Breathe new life into the dealership and your people. Plant the seeds now for growing a harvest of opportunities down the road a bit.

Action

In order for the action step to succeed, the aforementioned steps need to be handled first. No more ready-shoot-aim. No, you are now taking all the planned steps to reap an abundant harvest of increase so get out the Leopold scope and draw a bead. Of course, to win the battle you have to have good, well-equipped soldiers. Winning is virtually impossible if your soldiers are weaponless, cold and starving. Three things have to occur for any great action achievement: purpose, persistence and patience. One tiny spark can ignite a raging forest fire and you can ignite enthusiasm for individual and sales team growth the same way. If you take actionable steps to make improved changes to your store you will reap benefits from doing so. If this is not a priority it will be like having a flat tire; then one day in the future you have to take care of it at a most inconvenient panic stricken moment.

Here are some beginning action steps I would initiate running any dealership:

1. Provide a long-term company outlook to every employee: Make your dealership the dealership where people enjoy coming to work because they see security and growth potential and a they are a participant in the planning.

2. Abide by the golden rule: Builds team unity, integrity, character, growth and an awesome overall morale.

3. Create an atmosphere where the business is like family: Comfortable environment allows for natural talents to become better. Let them know it is OK to screw up but provide them with the knowledge of how to do it right the next time.

4. Finally, challenge yourself to be the best employer in your market place: this will not only dramatically reduce attrition (huge savings) and increase business but attracts the best future employees because everyone will want to work for you.

Ask yourself this question: “What have you done for the first time recently?”

Faith that you can do something without action is useless. Worry immobilizes; concern moves you to action. The past should not be in front of you so take your eye off the rear view mirror and throw it in drive and speed to new successes. If you would like a refreshing approach to starting a new direction shoot me an e-mail at cbarker@dealer-communications.com requesting “action” and I will send you a couple of ideas.

Whose task is it to develop this environment?  Like most solid business endeavors of this critical importance it begins with top management’s creation, adoption, implementation and cultural adherence of the business concept.  Once this is accomplished, the responsibility is handed off to the sales managers and ultimately the entire team.  You see, starting at the top of the store’s leadership sets the course with sound ideas then, these concepts are transferred to the sales managers who can actually affect and maintain the changes outlined in the plan.  I firmly believe it then becomes the responsibility of the entire sales and management team to continue administering good sound fundamental business development deployment actions.  Roll it out.

The sales managers frankly are the critical pivot point.  They are the coaches on the field.   They must play this coaching role for raising the productivity of average performances and working with top performers as well.  Coaches also know how to maintain team work just like a football team that has one or two superstars.  The coach clearly recognizes the needs of the individual and the entire team because he cannot win without all of them on the field.  This often becomes tricky due to the high performer’s needs vs. the new salesperson or the average performer’s needs.  A ‘good’ coach leads their team to a winning season because they know everyone cannot be treated the same way and a working balance for personalities and skill sets has to be in place.  This does not mean that we bend the rules of our game plan; it means managers have to find flexibility in adapting to the various personalities on their team.

The coach who consistently practices sound coaching skills will always have an edge over all their competitors.  Any dealership can compete upon advertising dollars but no dealership can compete with you when the skill sets of your sales and service teams are top notch! It called differential.  How you choose to make your store different and more professional from your competitors’ will be the deciding reason customers choose your store and your people to do business.  The coach who cares about his people and knows the individual needs of his people is a coach who will begin getting results.  When the coach provides frequent leading edge sales, phone, relationship development, objection handling, negotiations and closing skills training he affectively keeps his team informed as to the progress and adjustments needed, and then provides encouragement and motivation towards the target goal; that the team will then be much more likely to improve their season record.  If you make every day game day, you will soon find your store and your people contenders for the championship.

Coaches play book should include:

Provide clarity in establishing each person’s personal goals.  How many units they feel they can sell?  How much money do they want to make?  What areas do they need help? Then break it down for them by showing and training them in the elements is required for fulfilling these goals.

Tell them about the big picture:

Every member of the team needs to know what the game plan looks like so be clear when you let them know.  People feel secure when there are no question marks lingering about the direction the coach is taking them.

Stay on top of the game plan:

Good coaches review constantly with the players in appraising where they are, how they are doing and what else is needed to succeed.   Just like sports, this does not happen after the game is over.  It occurs frequently throughout the game and in practice sessions.  Show the players once a week the adjustments and alignments they can take to come out on top.

Practice, practice, practice:

Every championship level team does this relentlessly and that is what makes them great.  Get yourself an in-house training solution so the practice can take place every week not just once every three months when a professional people developer comes in.  Training and practice is what develops the soul of a dealership but make sure the training is not some old tired dusty one.  Implement the new leading edge principles.  If you need some ideas on this, send me an email at cbarker@dealer-communications.com.

How times have changed! For the first time in almost a decade, the sale of domestic franchises is not only possible, it can be profitable.  Domestic franchises are in greater demand and have increased in value for several reasons:

• OEM balance sheets have been repaired and cost structures rationalized: General Motors and Ford recently received a credit rating upgrade from S&P and both are more profitable than they have been in years. With healing balance sheets and improved P&Ls, domestics are able to invest in product development and marketing, further strengthening their businesses and ultimately the value of their franchises.
• Product quality is equivalent to imports: Product quality has improved significantly, with most domestics ranking at or above high-volume import manufacturers for the first time in decades.
• Domestic market share is rising, often at the expense of high volume Asian imports. As Chart 1 clearly indicates, the current market share shifts are favoring the domestics at the expense of the high volume Asian imports – though much of this is currently driven by the effects of the Tsunami and the floods in Thailand.  That said, this shift may be difficult to undo given the yen’s recent rise, which limits Japanese companies’ ability to profitably buy back market share with incentives.
• Sales and profits at domestic stores are rising. In part due to the decline in the number of franchisees, sales and profits at domestic dealerships are rising sharply, in some cases to the highest level seen in years.

Chart 1

Market Share Year over Year Change

Date Source: Automotive News Data Center

*Midline Imports=Toyota, Honda, Nissan and Hyundai; Domestics=Ford, GM, and Chrysler

As a result of these trends, we have seen domestic franchises return to the top buyers’ shopping list. Chart 2 shows the breakdown of franchise acquisitions by the top 10 dealership groups in 2010 as compared to 2011 (YTD November). As you can see, the leading buyers are once again acquiring domestic franchises and spending less of their acquisition capital on non-luxury import franchises.

Chart 2

Franchise Acquisitions by the Top 10 Dealership Groups

Source: Automotive News, Public filings and Presidio Group market insight

Top 10 Dealership Groups according to Automotive News: The six public dealership groups, as well as Van Tuyl Group, Hendrick Automotive Group, Staluppi Auto Group, and Larry H. Miller Group.

In a lot of ways, the shift in buyer interest is not surprising given the potential return on investment available to buyers of domestic franchises. If you compare the blue sky multiples as published in Presidio’s August M&A Report (available at www.presidioautomotive.com), to manufacturer sales growth, you can see why buyers are once again interested in domestic franchises, see Chart 3. Buyers feel they can buy a franchise with above average sales growth at a low blue sky multiple, which could result in a high return on investment.

Chart 3

Sales Growth YTD November 2011 as Compared to 2010 versus the Presidio Blue Sky Multiples

Data Source: Automotive News Data Center and The Presidio Group’s August 2011 M&A Report

Despite the domestics’ market share increases, there are a number of factors that may keep domestic’s blue sky multiples lower than those of the high volume imports:

• Excess real estate. Most domestic stores sit on facilities that were originally sized for much higher volume. They have far more property than they need to meet current demand. These unproductive assets are still viewed as valuable by a current dealer, but may not add value to a buyer. Generally, the higher the property value, the lower the blue sky value.
• Facility improvements are needed. Many domestic facilities are old and require significant investments in order to match the level of appearance and customer comfort offered by import competitors. A high investment requirement reduces blue sky value.
• Supply and demand. There are still 10,288 domestic dealerships in the U.S. compared to approximately 4,600 midline Japanese and Korean dealerships. Dealership buyers have many domestic stores from which to choose, so they can look until they find a lower priced dealership. (Source: NADA)
• Lower profits. In 2010, the average Ford store selling 588 new units per year was making a lot less than the average Toyota store selling 1,201 new units per year. Most buyers are looking for higher earnings to support their investment in real estate and working capital. (Source: NADA)
• Weaker acquisition financing. The captive finance companies for Toyota/Lexus, Honda, BMW and Mercedes-Benz are very well capitalized and will offer attractive real estate and possibly blue sky financing to qualified buyers. These captives have access to a lower cost of capital than the financing arms of Ford, GM or Chrysler. Less attractive financing terms contribute to lower multiples for the domestics.

In the end, one of the factors that determine the blue sky multiple a buyer is willing to pay for a franchise is the franchise’s perceived investment risk. The greater the risk, the lower the multiple, while the lower the risk, the higher the multiple. As it relates to domestic franchises, we may be at a tipping point where the perceived risk is beginning to decline – particularly if market share gains stick. If the risk associated with domestic franchises declines, those who bought them at three to four times blue sky will certainly look like geniuses. Only time will tell. In the meantime, it is nice to see domestic blue sky value return and it will certainly be interesting to see where it heads in the future.

With the Penn State scandal that has recently surfaced, the legacy of Joe Paterno has stirred discussion as to what kind of legacy one will leave when their exit is less than ideal. Leaving a positive, lasting legacy and achieving Succession Success are contingent upon the smooth transition of leadership and management responsibility, all of which depends upon the exit strategy for “El Jefe,” the controlling and dominating leader/dealer. A well-planned exit strategy creates the needed space and opportunity for the successor to assume responsibility and learn from his or her mistakes.

All business owners think about exiting their business, some more seriously than others. These exit considerations range from visions and plans, to strategies. As these leaders are often addicted to work, an exit vision usually includes virtuous thoughts about withdrawal, and involves cryptic communication of intentions in various forms, such as carrying golf clubs or a fishing rod in the trunk. However, this vision is neither an easy nor often discussed subject. The inference from this type of “communication” is that if someone finds the boss unresponsive in his chair, they should nudge him and with no response call the paramedics to check for vital signs. With negative results from the paramedics’ tests, only then can succession planning begin. However this bold exit initiative should be pursued only with the understanding that if “da man” wakes up from a deep snooze – after all, he’s old and tired – in the ambulance, those who called the paramedics might as well start looking for new jobs.

An exit plan takes an exit vision one step further and would communicate verbally, (written memos are far too committal for the leader’s comfort) that one of these days the dad or the boss plans to take some time off. Unfortunately, that might consist of them just not going in to work on Saturday. If this miracle occurred and the boss discovered and acknowledged that in contradiction to all prior assumptions, the dealership did not crash and burn in his absence, the boss may then consider making plans for retirement. However the presumption of the boss is that his return was just in time to save everything from falling apart. Exit plans are not easily discussed, but when they are, there is no commitment and a tendency to back up or change timelines.

In contrast, an exit strategy is a written and communicated policy that stipulates through agreements, memos and board resolutions that as of a specified day, a transition of responsibility will take place and as of another date, the boss will transition to an oversight role as chairman of the board. The leader takes time to pursue other interests, remains accessible for questions and guidance, and monitors performance from the board level while providing the successor the opportunity to assume management and leadership responsibility. An exit strategy is a commitment without ambiguity, but with room for refinement as circumstances evolve and successors mature. An exit strategy does not have to be perfect, but it does have to be framed with commitment.

There is a lot at stake with the consideration, postponement, adoption and deployment of an exit strategy. In light of the high stakes, I have concluded that there are several succession planning absolutes that include:

• The transition from dreams and visions to the actual deployment of a kick-butt succession plan does not begin until the dealer makes a commitment to create room and opportunity for successors to begin assuming critical responsibilities and learning from mistakes.
• The probability for the continuation of success (succession) is directly dependent upon the time, effort and commitment applied to the development and deployment of an exit strategy.
• Not having a successor is a legitimate excuse for not deploying an exit strategy. However, there is no excuse for the profound loss of business value associated with not having a qualified successor.
• All effective exit strategies specify a time when the dealer steps back and the successor steps forward. An exit strategy without a timeline is just a dream.
• Management and leadership transition (the exit strategy process) must be led by the dealer. Without the dealer’s initiative and commitment, the transition will simply not happen.
• The “Joe Pa Syndrome” is always at play.

You think the automobile business is a young man’s game — what about football?  Over the last 19 years, since Joe Paterno was 65 years of age, he has been putting off the development, communication and commitment to an exit strategy. How many aspiring high quality coaches (managers), did he frustrate and drive out of football during this period? In Joe Pa’s defense, his goal was virtuous. Evidently, he wanted to be the winningest coach in college football. However, is it reasonable to question if he put his personal needs and priorities above that of Penn State (the family business)? If Joe Pa had exited at age 70, 75, or even 80, and given his handpicked successor the reins would Joe Pa still have been proclaimed “Mr. Penn State” for now and eternity? I submit likely so! However, what we see is a pitiful evolution of circumstances that forever tarnishes Joe Pa’s legacy and validates the Joe Pa Syndrome: The longer you put off an exit strategy, the greater the likelihood that something will go wrong. There’s a lot at stake with succession planning.

As I work my way around the patch, I am often asked, “Swami of Succession, how do I build the success that justifies succession planning?” It should come as no surprise to you that I don’t have a “silver bullet” answer to this very good question. However, I can share some “dos” and “don’ts” regarding leadership and management that I repetitively see as components of success.

Do understand the source of success

When it comes to being successful, franchises, incentives, hot merchandise, locations, buildings and processes are not the answer. Otherwise success would not be extra ordinary. No doubt the most coveted of dealership attributes help, but they are mere components of the engine.

Your people are the most perplexing resource that fuel and make your dealership haul ass or just meander along trying to keep up with traffic. Unfortunately as a dealer, leader and manager you cannot make your people hit the gas and seek the extra ordinary. You can only teach, coach, encourage and ultimately choose to maintain or exclude each employee who collaboratively forms your organizational culture. Your employees must choose to work together as a team, must choose to go the extra mile, must choose to seek success and they must choose to pay the requisite price to be extra ordinary. They do this so they can make your business better today than it was yesterday. Every choice by every employee has an impact on your success, good or bad. As a leader and manager, your “assignment Mr. Phipps” (Mission Impossible) is to inspire and motivate them to make these choices.

Do be a role model for the behavior, attitude, passion and commitment you expect

A role model is the best motivator known to man. Recognize that every supervisor sets the standards for everyone below them. Anyone near the top of the organizational chart is under pressure to set the standard for the entire organization. Optimism breeds optimism, energy breeds energy and passion breeds passion. Unfortunately you can also reverse the formula and acknowledge that lethargy breeds lethargy and pessimism becomes a self fulfilling prophecy. Therefore on those days when you or one of your managers doesn’t have the right stuff, don’t curse the field from which you are expecting a harvest. Stay home, go pound a golf ball or hang out with someone who can help you regain your focus and purpose.

Do expect the extra ordinary from everyone and express your confidence that they are going to deliver

Leadership is a game of sorts with the employees saying, “I don’t want to reveal really who I am by giving all I’ve got because my boss may discover I don’t have enough.” Unfortunately about 50 percent of your employees are scratching the bottom of their productivity tank and don’t have enough. However the others do have more to give and you will have more success if you simply acknowledge them along with the masses, continually expressing that you are depending upon their contribution and you are betting the farm that they will come through.

Do demand teamwork

You cannot compete without the willingness and capability to “do more with less.” A task master with a whip cannot create organizational alchemy whereas teamwork is the key to doing more with less.

Do praise that which is good

Don’t let any extra ordinary effort or achievement go unacknowledged. I assure you if you spend the bulk of your time affirming the good that your employees do, the “force” will pull from the dark side those who have not chosen to go the extra mile or they will be starved off the lot through lack of recognition.

Do not ‘praise but’

If you are motivated to praise a family member, manager or employee, let that seed of affirmation germinate into confidence and self-esteem before you follow with “but you can do better.” Otherwise, you are just wasting your breath and building frustration because no one hears a praise followed by a “but.” Minimally, use two sentences and lose the “but” or be prepared to be known as a butt.

Do not be crazy; assuming you can do the extra ordinary by continuing to do the ordinary.

If you are looking for different results you have got to be prepared to come out of your comfort zone and do things differently. Minimally that means new ways of doing things and probably that means new people that are receptive and motivated to try new things.

Do not tolerate mediocrity

Those who demonstrate that they are not willing to strive for the extra ordinary, not willing to subordinate personal priorities for team goals have no long term place in a successful dealership. Successful organizations are always in search of team members who will give their best and you can’t make room for dedicated team players or make them feel comfortable if slackers are hanging on.

General Motors has published dealers’ Retail Sales Performance Reviews for the calendar-year-to-date June, 2011. The report has also been posted on GM’s DART website. The Reviews place dealerships in one of five performance categories for the sale of new cars and new light duty trucks, respectively:

• Superior (100 RSI or greater and in top 15% of eligible dealers in the state).
• Satisfactory (100 RSI or greater but not in top 15%).
• Needs Improvement (85 to 99.9 RSI).
• Needs Significant Improvement (84.9 RSI or less but not in bottom 15%).
• Unsatisfactory (84.9 RSI or less and in the bottom 15%).

It is likely that many dealers will glance at their review and then toss it in the trash can. If you are being labeled as any of the following: “needs improvement,” “needs significant improvement,” or “unsatisfactory,” I would suggest that ignoring the report would be a big mistake!

The lessons learned from GM’s bankruptcy dealership terminations and the reinstatement arbitrations that followed are still very much applicable. The primary basis for GM’s termination of a dealer, and GM’s main arguments made to the arbitrators, was the dealership’s RSI performance was inadequate. GM argued vigorously that if a dealer could not maintain sales consistently at 100 RSI, which after all is performing at average, then the dealer should be terminated for failing to meet a reasonable minimum standard for performance. As I am sure all GM dealers have noticed, the “new” GM is no different than the “old” GM — the same company that terminated hundreds of dealers based upon their RSI scores. We should not expect a different approach by GM now.

Those GM dealers receiving a report that listed their RSI at less than 100, in either car or light duty truck, should respond in writing describing the reasons why you believe that the review gives the false appearance of poor sales performance. For many dealers this explanation will begin with a review of dealership inventory and lack of popular product.

Surprisingly, the Retail Sales Performance Review includes details of the number of each model vehicle earned by the dealership through June and how many of the earned allocation was turned-down by the dealership. In review of the allocation numbers included in these performance reports, it can be seen there is a consistent pattern showing that the number of vehicles allocated to those dealers is substantially less than the number of vehicles the reports reflect the dealership would need sell to be at 100 RSI. In some cases, the allocation provided by GM to the dealership is only 50% of the number of vehicles GM says the dealership must sell to be at 100 RSI.

Using GM’s own allocation numbers, dealers need to be replying to the Retail Sales Performance Review laying out the case that GM has failed, not the dealership, in its obligations. GM has to make available a sufficient number of vehicles, which would allow the dealership to meet 100 RSI. If GM is not capable of doing so, this is a prime example of a circumstance out of the dealership’s control that is giving the false appearance of poor sales performance.

In addition to woefully inadequate allocation of vehicles, dealers with a review showing RSI at less than 100, for either car or light duty truck, must consider GM’s recent change to the dealers’ Area of Primary Responsibility (APR) and Area of Geographic Sales and Service Advantage (AGSSA). As I have discussed in this column on a number of occasions, an increase in the size of the territory for which a dealership is responsible, or a change in territory that includes an area for which the dealer does not have the advantage over other same-line make dealers (even if that area doesn’t increase the overall size of the dealership’s APR), will automatically cause a dealer’s RSI score to decrease. Whether or not a dealer challenged GM’s recent changes to the dealership’s APR, if applicable a challenge should be raised in response to the Sales Performance Review. Having a territory assigned to you that is simply too large, or is mis-drawn such that other same line-make dealers are more convenient to the residents of that area than your dealership, is a recipe for a reduction in your RSI which is completely out of your control to correct.

GM dealers having an RSI less than 100, for either car or light duty truck, should also consider whether the use of a state average is fair under their specific market circumstances. There are certainly many states, which have such diversity in consumer preference that a comparison to the performance of other dealers within the same state is unfair. For example, in many metro markets there is a bias by the consuming public toward the purchase of import vehicles. If you are a GM dealer in such a metro market, there is a high likelihood that your RSI score will be below 100 in large part, if not exclusively, because you are being compared to GM dealers in other parts of the state where there is no such import-bias. If there is something unique about the purchasing preferences of the consuming public in your market as compared to other parts of the state, these factors should be set out in a response to GM’s Sales Performance Review.

One additional example of unique circumstances within a dealer’s market and outside of the dealer’s control, which is particularly poignant for GM dealers, is construction of an Essential Brand Elements compliant facility. GM’s RSI formula fails to take into account the disruption caused by construction at a dealership. We have GM dealers who have recently completed an EBE upgrade to their facilities at great cost to them only to have GM send them a Sales Performance Review showing their sales performance is less than satisfactory. These are facility upgrades, mind you, that GM insists that dealers make to their facilities! But for that insistence and the incentives tied to compliance with the EBE guidelines, most GM dealers would not see the need to renovate their facilities. So, for GM dealers who have conducted any significant facility construction during the first six months of 2011 and who have an RSI score of less than 100 in either car or light duty truck, we strongly recommend that a written response to the review include a description of the inconvenience to customers caused by the construction.

We have little doubt that the “new” GM is nothing more than the proverbial “lipstick on a pig” as compared to the “old” GM. Don’t be fooled by the lipstick, new GM would be more than happy to run dealers out of their franchise who they perceive are costing GM lost sales opportunities. GM, like most manufacturers, believes they always know best how a dealership is to be run and uses the arbitrary RSI formula to keep constant pressure on the dealer body without any consideration for a dealer’s specific market circumstances.