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The Fifth Essential Element: Structuring the Deal

Fifth in a Series of Articles on the Eight Essential Elements of Special Finance

In previous articles, we have discussed the first four elements – Commitment to the department, Inventory, Personnel, and Lenders. It is now time to look at what must happen at the point of customer contact as this month we discuss the sales process and structuring the deal.

There are two components of this element. Whether you are working a separate or blended floor, you must first use a process that allows you to identify a Special Finance customer before they are allowed to settle on the “car of their dreams”. The second component is the actual mathematical process that is used to structure the optimum selling price.

Sales Process

Whether a separate department within a dealership, or working as a blended floor, perhaps the most important step in the Special Finance sales process is to be able to identify the SF customer at the onset of the sale. Every day in 9 out of 10 dealerships in the country, potential buyers (SF customers) are blown out of showrooms after an unsuspecting sales person or desk manager allows a customer to select a vehicle, which in turn they present and sell, and eventually close subject to terms that they can never get approved by a lender. Often the blame or criticism is turned to the finance manager or Special Finance manager (aka the Miracle Worker) who is perceived to be ineffective if they can’t get the deal done.

As I have written in the past, it would be ideal if the customers were required to report to a balloon rack and select a colored balloon to walk around the dealership with – either a green balloon for those with good credit, or a red balloon for those with sub prime credit. That would make the sales process so easy. It would help keep a sales person from directing customers to, and working deals on vehicles that the customer could never qualify for, nor afford.

So how do we quickly make this determination before we walk the customer down a dead end road?

For those prospects which the SF Manager or department has attracted as leads, then contacted and set appointments to visit the dealership, that process is simple. The credit status of the customer has already been established, and once the customer arrives at the dealership the sales process is already set.

On the other hand, if the typical customer happens into the showroom without prior contact, unless they are carrying a red balloon, the situation is anything but clear.

The key, regardless of the department structure, is to insert a simple, non-offending qualifying question or two into your meet-and-greet process. It can be as simple as, “Are you here for the big sale today? Great! Are you interested in our special [insert the appropriate number] 0.0 percent APR interest rate program for people with above average credit?” (Green Balloon – proceed with your normal 10 steps to the sale) “No, then would you be here to take advantage of our special financing programs to help you establish or re-establish credit? Great, please follow me inside and we can get you quickly pre-approved.” (Red Balloon – proceed with the traditional SF sales process.)

In some stores, the “Red Balloon” will mean turning over the customer to the Special Finance sales team or department. In others, it will mean beginning to offer the customer the opportunity to discuss their credit background. Ultimately, with the SF customer, it means that the focus shifts to qualifying for financing rather than looking at a specific vehicle.

Once identified, the SF customer is shifted out of the typical 11 steps to the sale. The process begins with getting a customer statement and getting a credit bureau report as early as possible. With that information available, a SF or desk manager can assess which, if any, programs the customer will qualify for and what budgetary constraints will exist with the available lenders. By doing so, it will mean that SF customers are much less likely to be shown vehicles that they cannot qualify for, meaning the dealership will have a much better opportunity to deliver a vehicle, and the sales process for these customers will provide a much more positive buying experience.

The metaphor of using green balloons and red balloons may seem simple and childish to some, but for those that understand how important these qualifying steps are to a Special Finance department, it can turn the sales process into child’s play.

Deal Structure

Once the appropriate lender has been identified, the steps begin to structure the deal. To maximize gross profit there are four factors to consider.

First you must realize that “Backwards is Better.” Work the deal backwards from the maximum available advance from the lender, making sure that you ask for all of the available sale price, but no more. We will revisit this later in this article.

Factor number two is inventory. Make sure that the vehicles you suggest match the customer’s – and as importantly the lender’s – budget. Don’t try to put a size 13 foot into a size 8 shoe. You want to select vehicles that you are able to sell at full maximum gross profit as opposed to one where the lender will cap the sale price due to advance or maximum allowed monthly payment.

Factor number three is down payment – don’t be afraid to ask for it. The highest grossing dealers in SF 20 Groups consistently average the highest down payments collected.

When working deals from the bottom up, down payments become additional gross profit. If you start working a deal from the lender’s minimum down payment required to make a deal, you will be leaving significant gross profit on the table.

The fourth and final factor involves good relationships with the lender, and the “art” of rehashing deals. Most lenders have “wiggle” room, which will give them some flexibility to help put deals together. Don’t be afraid to ask for a rate concession or reduced discounts on deals already approved.

Just keep in mind that “Pigs get fat and hogs get slaughtered.” Don’t be too greedy.

Now, back to working a deal “bottoms-up”. No, I am not talking about chugging the nearest six-pack. Let me refer to the following example to explain what I mean.

After reviewing the customer statement and credit information, you feel certain that Mr. Jones will only qualify through a lender that will advance 110 percent of invoice or NADA trade value for the vehicle, and 135 percent of the NADA trade including tax, tags and after-sale products. Additionally, the lender will cap the payment at no more than 20 percent of Mr. Jones’ monthly income. This isn’t a problem if you are aware of it in advance, but, if you have a customer sold on a vehicle and need to finance MSRP or more, you are obviously in big trouble.

First, we must determine the maximum monthly payment allowed by the lender. We simply multiply Jones’ monthly income by 20 percent, and we immediately know what the upper limit will be.

From there, our vehicles should already be booked out (or we should be using software performs that function quickly). This allows us to know which vehicles will (at full gross profit opportunity) fit into applicable payment ranges.

Jones’ then would be directed to three vehicles that will all fit inside the lenders’ payment limitations. (My stores would select the highest potential gross profit, the oldest unit and a vehicle slightly less expensive than the other two.)

Once Jones has selected a vehicle, to calculate selling price, we would multiply the Average Trade Book Value by 110 percent. This amount, plus the available down payment, will be the maximum sale price that the lender will finance (also providing the maximum gross profit on the deal without getting any additional down payment from the customer). Considering this is the maximum, you wouldn’t negotiate a deal resulting in a higher sale price, as you know in advance that the lender won’t fund it. Finally, multiply the same book value by 135 percent. This amount will be the maximum amount that can be advanced in the deal. To determine how much room there is for back end product, we subtract from the 135 percent amount the 110 percent amount, then any monies required to cover tax, title and tags (since we have to record perfect a lien). The remainder is the amount of money available to sell a service contract, GAP, credit life, or any other back end product.

Assuming Mr. Jones’ agreement, using this process you have now a structured a deal that when contracted will fall within the lender’s guidelines, and provide the maximum gross profit available on the deal. It also staves off the dangerous situation requiring you have to bring the customer back to the dealership and re-contract, which always potentially leads to the deal coming undone … or worse.

To review, the process and deal structure can be summarized by a few simple but vital steps.

First, you must determine whether the customer is a prime or SF customer. If SF, attempt to gather the vital credit information to allow you to determine any applicable lenders that will finance the customer.

Determine which vehicles the customer will qualify for. After selecting a vehicle, work the deal backwards for maximum gross profit.

To maximize gross, make sure that you work the deal backwards, that you have the customer directed toward the proper inventory, that you obtain as much down payment as possible, and that you rehash deals with your lenders.

For one in ten dealerships, this is a routine process that is an everyday occurrence; for the other nine out of ten that don’t, give it a try. It will be an opportunity to add both additional deals, and significant gross profit to the bottom line.

Vol 2, Issue 5


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