Almost 20 years ago, Gary Duncan learned two very important lessons about the buy here pay here business. First: He could make a fortune in the BHPH business.
Second: Unless you really know all the ins and outs of collecting a debt, you might just as well forget about lesson number one.
Duncan knows a thing or two about car people. His family has been in the business since 1955 and now owns 16 retail franchises covering the gamut of foreign and domestic makes and models on eight lots. But that track record did give him a serious boost right where it counts the most in BHPH—financing.
An outstanding credit rating allows him to borrow money at the low inter-bank rate plus 1.35 percent. “Most Byriders are paying prime plus a few points,” said the dealer. “I have my car dealerships tied into it, so we had a good credit rating.”
In a business noted for independent operators, Duncan just feels like he’s made a better investment by going the franchise route.
With this kind of franchise, he explained, there’s a much more tangible way to demonstrate that he’s building equity in the business. If it gets down to it, Duncan believes that he’ll do much better selling a J.D. Byrider franchise than if he were just operating independent BHPH lots. “The reason I did this,” he explained about the franchise decision, “was so I would have something if I ever wanted to get out of it—like a McDonald’s.”
Learning From the Pioneer
Buying a J.D. Byrider franchise costs $50,000, said Bill Ackerman, vice president of franchising, but that’s just the ante to get into the game. A BHPH business like this takes a $1 million-plus infusion of capital to get started, he added. And Duncan is typical of most franchisees, operating more than one location. There are currently 57 J.D. Byrider franchises and 130 locations around the country.
“The business requires an enormous amount of capital,” said Ackerman. “You need your investment and the ability to get a bank to loan money to fund receivables, because we’re really in the receivables business.” Once a franchisee is up and running, they’re also paying royalties that average around $10,000 a month, and Ackerman said that most franchisees expect a lot of back-up for the money.
“We give them big-box retailing without the big box,” said Ackerman. “We invest heavily in training programs. There are seven courses from leadership to finance management, sales management, buying and reconditioning, accounting and sales, and collections—all the key business disciplines. In addition, we provide Web-based certified training modules for every position.”
Franchisees also get all the policies and procedures needed for a well-run BHPH operation and the computer system to manage it all. “We look for people with good business experience,” added Ackerman. “We need someone with the capital and a good business pedigree. If you can run a successful business,” he added, you can be a success in BHPH.
Because the BHPH business is more about collecting payments than selling cars, J.D. Byrider has constructed analytical tools to keep dealers on top of their portfolio. Each month’s loans are assembled into a portfolio of their own and tracked in a way that illuminates loss trends and spotlights collections.
Said Ackerman: “Like vintages of wine, each month becomes its own vintage, that’s what you collect.”
“One thing good about Byrider, they have a list they monitor through all the franchises—what to buy and what to stay away from,” said Duncan. “For example, Dodge van transmissions were flagged. We’re aimed more to the domestics. Imports are harder to buy in our price range. And we stay away from sports cars … two doors and … 4-wheel drives. You want the customer that needs transportation, needs a vehicle to get back and forth to work.”
Duncan also gets another assist from the franchisor identifying that customer. “We’ve invested heavily in a risk evaluator and take components like the credit bureau, job stability, budget analysis, the type of car they’re buying, how much money down versus cost,” said Ackerman. “It provides confidence while building millions in receivables that those receivables will perform.”
Another confidence-builder is making sure the customer is driving off the lot with a car that won’t quit on them. “We spend from $1,000 to $1,300 on reconditioning before we even sell it to a customer,” Ackerman added about the franchisees’ inventory. “And there’s always some form of limited warranty or service contract required, up to 24,000 miles and 24 months.”
Getting the sale, though, is just the beginning of the next big step: collecting the money the customer owes. That’s why Byrider is aggressive about making sure franchisees are creating a favorable reputation for themselves. In after-sale surveys, Byrider calls up thousands of customers every month to take their temperature and assess their experiences.
So far, the numbers say, so good. “We have 96 percent-plus satisfaction in sales,” said Ackerman, and close to that level of satisfaction in service.
Duncan’s built a successful record in Virginia, but he doesn’t sugarcoat the experience, either. His first lot in Roanoke sells about 50 vehicles a month. Blacksburg, a leaner operation, completes about 25 sales a month. That’s created a $7-million portfolio of receivables in Roanoke and $2.5 million to collect in Blacksburg. Duncan said he has about 20 people on the staff in Roanoke, with another 10 in Blacksburg.
“With Roanoke,” he added, “it is a larger market, and with extra volume you could grow the portfolio.”
In BHPH, you stick with the numbers that work. For Duncan, the magic number on any one of his vehicles is $5,200—the purchase price plus reconditioning. He’ll sell the vehicle for about twice that amount.
“Byrider has an interesting concept which I agree with,” added Duncan. “Byrider has taught us to cut the rate and shorten the term to get them to the end. Our costs went up and then down. Right now, customers are paying 23.9 percent over 36 months on a bi-weekly basis. And they get an 18 month, 18,000-mile warranty.” The warranty is generous, but it just makes sense when you’re collecting payments on a car. “If the cars don’t run,” said Duncan, “they don’t pay.”
Duncan discovered early on that staying in business is a lot easier when you operate your own service center. It’s also a very good idea to have someone on the payroll who has experience in debt collections. Duncan recruited someone with years of experience at finance companies, and he’s kept him on the payroll for seven years. “He knew collections. And that’s the key: collections. It’s like everything else,” he said. “You need the right people with the right background.”
“They have a great support system,” he added, “with great people to work with. Meetings are like a family reunion. They look after your interests.”
They get well paid for the support. Duncan estimates that he pays out about $12,000 a month in royalties, which is a percentage of the receivables on the books.
The demand in his part of the country is also steady. Virginia has the kind of demographics that work well in the BHPH business.
“We’re in a college area and Roanoke is very conservative,” said the dealer. “We never get pinched as bad as the rest of the country. We don’t go real high and we don’t go real low. You just don’t have the bloodbaths that are going on in other areas of the country. We’re more of a blue-collar place, with an average family income of around $35,000, $40,000 a year.”
That solid base of consumer demand is making him feel confident that his BHPH operations will weather the ongoing economic slowdown. “I would think it wouldn’t get worse,” he said, adding, “It will probably get better” as harder economic times increase demand for the vehicles and financing he provides.
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