Don’t Be Timid: Lack of Liquidity Paired With Fear and Ego Becomes a Lethal Mix

Over the past couple of months, I have both spoken to and worked with some dealer groups that are getting kicked in the teeth big time. I am talking about seven-digit reversals over the past year (some involving very successful long-term dealers). What is really painful is watching a couple of them in particular – people I consider good friends – come to the point where they have had to sell or shut their doors.

More will be faced with the same decision. A domestic dealer called me looking for help recently; he has been in the red for 21 of the last 25 months. I asked him how liquid he was, and he could only offer a forced laugh. He has owned the store for years and years and is suddenly staring the end square in the face.

For certain, not every dealer is losing their shirt. Some have improved profitability over the past year, and a few have even increased sales volume. Most of them took prudent and necessary steps as 2007 ended and the calendar turned to 2008. Others did not.

If you haven’t noticed, I strongly believe there has been a permanent shift in consumer buying preferences. GM and Ford believe so, as they have begun slashing their production of full-size SUVs and pickup trucks. If a company so dyed-in-the-wool as what Ford used to be can make such drastic decisions (kudos to Alan Mullaley), you’d better believe this market shift isn’t just a blip, and Ford’s and GM’s actions set the foundation of profitable operations going forward.

The difference is that even Ford and GM have enough liquidity (I think and hope) to bear the consequences on their financial statement. Many retailers, especially the small- to medium-sized ones, don’t. Based both on conversations with dealers and the financial statements that I have seen, I would bet one in four dealers currently is out of trust on their floor plan.

A twist on an old adage would be: bad decisions get you in trouble, and pride keeps you there. In this case, lack of liquidity causes bad decisions. Mind you, they may be the best decisions that can be made in a tough situation, but they are still decisions that would be avoided if cash wasn’t an issue. This is what starts the spiral in motion.

I don’t have to tell you lack of liquidity is serious. Cash is king. If you are currently one of those dealers who is out of trust and out of cash, it is time to deal with it. Either find a way to recapitalize the dealership properly, go to your floor planner and create a work-out plan or find a buyer. Delaying it with lack of action due to fear or pride will just cost you more money, as well as run you out of options that might currently be available. Don’t kid yourself that you can sell your way out of it. How much gross profit would you have to generate to turn it into net profit and enough cash flow to cover the current deficiency?

Unfortunately, it gets worse. Dealers are sharp people. They didn’t get to their place in the business world because they are dolts. The problem is, there are many who have risen to a certain stature, and once they’re there, they don’t want to do something to cause them to be perceived as weak or as a failure. This fear causes them to ignore or forestall necessary actions that are not only prudent, but also vital for the viability of the operation.

Often these decisions involve people. Sometimes they are long-term employees or even family members – siblings and/or in-laws—certainly not bad people, just non-productive. In good times, strong profits and cash flow can hide the warts and the flaws that have always been there. That is not the case in 2008 where the fluff is stripped away. Six different troubled dealers immediately come to my mind who all have very highly paid, non-revenue producing, non-beneficial (even detrimental) employees on board who seriously erode profitability and liquidity. I have discussed the situation with each of them. They just can’t make themselves deal with it, out of either fear or pride—sometimes both. It really won’t matter, because their indecision will be lethal when the last of the cash is gone.

The retail auto business has never been easy. It requires one to invest a significant amount of capital, have strong business skills in a number of diverse profit centers, and be able to surround oneself with skilled and productive people. It is even more difficult in tough economic times, which I firmly believe will remain in place until at least the third quarter of 2009, if not January 2010. Don’t be afraid to make the tough decisions today to ensure that you will not only survive the next 18 months, but thrive. It is not the time to be timid.

Until next month,
Be strong!

Vol 5, Issue 8