Dealer Ops

Five Perils the Independent Dealer Should Avoid


“Business at buy-here, pay-here dealerships is picking up as bigger, nationwide subprime lenders tighten credit, or quit the business. As other lenders raise their standards, buy-here, pay-here dealerships are the only option for thousands of high-risk borrowers who need a vehicle.”

 

Believe it or not, that quote is from an article written by Jim Henry and published in November, 2002 in Automotive News. These same words carry a more pertinent meaning in the industry today. In fact, for many independent dealers, they are words of survival.

I’ve seen the numbers and read the reports about the demise of the franchise dealer during the last year—that we are losing as many as two franchise dealers per day to the recession while many others struggle to survive. I agree, it’s sad to see and painful to watch, but what you don’t read much about is what is happening to independent car dealers across the country. And I will tell you, my heart goes out to many of my fellow “indies” with corner lots in Smalltown, America, because the number of them going out of business is as high as 10 per day.

How do you avoid being one of them? Watch out for the five perils facing independent dealers.

5 Perils for Independent Dealers to Avoid

1. Lost Sales
–Vehicle sales have been off for several months. This hits the independent dealer particularly hard because whenever new car sales are off, franchise dealers keep more of their trade-ins and put more effort into selling used cars. Lately, many large auto groups around me have become my competitors since they have jumped headfirst into the special finance pond and muddied up the water for everyone, especially the customers.

But, just like I told my staff, patience, persistence, fundamentals and good, old-fashioned customer service will win out in the long run. These times remind me of when I first started out in the car business. In order to stay in business, I had to sell to less desirable, lower-income, credit-challenged customers, the ones who naturally showed up at the door from word of mouth. Ironically, it’s these same customers who are paying the bills for us today. They put me in business and are keeping me in business.

Lesson: Know exactly who you are. Understand your niche, and remember to take excellent care of the customers who brought you to the dance.

2. Floorplans – Many independent dealers, even the more conservative-minded, started floorplanning their inventory when sales and profits were up. We all wanted to grow. We were making money and a floorplan created a shortcut to rapid growth. However, what happens when sales stop? The bank wants their money and the inventory you bought 90 days ago has depreciated faster than Lehman Brothers stock.

Many floorplan companies waste no time with independent dealers who are late on their payments today. I know of several dealers who had their inventory repossessed the moment they became delinquent, which just compounds the depreciation problem when their inventory is dumped at auctions, driving the prices down even further. The good news is there are great deals for those of us who have the cash.

Lesson: A strong reminder of something that every independent dealer knows—cash is king! Growth is great, but remember, don’t grow too big for your britches. The seams may come undone at the worst possible time. Always have an exit plan for reducing your debt quickly.

3.   Lost Finance Sources – If you’ve ever wondered what it’s like to be an outcast or the black sheep, try being an independent car dealer today who specializes in subprime sales and finance and you will know firsthand. We must be the least desirable customers in the banking industry; nobody wants to do business with us.

Now, to give the Devil his due, we are paying for the sins of several less-than-ethical dealers who left the banks holding the bag—or paper. The end result has not been pretty for those who have enjoyed years of strong relationships with the top finance companies.

To solve this problem we have relied more heavily on our own related finance company (RFC), or buy here pay here (BHPH) as it’s better known. For those customers who warrant a more expensive vehicle, we have worked out a recourse agreement with a local credit union to finance them and the combination is working great.

Lesson: Again, cash is king! Fourteen-hundred payments per month at $90 each are excellent reminders of what business I should be in. Take matters into your own hands and control your future by relying less on outside vendors and finance companies, but also treat the existing relationships with your finance sources like they are the most important to your business because they are. Lastly, take a good look at BHPH. It’s not for everybody, but it is the core of special finance. I can’t imagine not being in it, especially today. It was the best business decision I ever made!

4. Legal Compliance – It’s not enough that we have multiple battles to fight on several fronts, but this one called legal compliance can go unnoticed for years, slowly building up until one day, bam! It hits you like a kamikaze attack that can instantly put you out of business. It’s an issue that simply cannot be overlooked, ignored or put off until you have more time to deal with it.

The new Red Flags Rule, Gramm-Leach-Bliley Act, Truth in Lending, OFAC, Fair Lending Act, and all the state and DMV/BMV requirements make a business that was once a walk in the park like walking through a mine field today. Pay attention and be careful. The consequences are just too costly.

Lesson: Don’t overlook or underestimate the significance of becoming and staying legally compliant. Know the rules and mandate that compliance become the culture of your organization.

5. Managing the Budget – Remember, a car dealership is a business, and for many of us, it’s our way of life. If your budget gets out of whack, there is no time to hesitate. There is no time for blame or sulking about the economy. You can lose $50,000, $75,000 or even more in a blink of the eye, and before you know it, there’s no money in the checking account.

If this happens, don’t look for Uncle Sam, your banker or anyone else to bail you out. You’re not General Motors! It’s not going to happen. Instead, you have to be proactive. Know your financials and manage them daily.

It’s too easy to get comfortable with all the toys, gadgets, latest software and services, and even the people who become like family but cost you money. If it’s not making you money, saving you money or saving you time, you probably don’t need it. Get rid of it and do so in a hurry because time is money, and every day you hesitate could be costing you a fortune.

Lesson: There is a huge difference between needs and wants. Keep what you truly need to operate your business and get rid of the rest. Check and manage the budget daily, and when you see problems, act immediately. Don’t hesitate, because an unprofitable dealership is an unsafe place to work.
 
 

Vol 6, Issue 2

About the author
Ben Donnarumma

Ben Donnarumma

Contributing Author

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