Adding Profit Centers to Your Dealership

For some dealers, it was a good year last year, and for others it was just OK and could have been much better than it was. There is nothing you can do to change it now, but you can do something to make 2011 a better and more profitable year.

There are many profit centers you can add to your dealerships. One is a detail department. You are probably already detailing your own vehicles. Why not expand this service and offer it to your customers? It may not directly bring in a bottom line net profit after expenses, but it will keep your customers at your dealership for yet another type of vehicle service. It also gives your salespeople another chance to talk to customers about their cars and see if they are willing to trade for a newer and better vehicle.

Some new and used vehicle dealerships have expanded into buy here pay here (BHPH) or lease here pay here (LHPH) sales. By doing so, these dealerships have greatly increased their potential customer market and generated large gross profits from the sales and interest earnings from the customer payments.

One dealer I know has generated approximately $1 million of notes receivable and is creating approximately $20,000 per month in interest income as a result, while also experiencing a very low repossession rate by using selective underwriting processes. The vehicle gross profits and interest income helped the dealership generate a profit in a slow year, even after reserving some of the gross profit for future estimated repossession losses. The vehicles sold are trade-ins from his retail lot and probably would have been wholesaled before. The portfolio has grown steadily and will continue to do so with very little overhead attributed to it.

When your BHPH portfolio grows to approximately $1 million, it is probably time to review setting up a related finance company (RFC) owned by the dealer. The dealership sells the notes by year-end to the RFC at a fair market value discount (required by the IRS), which reduces the gross profits. This allows the dealership to reduce the large profits generated from the grosses and defer them until the cash is actually collected in the future to be able to pay the taxes on the gross profit.

It can also aid in collection efforts by separating the sales process from the customer payments. By creating an RFC, the RFC can still record the interest income, use the unearned discount deducted on the dealership’s books as a reserve for repossession losses, retain cash not used to pay taxes (until sometime in the future) and increase the net worth long term in a separate company. The RFC can also be used as a very effective estate-planning tool to shift future net worth to the next generation without any gifting limits.

Both a detail department and BHPH sales help increase traffic to your dealership with customers you would not normally see. Once you get them there, you have to find a means to retain them for life. If you do a good job detailing the vehicles and/or providing them with adequate transportation, they will be repeat customers.

Another way to retain customers is to train your sales personnel constantly in all the ways they interact with potential and repeat customers. One of the worst things I see happen in some dealerships is the lackadaisical approach salespeople take when talking to their ups, whether in person or on the phone. Some of these salespeople do not generate excitement about the vehicles or about the potential customer’s buying experience.

If the customer shows up at your door, they are probably more than just interested or they would not be there. Make the experience the most positive and happy experience you can.  They will be more than willing to make a deal with you because you have made an annoying and complicated purchase easy for them. It does make a very good impression, outside of the sales process, to also introduce the customers to the dealer; it helps create an even longer-lasting relationship. People feel important when they meet an owner of a company they are doing business with.

It is hard to retain unhappy customers. It is much easier to retain customers who really enjoyed buying a vehicle from you because you developed a relationship with them and they trusted you to put them in a vehicle for the right price and payment. These satisfied customers will tell all of their friends to shop with you. And guess what, they may even remember the salesperson’s name!

Vol. 8 Issue 2