-  Photo by Slatan via Shutterstock

Photo by Slatan via Shutterstock

Reinsurance company ownership helps dealers build personal wealth with tax-advantaged income. But performance can’t be measured in profits and losses alone. Properly selected and leveraged, the right program can benefit every aspect of your dealership enterprise — from F&I and fixed ops to succession planning and key manager retention.

Here are 10 mistakes dealers commonly make in their pursuit of maximum production and profitability.

1. Settling for the Factory Program

This was my biggest mistake when I was a dealer. The factories want dealers to stay loyal to their program — they want the profits.

Contrary to what the OEM says, their program is not necessarily what’s best for the dealer. Once you are signed up on a factory program, the factory then has control of and visibility into your service and parts operations. You could be subject to additional audits. You’ll also be subject to using factory time standards for repairs and the factory warranty labor rate instead of retail customer pay rates.

And if there’s an OEM warranty audit, the factory will have visibility — which can also bleed over into your reinsurance program. And there could be exposure for chargebacks.

You shouldn’t be settling for an OEM program. I strongly recommend that if you are considering this, you do your due diligence and compare other programs first.

2. Choosing the Wrong Program for Your Enterprise and Your Personal Finances

It’s very important for you to consider your future plan for the dealership. Do you have adult children who are going to be entering the business? Not understanding the tax ramifications of your decisions can cost you a lot of money in the long run.

It’s very important to have a long-term goal and planning session with your trusted advisors, including your CPA and attorney. Determine what you’re trying to accomplish — building long-term wealth or raising capital now. Also take a look at who is working in the dealership. Do you have partners? Do you have key managers?

Then consider your short- and long-term goals, and make sure you have a thorough understanding of the available programs. A thorough comparison of all the available programs and an understanding of how each can help you meet your short- and long-term goals is imperative.

3. Prioritizing Fees Over Total Profitability and Structure Benefits

When you form a reinsurance company, depending on the structure, you may have to come up with a set capitalization amount and pay fees to establish and annually renew your charter and file your reinsurance company's tax returns.

While it’s important to pay a reasonable fee, you need to take a look at the total net return or benefit after fees. "Low-fee" providers may not give you many of the critical benefits or the right structure, and you may end up finding you don’t have access to your money.

Once again, this is why it’s important to compare the programs side by side. A thorough review will cover about 30 questions and stack all the providers up against each other. In my experience, the programs with the lowest fees are the least likely to provide the structure, service, support and reporting you need.

Be fee aware. But don’t make the fees the focus of your program selection.

4. Not Managing Rates, Claims and Trends

Rates are very important — these are the costs that the F&I managers are selling from inside the F&I office. And there are many things that affect rates — certain cars that have a higher breakdown rate and increasing parts prices, for example — so you need to adjust what F&I is charging. You must choose a provider that fully comprehends this.

If you’re not staying on top of those rates, comparing those to actual repair trends, comparing them to your loss ratios and loss severity, and making sure to make at least annual rate increases and doing some reserve and rate analysis, you will very quickly see repair costs go up, and then find that you’re not collecting enough. This will negatively affect profitability in your reinsurance company.

Follow the trends. Make sure your rates are not necessarily just competitive with the factory rates, but that you’re also collecting enough money to maintain a healthy loss ratio inside the company.

5. Not Understanding How or When to Take Loans or Dividends

Too many dealers fail to involve their key advisors and their CPAs as they set up their reinsurance companies. Understanding the ability to take dividends and loans is a very important aspect of building wealth.

Some providers allow loans only from earned premium. A few providers also allow loans from unearned premium. You want a provider that is very sensitive to your changing needs.

When a dealer decides to take distributions from their reinsurance company, they often take dividends when they should actually take out a loan. There are no taxes on loans as long as they’re repaid, but there are taxes on dividends.

You and your provider have to know what the money is going to be designated for to determine the best option. It’s a good time to involve your CPA. They need to know what you're trying to accomplish, because once the dividend is taken, it can’t be paid back — nor can you recover the taxes you paid.

6. Not Leveraging Reinsurance in Your Succession Planning

I often speak at 20 Groups and ask dealers about their succession plans — is their adult child or a partner prepared to buy them out of their business?

With valuations of dealerships so high, it’s often difficult to raise the working capital to buy one. The greater a dealership’s net worth becomes, the larger the estate tax issue a dealer is going to have.

Reinsurance companies accumulate a tremendous amount of cash and deferred profits. If your children want to buy the dealership in the future, consider forming one or more reinsurance companies in their names now.

The profit and cash flow from these companies will go to them, with an agreement and restrictions that they’re to use the money to buy stock in the dealership. This way, they get a stake in the success of the business — but not the business itself — and help raising the working capital they’ll need to buy you out when the time comes.

7. Not Leveraging Reinsurance as a Key Manager Retention Tool

If you run a good operation, your competition is going try to steal your key employees. These people are the lifeblood of your business. They are incredibly hard to replace.

The innovative dealers I work with involve their GMs, GSMs, F&I directors and other key managers in reinsurance company ownership. This gives these key players an opportunity to share a small percentage of the reinsurance premium and profits and become part of something that’s going to build long-term wealth for them.

The dealer then has control over how much is deposited in the key manager’s company, which acts like a deferred compensation plan. Best of all, forming reinsurance companies for key managers makes it much harder for other dealers to poach them.

8. Not Understanding Tax Benefits and Strategies, and Not Involving Your CPA

Many dealers don’t know that the tax structure that makes reinsurance possible has been around for nearly 40 years. It was part of the Reagan administration’s Tax Reform Act of 1986. Like all taxpayers, dealers must report and pay taxes on their earnings. But reinsurance company ownership creates a significant advantage that can help reduce your total liability.

The deferral of taxes until the money is drawn out is one of the great benefits of reinsurance. A strong provider with a proven success track record will recommend involving the dealer’s CPA and attorney throughout the entire process as well.

9. Not Comparing Providers on an Equal, Side-by-Side Basis

We find there are about 30 comparative questions that need to be asked of each potential provider, so you can have a thorough understanding of what they do and don’t do.

Consider, for example, who’s going to do the best job delivering F&I and compliance training, which providers offer the most sensible and liberal loan policy (if you need a working capital), and how much involvement you will have in claims.

When you lay these questions out on a side-by-side basis, it becomes fair to everybody. You end up knowing exactly what you’re paying for. That will help you make a good, articulate, analytical decision.

10. Choosing a Provider that Restricts Your Rights of Ownership

Too many dealers choose a provider that restricts your rights of ownership. If your provider doesn’t let you have involvement with high-dollar claims, doesn’t meet with you on a quarterly basis to look at trends and losses, doesn’t have innovative products, doesn’t allow you to choose the investment manager or manage the funds, or doesn’t allow you to borrow earned and unearned premium, you may have chosen the wrong provider.

Dealers should demand all of the above as well as transparency on fees, claims and reserves and useful, understandable reporting, counseling and consulting. In short, you need to know how the reinsurance works and how it’s going to work for you — now and well into the future.

BONUS Mistake No. 11: Not Realizing the Substantial Amount of Net Profit, Cash and Working Capital a Reinsurance Platform Will Provide You and Your Family

When I was a dealer, I made this mistake because I did not understand how reinsurance worked. Only after I sold my dealerships did I realize the massive amount of money I left on the table.

Reinsurance company ownership will help you and your family build personal wealth outside the dealership. It’s your own financial asset, separate from your retail enterprise but fueled by its success. If you have yet to take advantage, you are giving your underwriting profits away.

Make reinsurance an urgent matter. Get into the right structure with the right provider right now, and avoid the mistakes that leave tax-advantaged income on the table.

Properly selected and leveraged, the right program can benefit every aspect of your dealership enterprise.

Graye Wolfe is a former 10-store, 14-franchise dealer from Boise, Idaho, and senior managing director for Portfolio, a national provider of reinsurance and F&I programs and products. He is also the founder of Performance Improvement Concepts and a graduate of Northwood University and the NADA Dealer Candidate Academy.


"Properly selected and leveraged, the right program can benefit every aspect of your dealership enterprise."