If you are an owner contemplating selling one or more of your stores, there are several steps you should take first before you even pick up the phone to call a broker. Being prepared will ultimately make the transaction smoother. 

As it’s often said, the devil is in the details.

The first phone call should be to your manufacturer’s representative. Discussing the intention to sell with your manufacturer will make the dialog easier before a potential buyer is even found. Among the things that need to be discussed with your manufacturer include understanding the manufacturer’s requirements to accept a potential buyer as a franchisee, as well as the steps in the approval process and the timing (for example, due to the holidays, getting a transaction approved late in the year is very difficult). It’s not unusual for a manufacturer to provide a qualified buyer certain incentives such as favorable loan terms or even a subsidy to purchase under certain circumstances.

The second phone call should be to your CPA to help you with putting together the financial information that the buyer will need. If your accountant has not had experience with buy-sell transactions and dealership valuation work, you should find one that has had experience with dealership transactions. Likewise, having an attorney that has closed on dealership transactions will make the transaction much smoother.

Your CPA, broker, and attorney will ask you for many records, so it is important to start assembling your records to be able to share them with these professionals. Typically, you will need to provide monthly dealer financial statements for the past two years (three is even better) and the year-end accompanying schedules for all key accounts including receivables, inventory, warranties, and so on. If you have audited or reviewed financial statements, you should have those available as well as tax returns for the business for the last three years.

The next thing will be to identify — with the help of your controller, office manager, and general manager — items that are “one-time” or non-recurring income and expense items like manufacturer’s facility incentives, litigation settlements, or gains from real estate or other assets. Additionally, if you have multiple stores and there are shared expenses between stores or a management fee from a management company that performs administrative tasks or has certain costs centralized (legal, insurance, etc.), you will need to explain how those amounts may impact the continuing operations of the store that is going to be sold. 

Next, evaluate your staff. Are there any employees that are being paid higher than average salaries (family members, long-tenured employees, high performers)? Your buyer will ask for a listing of employees and their position, pay, and so on. Being ready to answer this question will make the due diligence part of the transaction go smoothly.

All of these non-recurring charges, allocations, and other items have to be identified in order to arrive at the true operating income of the store. This analysis is often used to calculate the portion of the sales price known as “blue sky” or goodwill. While there are factors other than earnings that factor into the “blue sky” amount, blue sky is almost always a number that is a function of earnings.

Along with determining the operating income and the blue sky, other factors have to be considered that will affect what you will ultimately pocket when you sell the dealership’s assets. Among the factors to consider are the impact of recapturing the LIFO reserve, depreciation recapture, and other taxes that eat into your net cash to be received upon closing such as bulk sales tax.

Finally, one other area that is very often not given sufficient attention is your fixed assets and leasehold improvements. Having a physical inventory performed by an independent third party and tagging the assets can make the transaction go smoother. Consider using an independent appraiser to value your furniture and equipment, particularly if you have had a recent expansion and purchased significant amounts of parts, service, or body shop equipment. You can coordinate with the buyer so that the appraiser is mutually agreeable to both sides and even split the cost right down the middle so that there is no perception of a conflict of interest.

Once you’ve identified a buyer and a deal is imminent, the work doesn’t stop there, as the closing of the transaction approaches, there are several steps you will need to take to make the closing and the transition smoother including:

• Plan your communications with employees. There will understandably be apprehension about a change in ownership — get a step ahead by informing the employees once a deal has been reached.

• Keep an eye on your vehicle inventory levels and start making adjustments as necessary. For example, some agreements limit or exclude prior year models even if new. If you have new units that are aged, discount them and move them out. Having too many new units can make the transition to the new owner’s floor plan lender more time consuming.

• Make sure that your accounting office is keeping up with the posting of deals. A clean inventory schedule is easier to deal with, as the status of which cars are being sold and which are still on the lot will be easier to track during the closing.

• Have your back office verify that it has MSO for all new vehicles and titles for all used vehicles, with any exceptions noted with the status on obtaining the title or MSO.

• A parts inventory will have to be performed. Prepare your parts department for the inventory count by separating any parts that will not be part of the purchase such as obsolete parts.

As it’s often said, the devil is in the details. With proper planning and having the right professional team in place, you will have a smooth transaction. There are many other particulars as a seller that you need to consider, such as putting a price on your dealership based on the attributes that make your store unique, which we will discuss in a future article.

Juan C. Pena, CPA, CGMA is director in the audit department and risk advisory practice at MBAF, a top 40 public accounting firm.