There are a couple of philosophies that exist with entrepreneurs, including BHPH auto dealers.
The dealer principal may have relevant experience in the auto industry, or just be a businessperson with an idea for greatness. Regardless of a dealer’s background or motivation, they need to have the mindset of building a business they could sell and use that groundwork to help build a foundation for important decision-making. Planning that includes the possibility of a future sale is prudent, as selling the dealership may be the homerun you’re seeking.
Each dealer approaches their dealership differently which may include an original idea, a refined approach – innovation, etc. that sets them apart.
I think dealers are definitely entrepreneurs as they put their vision in motion by developing a business plan (if only in their mind), take on serious risks, and believe that their idea will generate profit and income.
Many businesses are established because the owner believes they can build a successful, profitable business which, with any luck, will provide rewarding income that will carry them into the distant future. On the other hand, other owners are not as interested in the long-term operation of the business. It’s more of a quick fix approach to planting the seed, growing the “tree,” and harvesting the reward by selling the apples, so to speak. We’ve all seen it before where businesses begin with the sole intent of selling it in a reasonable amount of time for a substantial monetary reward.
How do these two models of long-term vs. quick fix differ? They don’t. In either case, the same requirements and considerations exist for success.
Although the following list are just examples, they are extremely important to keep in mind:
A high-quality business plan is necessary in order to determine your initial and longer-term capital needs.
That is, the investment in your business. If you are fortunate to already have enough funding in hand, either from your own resources or with the aid of an additional investor or two, that will save you time and effort. However, outside investors are expensive as they typically expect a percentage of the business with a return that may be higher than the amount of money they are willing to invest. Once you have decided on what your dealership concept should be and the why to your business brand – older, cheaper vehicles or newer, lower mileage vehicles with a higher upfront cost – you will need to determine markups, to arrive at top-line revenue. Let’s see, then there’s overhead which always seems to be higher than you would like. Also lot and building purchase/rent, staffing and compensation (don’t forget benefits), utilities, furnishings, signage, lighting, fencing, advertising, tools, possibly a lift if you will be doing your own reconditioning, etc.
There are many considerations, but once you’ve formulated these basics, you should locate a CPA or other financial person who can help put together a sales and expense forecast for your business.
It is better to think about cash flow budgets up front, and what it takes to run a profitable business, rather than get caught flatfooted later. A professionally prepared business plan with a forecast can be very helpful to support your day-to-day operations as well as showing potential investors and bankers that you are starting on a professional note. The business plan provides a good reference point for your budget enabling you to frequently compare it to actual results. This consistent check-in on your business helps you evaluate any adjustments that might need to be made. Having a solid plan also helps prevent entrepreneurs being lured in by the newest gimmick. Knee-jerk decisions can be avoided if they were not originally considered in the forecast, unless there was an oversight that needs to be included.
Where to obtain vehicles to build your inventory for resale is an important consideration in your business plan.
You need to answer questions such as how to finance the inventory. Should you utilize an inventory floor plan? There are several floor plan sources, some better than others. This is an additional opportunity to use the services of an experienced dealership financial expert to assist you in choosing a floor plan provider. You will benefit from having that expert assist you in reading the floor plan agreement and deciphering the true cost of the floor plan credit line. There is more involved than just an interest rate, including curtailment charges, advance reductions with aging of the inventory, inventory audit requirements, etc., all of which can cost you more than you may realize.
Staffing is an important consideration.
An incompetent or dishonest employee can cost you much more than selecting a person with good experience, good references, professional appearance, and verifiable job knowledge, even though their compensation may be higher. Compare an employee with the right qualifications and higher compensation to the cost of an employee who is disruptive to your business and/or causes dissatisfied and angry customers. Not only could you and the dealership gain a bad reputation or worse from business mishaps, you could also be sued. There’s little chance that an unhappy customer will be a long-term lead source or a return customer for you. Selling cars is a relationship business and people matter.
Knowing compliance with regulations from your state regulator and the Consumer Financial Protection Bureau (CFPB) is critical to running a successful dealership business.
Many times, a new dealer is unaware of all the requirements or will assume that they will not be bothered by regulators because the dealership is comparably small. Small is not a safe harbor. All it takes is one customer to complain about unfair, deceptive, and/or abusive practices or treatment raise a flag and trigger a compliance audit to be scheduled. The result could lead to significant fines, negatively impact the dealership’s reputation, or worse case shut your dealership down. Compliance training is easily available from numerous reputable sources, including your state association, specialized attorneys and other private vendors. The small cost to gaining an understanding of compliance and regulations will be well worth it as you put the key concepts into your day-to-day operations. These standards, which are generally good business practices, should also minimize customer complaints.
Make sure that your staff understands that customers should always be treated with dignity, whether in the sales, collection, or even repossession scenarios. You do not want to cause complaints to be filed with regulators or attorneys. Not being respectful of or humiliating a customer will only cause animosity, costing time and money. Taking the professional high road is always best.
Computers and software/apps are becoming essential to run a successful dealership.
Automating processes with business technology has been designed with the auto industry’s needs in mind. Fortunately, there are several quality providers whose Dealer Management Systems (DMS) platforms are stable and relatively easy to learn and use. The DMS usually includes a link to a general ledger system, enabling a good bit of automatic posting of entries as well as producing financial statements on a routine basis. Technology with installation and maintenance can be somewhat expensive. Prior to buying, talk with other dealers and gather information about each of the DMSs that you are considering. Making a poor decision and having to replace a DMS because it didn’t meet your needs can be disruptive to your business.
Whether you decide to hold your finance contracts or sell them off, underwriting your customers is a very important fundamental.
When underwriting, there are several considerations such as determining if the customer can afford the proposed vehicle. Does the customer pay their debts on a vehicle? To answer the preceding questions, most dealerships pull credit reports on their potential customers and then structure the finance deals appropriately. What other customer information do you need? After having obtained the information, does your staff know how to interpret it? Developing underwriting guidelines and procedures is as critical as training your staff to consistently adhere to the guidelines. Loans written ignoring guidelines, that is making exceptions, result in a disproportionate number of defaults and complaints often follow. No one wins with a repossession – the customer nor the dealership.
As your portfolio develops, FinTech companies can ably assist you in evaluating your underwriting performance by providing meaningful analysis of your portfolio and show you what underwriting improvements could be made to improve your portfolio.
The largest asset in the dealership will be your portfolio value. It is also the asset which will be most important to a potential purchaser and to your financial success, whether you are selling or operating the dealership.
Collections from non-prime buyers is a normal practice for most dealerships.
It is valuable to have well-trained, courteous collectors, that follow dealership procedures. Even if a customers’ credit and ability to pay are correctly judged by the underwriting staff, collections can still be a chore with monitoring, reminding, and educating customers on the importance of making their payments on time. Remember that deliberate, but friendly and courteous relations with your customers does pay off. In the event that you decide to sell or leverage your loans for future growth at some point, and the better your underwriting and collection protocols have been, the higher price your portfolio will bring resulting in a higher value of your dealership.
Back to the opening premise, does it make a difference whether you plan to operate long-term or sell your dealership? No, it doesn’t as a well operated dealership with good portfolio performance, low incidence of significant customer complaints and/or regulatory attention, good inventory, building/lot appearance, and great customer service provide direct benefits to you. Whether you operate long-term or choose to sell your dealership, you will reap greater rewards, i.e., make more money with a good business plan that has been followed!
The difficulty for an investor interested in acquiring a dealership(s) is identifying one that is impressive and meets all the requirements outlined above. There was a commercial with a saying whose message was, “Look Sharp, Be Sharp!” If you operate the dealership to high standards, you will generate more successful customers. If your dealership has a great appearance, and a record of profitability with a good reputation, you will attract the attention of potential purchasers. Build your dealership the right way from the start and results will be more successful whether you decide on long-term growth or to sell your dealership.
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