Death of an Automobile Dealership

Closing a store requires considerable effort and				considered.Leasehold ImprovementsThe value of
attention and the items listed below, in no				Leasehold Improvements is generally lost in the
particular order, are minimal considerations when				termination process.VehiclesWhile accomplishing a
terminating a franchise and closing a dealership				new vehicle inventory valuation is a relatively,
operation.THIS CHECKLIST IS NOT "ALL				routine matter, it is also time consuming;
INCLUSIVE". YOU SHOULD CONSULT WITH				consequently, in order for a dealer to realize full
YOUR ATTORNEY AND ACCOUNTANT AND				value, or each vehicle, at time of transfer, a
THIS LIST SHOULD BE CONSIDERED AS AN				checklist must be compiled and maintained. There
ADDITIONAL AID FOR YOU TO USE TO BUILD				are certain additions to, and subtractions from,
UPON WHEN YOU CONFER WITH THEM.Basic				the invoice price that must be made.The
Preparation1. Officers, Directors and				difference in cash to be paid by purchaser's
ShareholdersBe certain to hold both directors and				flooring entity to the dealer's flooring institution
shareholders meetings and to obtain resolutions				can be considerable, especially with respect to
from each entity, authorizing the dealer to				domestic lines, where holdback monies routinely
liquidate the dealership, or a substantial portion of				average between $400 and $600 per unit, or
the dealership's assets.Determine whether or not				more.A dealer needs to be aware of this figure,
the board and shareholders may authorize you a				early on in order to provide for the contingency
termination bonus and prepay your for your				during negotiations.Various states have laws more
services in "winding down the business". Consult				liberal than the factory's Sales and Service
with your accountant and attorney to determine				Agreements and the specific laws of the
what would be a reasonable amount of				terminating dealer's jurisdiction should be review.
compensation in the event a company creditor				For example, Maine requires that the factory
challenges the transaction.Determine if it is				repurchase terminating dealers' entire new vehicle
reasonable for officers to buy themselves and				inventory, regardless of model year. Some states
their spouse vehicles. Pay "Net" "Net", as that				require the factory repurchase only current model
would be the sales price if the vehicle were				year vehicles and others current plus one year
returned to the factory or sold to a purchaser of				carry-over.In MSO states, the dealer should
the business.The officers should open a new bank				control all vehicle keys and MSOs - if the lender
account, at a different bank, and: (a) use a PO				does not already have them.Prepare to liquidate
Box, or Private Mail Service as a mailing address;				used vehicles and any dealership vehicles such as
and (b) use a different check color in order to				parts trucks, courtesy vans, demonstrators and
easily determine pre and post closing checks				snow plows. It is generally easier to obtain a good
written.Authorize payment to and pre-pay the				price for them by not letting anyone "cherry pick".
company's attorney and accountant with a				Several wholesales should bid them as a
retainer. Their services will be needed to properly				"group".Make list of carryovers and if the factory
close the business and the company might not be				will not repurchase them have the wholesalers bid
able to pay them later.Authorize pre-payment of				them separately and also shop them with other
whatever services or supplies the company will				dealers.Dealer plates must be surrendered and
need to be serviced during the wind-down period.				accounted for when the dealer license is
For example, property and personal insurance, real				terminated.13. Appraisals and AuctionsThere are a
property taxes (if the property is not owned by				number of competent, recognized appraisers, our
a third party), rent, utilities and such.2. The Facility				firm could recommend. In order to maximize the
and InsuranceA one-sheet summary of the lease				dollar value of an appraisal or auction, the dealer
should be attached to the original, in order to				should contact several firms, determine how they
facilitate matters. The summary should include				operate, what records will be required, the
such items as: the dates of the base term; the				method for valuing. After obtaining such
base rent; the current rent; the dates of any				information, the dealer should know the precise
option periods, together with notations regarding				form and schedules necessary in order to
rent increases; the facility ownership; the lessee				maximize the appraisal or sale of the fixed assets.
and lessor; a notation as to whether or not the				In addition, by assigning an employee to
factory has point, or site protection; the rent as				thoroughly prepare the assets and schedules, the
an equivalent to the dollar value per new unit sold;				dealer will better understand the value of the
and, a notation as to WHETHER OR NOT THE				assets at the premises.Perhaps the greatest
LEASE IS ASSIGNABLE and under what				problems, with respect to appraisals and auctions,
conditions.Other considerations regarding the				are: (1) neither party takes the time to
facility lease include violations of the ADA,				understand the methods and reasoning used by
hazardous materials (underground gas tanks, or				the appraisal/auction company; and (2) the dealer
underground oil disposal tanks) being located on				almost never adequately prepares the assets and
the property.Owned FacilitiesWith respect to				schedules. We invariably find that all of the
receiving "factory termination assistance", some				dealership's assets do not appear on schedules,
Sales and Service Agreements, General Motors				either because they have been fully depreciated,
for example, make a distinction between "owner				or because of an error.14. Contracts for
occupied" and "leased" dealership facilities. Be sure				ServicesService maintenance contracts and
to read your Sales and Service Agreement in				personal service contracts should be reviewed for
order to understand and be able to capitalize on				personal guarantees, term and assignability. An
the distinctions.Leased FacilitiesIf the selling dealer's				oversight could mean that personal liability, for
rent factor prior to the sale of the dealership is				performance, would remain with the selling dealer.
within factory guidelines the factory should make				Service maintenance contracts should be
the dealer's lease payments for the period				scheduled, with the detail indicating the amount of
specified in the Service and Sales Agreement.				each payment, duration of agreement, service to
(See, however, the EPA section.)Check with your				be rendered, and any personal liability. Any
insurance agent to determine the requirements				contracts that can be cancelled should be
for insuring an empty building.Other InsuranceIn				calendared for cancellation.15. Contingent Liability
addition to facility insurance the dealer will need a				and ReservesThe dealer should know the amount
"tail" or rider on his or her garage keepers				of all outstanding retail paper, which has been
insurance. Most insurance today is "claims made"				unconditionally guaranteed by the dealership, or
versus "occurrence".In actual practice, most cases				the dealer. The dealer should know which the
that are settled are settled within the insurance				dealership's reserve account will be subject to
policy limits and the insurance company will have				charge backs, for early payoffs and the amount,
paid for both the defense and the settlement.With				if any, of recourse against the dealer and the
respect to Medical Insurance, arrange for COBRA				dealership.A spreadsheet of the outstanding
all employees of the company. Again, officers and				contracts should be compiled, detailing, in addition
directors may be able to include medical insurance				to collateral description, remaining term and
payments as part of their wind-down				delinquency status, and credit grade, such as A, B,
compensation.3. UCC, Mechanic's Lien and Title				or C, or whatever system the finance company
SearchesMost dealers are not cognizant of all				uses. The type of recourse, average monthly
existing liens on dealership's assets.In order to				reserve charge-backs and the current reserve
accurately estimate the selling dealer's anticipated				balance should also be included.Shortly after
net proceeds, all of these liens will have to be				informing the financing institutions of the dealer's
discovered, preferably, prior to				intent to close the dealership, the lenders should
negotiations.Possession of title reports and UCC-1				again be approached, regarding the availability of
reports will give the dealer adequate time to				any "walk-away" programs. Furthermore, in the
address the issues and to have readily available				event the dealership has been operating with
answers, if and when a prospective purchaser				reduced reserve retention, the amount required
raises the issue.4. Taxes Due and AnticipatedThe				to bring the reserve(s) to standard, upon
dealership's comptroller or accountant, should				cessation of retail operations, should be
prepare a sheet of all taxes currently owed by				determined. On occasion, this amount has proved
the dealership and all anticipated taxes. The list				to be significant.Eventually, when confidentiality is
should identify the amount, to who owed and the				no longer an issue, the dealer should discuss with
reason. In certain states unpaid taxes have a				the lender, the handling of future repossessions,
"superlien" status and if unpaid the selling dealer's				extensions, renewals and other maintenance
assets can and will be attached to recover unpaid				functions. If the prior dealer-lender relationship was
taxes due by the selling dealership. This				good, the dealer will discover that an incredible
attachment can occur months after the dealership				amount of help available from a cooperative
has closed.As a general rule, anyone authorized to				finance company.Lastly, if the dealer discovers a
sign on the checking account can be held				large contingency, a certain degree of assistance
personally liable for at least Â½ of the payroll				may be negotiated with the buyer.16. Accounts
withholding tax, as well as 100% of all of the sales				Receivable and CashCashWhile apparently obvious,
taxes due. In addition, in some instances dealers				dealership cash must be considered. Generally a
have been held personally liable for monies				new checking account should be opened at a
collected from customers that should have been				financial institution that is not affiliated with the
treated as "trust" monies, such as: customer				dealer's current business. Also, if possible, a locally
trade payoffs, customer credit and life insurance				owned bank should be used, versus a national
premiums, and customer warranty and service				bank. The dealer should consider reducing the
contract premiums.5. Notes and Accounts				number of signatories on the checking account(s)
Receivable From OthersThe "Notes and Accounts				to two, one of which is the dealer and, effective
Receivable - Other" account is usually a "catch-all"				the day of the close, the number of signatories
account on the dealership statement. For				should be reduced to the dealer principal
purposes of a dealership sale, this account should				only.Factory ReceivablesFrom the moment a
be purified (1) in order to apprise the dealer of				decision to close the store is reached, factory
any extra funds, which may be available for final				receivables should receive concentrated attention.
sales and property taxes and (2) to make both				The very instant an awareness of the pending
the dealer and accountant aware of any				closing reaches the factory, the payments
"in-house" loans to officers, directors and				cease.Try to resolve all problem receivables, such
employees, which may have to be repaid.6.				as warranty disputes, well before the closing. In
Prepaid ExpensesThe prepaid expense account is				any event, assistance from the factory, following
another "catch-all" account that must be purified.				the close of escrow will be essential to process
When scheduling the prepaid expense account the				warranty re-submissions and other problems.
comptroller should make a thorough search for all				Employee ReceivablesEmployee receivables
lease and contract deposits. In many instances,				should also be thoroughly analyzed during this
service equipment on lease, vehicles on lease,				preliminary stage. An immediate policy, of no
computers on lease, and other leases made to				advances, should be established.Without causing
the dealership carry security deposits, or the last				alarm, employee receivables should be scheduled
month's payment, or both.7. Dealership				and a course of repayment established. One of
EmployeesAlong with the normal				the better methods is to prepare a schedule of
employer-employee relations, there are two very				what each employee owes and, as the final pay
important legal areas that may affect automobile				periods approach, make certain the receivables
dealers: (a) pension fund liability; and (b) state and				are deducted from the employee's final checks.
federal laws regarding closings.In some states the				Unfortunately, some states do not allow the
selling dealer could be personally liable for funding				dealer to set-off debts against wages. Your
employee pension funds; while in others the dealer				state's policy/law should be reviewed with your
must give employees advance notice of any				attorney before proceeding to set-off any
closing. Also, the United States Congress passed				employee debt.Customer and Vehicle
legislation regarding "closings". In the instances of				ReceivablesThe selling dealer should make certain
"closings", both state and federal laws put a				that vehicle receivables and customer accounts,
minimum on the number of persons employed,				other than service and parts, are pure. Necessary
usually 50 or 100, before the law applies to the				adjustments and write-offs should be made, with
dealer's company. Check the Hart Scott Rodino				the purpose of arriving at a receivable figure
Act (HSR) and the WARN Act.With respect to				which realistically depicts the amount of cash
wages, some jurisdictions have enacted statutes				which can be expected.If the dealership's service
making certain shareholders personally liable for				and parts policy has been well monitored, these
corporate debts owing to laborers and other				accounts should pay in an orderly manner. In
employees. Welfare and pension funds also qualify				addition, the dealer should decide whether
as wages under New York's statute.The				collections should be performed by dealer, and
comptroller, or accountant should prepare a				one or more employees, or whether the dealer
list of these liabilities, to include any amounts due				can sell the accounts to a factoring house.17.
the employees, with respect to accrued				Leased EquipmentNot all leases can be cancelled.
vacations, withholding taxes, pension and profit				The dealer should determine which, if any, of the
sharing plans and wages, as of the date of				leases have personal guarantees, and with respect
close.Insofar as the actual terminations are				to such leases, make a concerted effort to
concerned, if the dealership is "union", the dealer				negotiate a settlement with the lessor. That
should talk to the union's representative in order				assumes that the corporation is insolvent. If the
to be sure that all of the conditions of the union				corporation is solvent, than settlements need to
contract are met.8. Long Term DebtAll long-term				be negotiated with respect to corporate leases.18.
debt should be itemized and a method of				EPA InspectionIf the real property is owned by
repayment determined. Interest should be				the closing dealer, it is important for the dealer to
computed. When past due interest and past due				determine where and what the problems are likely
payments are added to the loan balance, the loan				to be. If underground gas or oil storage tanks
pay-offs are generally higher than anticipated.The				have ever been located on the dealership real
comptroller should prepare a list of these debts,				property, the dealer should, if not already
to include the amount owed including interest, to				available, contact a private inspection agency and
who owed, purpose of debt, maturity, terms and				obtain a certificate of clearance, or compliance,
security given. In addition, after the list is				with respect to it.Be aware, no agreements
completed, the comptroller should keep a running				between the parties can modify, or redistribute
total, daily, through close of escrow.9. Other				their respective liabilities, with respect to state and
Notes PayableAs with long-term debt, other notes				federal laws.19. Expenses of TransactionThere are
payable should be listed by amount including				certain extraordinary expenses, such as real
interest to date of close, to whom owed,				estate appraisal fees, consultant fees, attorney
purpose of note, maturity, terms and security				and accounting fees, which are incidental to the
given; and arrangements should be made to retire				preparing a dealership for closing. These expenses
the debt.10. The Financial StatementsThe retail				will be paid both from the dealership general
automobile business is one of the few businesses				account and directly from the closing dealer's
requiring a complete closing of all books and				personal account. The dealer should alert the
records, promptly, at the end of each and every				bookkeeper to maintain a separate journal, in
month. Factories and finance companies require				which to record these expenses, in order that the
reporting on factory originated, or approved				accountants may readily determine the costs of
forms.In preparing the store for closing, a				sale and categories of expenditures, for income
reconciliation statement may be used, explaining				tax purposes, both personal and business.Closing
categories such as "other income & expense",				DateAbsent exigent circumstances, the dealer
warranty, finance and insurance income not				should estimate the amount of time necessary to
shown on the statement, along with extraordinary				prepare the store for closing, usually
items.You will need a final financial statement for				approximately thirty days. If possible, the closing
tax purposes.11. Storage of RecordsDealerships				should be on a payday.The Comptroller's
amass a great deal of paperwork, the safe,				ResponsibilitiesThe Dealer's comptroller should
accessible, storage of which will present a				prepare, or be responsible for the preparation of,
necessary problem to the selling dealer. No				the following items and documents, for
dealership record will be as important as it is on				transfer:The Books & Records;All Purchase
the day it cannot be found. Former dealers have				Orders and Deposits;The Franchise Termination
related stories of attempting to retrieve				Letter and the Factory's, or Distributor's
documents from mini-storage facilities, in both rain				Acceptance of the Buyer's Resignation;The
and snow.The appropriate time period should be				Accounts Receivable List;Prepaid
determined, only after the dealer's accountant and				Expenses;Preparing a Leased Equipment
attorney have considered and advised the dealer				Inventory;Securing Old Credit card plates and
with respect to statute of limitations problems				Machines;The Parts and Accessories Return,
and other document retention regulations, peculiar				Vehicle Return, and Rent Assistance Demand
to the political area in which dealership is located.12.				Letters;The Transfer and/or cancellation of
In-House Service ContractsIf the dealer has sold				various: Telephone Numbers; Post Office
any "in-house service contracts", the selling dealer				Boxes;The insurance arrangements: life, garage
will not want former customers calling at his or				keeper's tail, real and personal property, health,
her home for repairs, or complaints; therefore, a				etc.The Dealer's ResponsibilitiesThe Dealer should
system of service, along the following lines, should				prepare, or be responsible for reviewing and
be negotiated with a dealer located in close				supervising all of the items in the checklist and for
proximity to the closing store.13. The Hard				the preparation of the following items:Decide on
AssetsParts and AccessoriesEach factory has its				the employees that are required to stay in order
own definition of "returnable" parts and returnable				to complete the closing of the store.Check for
accessories. Most also include a discount for				sold orders decide whether to deliver, cancel, or
packing and shipping.Just prior to closing, a				refer to another dealer.Cancel company credit
computer printout ought to be obtained listing all				cards, including any phone credit cards and any
parts and accessories, their purchase date and				mobile phones - except your own.Secure
cost in invoice.Parts and Accessories need to be				telephone service. Set a Voice Mail message
segregated into "returnable" and "non-returnable"				regarding a dealership referral.DETERMINE THE
categories. Returnable parts and accessories need				FACTORY'S OBLIGATIONS WITH RESPECT TO
to be inventoried and packaged according to the				ITS RIGHTS TO LEASE AND PURCHASE. BE
factory's specificationsNon-returnable items need				SURE TO MAKE CLAIMS AND REQUESTS FOR
to be marketed to other dealers or parts houses				ASSISTANCE WITHIN THE TIME PERIOD
such as "Napa". Note: Some "non-returnable" parts				SPECIFIED IN THE SALES AND SERVICE
may in fact be returnable to the supplier from				AGREEMENT.If necessary, talk to a Realtor and
who it was purchased, such as Delco, MotorCraft,				list the facility on the market (lease or sale).Find
Mopar, Napa, etc.Do not mark on or damage				out where credit card monies are deposited and
original packages when inventorying or packing as				move the account if it is in the same bank where
some factories will not classify items in marked				the company's general account resides.Close out,
packages as "returnable".Be sure to account for				or transfer to another dealer all active service
aftermarket items such as Gas, Oil & Grease,				ROs. If possible, negotiate a referral fee.Create a
Nuts, Bolts, Supplies, Work in Process and Repair				press release for store closing.Cancel all new
Order (Need to collect A/Rs), Signs, Tools,				vehicle orders that are not scheduled, do not
Miscellaneous Equipment & Supplies.Furniture,				order any new cars.Close out all service ROs so
Fixtures and EquipmentThe hard assets fall into				that work is completed by date of close. Do not
two categories: (a) Those repurchased by the				accept any work that can't be completed by
factory, such as special tools, parts equipment,				store shutdown date.As always, when closing a
signs, some computer systems, etc.; and those				dealership, you should always consult with a
not repurchased by the factory, such as desks,				qualified attorney and accountant.For additional
chairs, etc.Repurchased and non-repurchased				information on this and other automobile
items should be segregated and an inventory /				dealership subject matters, go to: Pico has a
auction service contacted to bid the auction on				Doctorate of Jurisprudence and is a vice president
the non-repurchased items. When considering the				of Automotive Advisors. He has completed over
auction, terms such as advertising time, location,				1,000 dealership transactions, and published the
minimum bids, guaranteed minimums from the				first books copyrighted in the Library of Congress
auctioneer, and so forth, must be				on Buying and Selling Automobile dealerships.

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Death of an Automobile Dealership