Death of an Automobile Dealership

Closing a store requires considerable effort and				be segregated and an inventory / auction service
attention and the items listed below, in no				contacted to bid the auction on the
particular order, are minimal considerations when				non-repurchased items. When considering the
terminating a franchise and closing a dealership				auction, terms such as advertising time, location,
operation.				minimum bids, guaranteed minimums from the
THIS CHECKLIST IS NOT "ALL INCLUSIVE". YOU				auctioneer, and so forth, must be considered.
SHOULD CONSULT WITH YOUR ATTORNEY				Leasehold Improvements
AND ACCOUNTANT AND THIS LIST SHOULD BE				The value of Leasehold Improvements is generally
CONSIDERED AS AN ADDITIONAL AID FOR				lost in the termination process.
YOU TO USE TO BUILD UPON WHEN YOU				Vehicles
CONFER WITH THEM.				While accomplishing a new vehicle inventory
Basic Preparation				valuation is a relatively, routine matter, it is also
1. Officers, Directors and Shareholders				time consuming; consequently, in order for a
Be certain to hold both directors and shareholders				dealer to realize full value, or each vehicle, at time
meetings and to obtain resolutions from each				of transfer, a checklist must be compiled and
entity, authorizing the dealer to liquidate the				maintained. There are certain additions to, and
dealership, or a substantial portion of the				subtractions from, the invoice price that must be
dealership's assets.				made.
Determine whether or not the board and				The difference in cash to be paid by purchaser's
shareholders may authorize you a termination				flooring entity to the dealer's flooring institution
bonus and prepay your for your services in				can be considerable, especially with respect to
"winding down the business". Consult with your				domestic lines, where holdback monies routinely
accountant and attorney to determine what				average between $400 and $600 per unit, or
would be a reasonable amount of compensation in				more.
the event a company creditor challenges the				A dealer needs to be aware of this figure, early
transaction.				on in order to provide for the contingency during
Determine if it is reasonable for officers to buy				negotiations.
themselves and their spouse vehicles. Pay "Net"				Various states have laws more liberal than the
"Net", as that would be the sales price if the				factory's Sales and Service Agreements and the
vehicle were returned to the factory or sold to a				specific laws of the terminating dealer's jurisdiction
purchaser of the business.				should be review. For example, Maine requires
The officers should open a new bank account, at				that the factory repurchase terminating dealers'
a different bank, and: (a) use a PO Box, or				entire new vehicle inventory, regardless of model
Private Mail Service as a mailing address; and (b)				year. Some states require the factory repurchase
use a different check color in order to easily				only current model year vehicles and others
determine pre and post closing checks written.				current plus one year carry-over.
Authorize payment to and pre-pay the company's				In MSO states, the dealer should control all vehicle
attorney and accountant with a retainer. Their				keys and MSOs - if the lender does not already
services will be needed to properly close the				have them.
business and the company might not be able to				Prepare to liquidate used vehicles and any
pay them later.				dealership vehicles such as parts trucks, courtesy
Authorize pre-payment of whatever services or				vans, demonstrators and snow plows. It is
supplies the company will need to be serviced				generally easier to obtain a good price for them
during the wind-down period. For example,				by not letting anyone "cherry pick". Several
property and personal insurance, real property				wholesales should bid them as a "group".
taxes (if the property is not owned by a third				Make list of carryovers and if the factory will not
party), rent, utilities and such.				repurchase them have the wholesalers bid them
2. The Facility and Insurance				separately and also shop them with other dealers.
A one-sheet summary of the lease should be				Dealer plates must be surrendered and accounted
attached to the original, in order to facilitate				for when the dealer license is terminated.
matters. The summary should include such items				13. Appraisals and Auctions
as: the dates of the base term; the base rent;				There are a number of competent, recognized
the current rent; the dates of any option periods,				appraisers, our firm could recommend. In order to
together with notations regarding rent increases;				maximize the dollar value of an appraisal or
the facility ownership; the lessee and lessor; a				auction, the dealer should contact several firms,
notation as to whether or not the factory has				determine how they operate, what records will be
point, or site protection; the rent as an equivalent				required, the method for valuing. After obtaining
to the dollar value per new unit sold; and, a				such information, the dealer should know the
notation as to WHETHER OR NOT THE LEASE IS				precise form and schedules necessary in order to
ASSIGNABLE and under what conditions.				maximize the appraisal or sale of the fixed assets.
Other considerations regarding the facility lease				In addition, by assigning an employee to
include violations of the ADA, hazardous materials				thoroughly prepare the assets and schedules, the
(underground gas tanks, or underground oil				dealer will better understand the value of the
disposal tanks) being located on the property.				assets at the premises.
Owned Facilities				Perhaps the greatest problems, with respect to
With respect to receiving "factory termination				appraisals and auctions, are: (1) neither party
assistance", some Sales and Service Agreements,				takes the time to understand the methods and
General Motors for example, make a distinction				reasoning used by the appraisal/auction company;
between "owner occupied" and "leased" dealership				and (2) the dealer almost never adequately
facilities. Be sure to read your Sales and Service				prepares the assets and schedules. We invariably
Agreement in order to understand and be able to				find that all of the dealership's assets do not
capitalize on the distinctions.				appear on schedules, either because they have
Leased Facilities				been fully depreciated, or because of an error.
If the selling dealer's rent factor prior to the sale				14. Contracts for Services
of the dealership is within factory guidelines the				Service maintenance contracts and personal
factory should make the dealer's lease payments				service contracts should be reviewed for personal
for the period specified in the Service and Sales				guarantees, term and assignability. An oversight
Agreement. (See, however, the EPA section.)				could mean that personal liability, for performance,
Check with your insurance agent to determine				would remain with the selling dealer. Service
the requirements for insuring an empty building.				maintenance contracts should be scheduled, with
Other Insurance				the detail indicating the amount of each payment,
In addition to facility insurance the dealer will need				duration of agreement, service to be rendered,
a "tail" or rider on his or her garage keepers				and any personal liability. Any contracts that can
insurance. Most insurance today is "claims made"				be cancelled should be calendared for cancellation.
versus "occurrence".				15. Contingent Liability and Reserves
In actual practice, most cases that are settled are				The dealer should know the amount of all
settled within the insurance policy limits and the				outstanding retail paper, which has been
insurance company will have paid for both the				unconditionally guaranteed by the dealership, or
defense and the settlement.				the dealer. The dealer should know which the
With respect to Medical Insurance, arrange for				dealership's reserve account will be subject to
COBRA all employees of the company. Again,				charge backs, for early payoffs and the amount,
officers and directors may be able to include				if any, of recourse against the dealer and the
medical insurance payments as part of their				dealership.
wind-down compensation.				A spreadsheet of the outstanding contracts
3. UCC, Mechanic's Lien and Title Searches				should be compiled, detailing, in addition to collateral
Most dealers are not cognizant of all existing liens				description, remaining term and delinquency status,
on dealership's assets.				and credit grade, such as A, B, or C, or whatever
In order to accurately estimate the selling dealer's				system the finance company uses. The type of
anticipated net proceeds, all of these liens will				recourse, average monthly reserve charge-backs
have to be discovered, preferably, prior to				and the current reserve balance should also be
negotiations.				included.
Possession of title reports and UCC-1 reports will				Shortly after informing the financing institutions of
give the dealer adequate time to address the				the dealer's intent to close the dealership, the
issues and to have readily available answers, if				lenders should again be approached, regarding the
and when a prospective purchaser raises the				availability of any "walk-away" programs.
issue.				Furthermore, in the event the dealership has been
4. Taxes Due and Anticipated				operating with reduced reserve retention, the
The dealership's comptroller or accountant, should				amount required to bring the reserve(s) to
prepare a sheet of all taxes currently owed by				standard, upon cessation of retail operations,
the dealership and all anticipated taxes. The list				should be determined. On occasion, this amount
should identify the amount, to who owed and the				has proved to be significant.
reason. In certain states unpaid taxes have a				Eventually, when confidentiality is no longer an
"superlien" status and if unpaid the selling dealer's				issue, the dealer should discuss with the lender,
assets can and will be attached to recover unpaid				the handling of future repossessions, extensions,
taxes due by the selling dealership. This				renewals and other maintenance functions. If the
attachment can occur months after the dealership				prior dealer-lender relationship was good, the
has closed.				dealer will discover that an incredible amount of
As a general rule, anyone authorized to sign on				help available from a cooperative finance
the checking account can be held personally liable				company.
for at least ½ of the payroll withholding				Lastly, if the dealer discovers a large contingency,
tax, as well as 100% of all of the sales taxes due.				a certain degree of assistance may be negotiated
In addition, in some instances dealers have been				with the buyer.
held personally liable for monies collected from				16. Accounts Receivable and Cash
customers that should have been treated as				Cash
"trust" monies, such as: customer trade payoffs,				While apparently obvious, dealership cash must be
customer credit and life insurance premiums, and				considered. Generally a new checking account
customer warranty and service contract				should be opened at a financial institution that is
premiums.				not affiliated with the dealer's current business.
5. Notes and Accounts Receivable From Others				Also, if possible, a locally owned bank should be
The "Notes and Accounts Receivable - Other"				used, versus a national bank. The dealer should
account is usually a "catch-all" account on the				consider reducing the number of signatories on
dealership statement. For purposes of a dealership				the checking account(s) to two, one of which is
sale, this account should be purified (1) in order to				the dealer and, effective the day of the close,
apprise the dealer of any extra funds, which may				the number of signatories should be reduced to
be available for final sales and property taxes and				the dealer principal only.
(2) to make both the dealer and accountant				Factory Receivables
aware of any "in-house" loans to officers,				From the moment a decision to close the store is
directors and employees, which may have to be				reached, factory receivables should receive
repaid.				concentrated attention. The very instant an
6. Prepaid Expenses				awareness of the pending closing reaches the
The prepaid expense account is another "catch-all"				factory, the payments cease.
account that must be purified. When scheduling				Try to resolve all problem receivables, such as
the prepaid expense account the comptroller				warranty disputes, well before the closing. In any
should make a thorough search for all lease and				event, assistance from the factory, following the
contract deposits. In many instances, service				close of escrow will be essential to process
equipment on lease, vehicles on lease, computers				warranty re-submissions and other problems.
on lease, and other leases made to the dealership				Employee Receivables
carry security deposits, or the last month's				Employee receivables should also be thoroughly
payment, or both.				analyzed during this preliminary stage. An
7. Dealership Employees				immediate policy, of no advances, should be
Along with the normal employer-employee				established.
relations, there are two very important legal				Without causing alarm, employee receivables
areas that may affect automobile dealers: (a)				should be scheduled and a course of repayment
pension fund liability; and (b) state and federal laws				established. One of the better methods is to
regarding closings.				prepare a schedule of what each employee owes
In some states the selling dealer could be				and, as the final pay periods approach, make
personally liable for funding employee pension				certain the receivables are deducted from the
funds; while in others the dealer must give				employee's final checks. Unfortunately, some
employees advance notice of any closing. Also,				states do not allow the dealer to set-off debts
the United States Congress passed legislation				against wages. Your state's policy/law should be
regarding "closings". In the instances of "closings",				reviewed with your attorney before proceeding
both state and federal laws put a minimum on the				to set-off any employee debt.
number of persons employed, usually 50 or 100,				Customer and Vehicle Receivables
before the law applies to the dealer's company.				The selling dealer should make certain that vehicle
Check the Hart Scott Rodino Act (HSR) and the				receivables and customer accounts, other than
WARN Act.				service and parts, are pure. Necessary
With respect to wages, some jurisdictions have				adjustments and write-offs should be made, with
enacted statutes making certain shareholders				the purpose of arriving at a receivable figure
personally liable for corporate debts owing to				which realistically depicts the amount of cash
laborers and other employees. Welfare and				which can be expected.
pension funds also qualify as wages under New				If the dealership's service and parts policy has
York's statute.				been well monitored, these accounts should pay in
The comptroller, or accountant should prepare				an orderly manner. In addition, the dealer should
alist of these liabilities, to include any amounts due				decide whether collections should be performed
the employees, with respect to accrued				by dealer, and one or more employees, or
vacations, withholding taxes, pension and profit				whether the dealer can sell the accounts to a
sharing plans and wages, as of the date of close.				factoring house.
Insofar as the actual terminations are concerned,				17. Leased Equipment
if the dealership is "union", the dealer should talk to				Not all leases can be cancelled. The dealer should
the union's representative in order to be sure that				determine which, if any, of the leases have
all of the conditions of the union contract are met.				personal guarantees, and with respect to such
8. Long Term Debt				leases, make a concerted effort to negotiate a
All long-term debt should be itemized and a				settlement with the lessor. That assumes that the
method of repayment determined. Interest should				corporation is insolvent. If the corporation is
be computed. When past due interest and past				solvent, than settlements need to be negotiated
due payments are added to the loan balance, the				with respect to corporate leases.
loan pay-offs are generally higher than anticipated.				18. EPA Inspection
The comptroller should prepare a list of these				If the real property is owned by the closing
debts, to include the amount owed including				dealer, it is important for the dealer to determine
interest, to who owed, purpose of debt, maturity,				where and what the problems are likely to be. If
terms and security given. In addition, after the list				underground gas or oil storage tanks have ever
is completed, the comptroller should keep a				been located on the dealership real property, the
running total, daily, through close of escrow.				dealer should, if not already available, contact a
9. Other Notes Payable				private inspection agency and obtain a certificate
As with long-term debt, other notes payable				of clearance, or compliance, with respect to it.
should be listed by amount including interest to				Be aware, no agreements between the parties
date of close, to whom owed, purpose of note,				can modify, or redistribute their respective
maturity, terms and security given; and				liabilities, with respect to state and federal laws.
arrangements should be made to retire the debt.				19. Expenses of Transaction
10. The Financial Statements				There are certain extraordinary expenses, such
The retail automobile business is one of the few				as real estate appraisal fees, consultant fees,
businesses requiring a complete closing of all				attorney and accounting fees, which are incidental
books and records, promptly, at the end of each				to the preparing a dealership for closing. These
and every month. Factories and finance				expenses will be paid both from the dealership
companies require reporting on factory originated,				general account and directly from the closing
or approved forms.				dealer's personal account. The dealer should alert
In preparing the store for closing, a reconciliation				the bookkeeper to maintain a separate journal, in
statement may be used, explaining categories				which to record these expenses, in order that the
such as "other income & expense",				accountants may readily determine the costs of
warranty, finance and insurance income not				sale and categories of expenditures, for income
shown on the statement, along with extraordinary				tax purposes, both personal and business.
items.				Closing Date
You will need a final financial statement for tax				Absent exigent circumstances, the dealer should
purposes.				estimate the amount of time necessary to
11. Storage of Records				prepare the store for closing, usually
Dealerships amass a great deal of paperwork, the				approximately thirty days. If possible, the closing
safe, accessible, storage of which will present a				should be on a payday.
necessary problem to the selling dealer. No				The Comptroller's Responsibilities
dealership record will be as important as it is on				The Dealer's comptroller should prepare, or be
the day it cannot be found. Former dealers have				responsible for the preparation of, the following
related stories of attempting to retrieve				items and documents, for transfer:
documents from mini-storage facilities, in both rain				The Books & Records;
and snow.				All Purchase Orders and Deposits;
The appropriate time period should be determined,				The Franchise Termination Letter and the
only after the dealer's accountant and attorney				Factory's, or Distributor's Acceptance of the
have considered and advised the dealer with				Buyer's Resignation;
respect to statute of limitations problems and				The Accounts Receivable List;
other document retention regulations, peculiar to				Prepaid Expenses;
the political area in which dealership is located.				Preparing a Leased Equipment Inventory;
12. In-House Service Contracts				Securing Old Credit card plates and Machines;
If the dealer has sold any "in-house service				The Parts and Accessories Return, Vehicle
contracts", the selling dealer will not want former				Return, and Rent Assistance Demand Letters;
customers calling at his or her home for repairs,				The Transfer and/or cancellation of various:
or complaints; therefore, a system of service,				Telephone Numbers; Post Office Boxes;
along the following lines, should be negotiated with				The insurance arrangements: life, garage keeper's
a dealer located in close proximity to the closing				tail, real and personal property, health, etc.
store.				The Dealer's Responsibilities
13. The Hard Assets				The Dealer should prepare, or be responsible for
Parts and Accessories				reviewing and supervising all of the items in the
Each factory has its own definition of "returnable"				checklist and for the preparation of the following
parts and returnable accessories. Most also include				items:
a discount for packing and shipping.				Decide on the employees that are required to
Just prior to closing, a computer printout ought to				stay in order to complete the closing of the store.
be obtained listing all parts and accessories, their				Check for sold orders decide whether to deliver,
purchase date and cost in invoice.				cancel, or refer to another dealer.
Parts and Accessories need to be segregated into				Cancel company credit cards, including any phone
"returnable" and "non-returnable" categories.				credit cards and any mobile phones - except your
Returnable parts and accessories need to be				own.
inventoried and packaged according to the				Secure telephone service. Set a Voice Mail
factory's specifications				message regarding a dealership referral.
Non-returnable items need to be marketed to				DETERMINE THE FACTORY'S OBLIGATIONS
other dealers or parts houses such as "Napa".				WITH RESPECT TO ITS RIGHTS TO LEASE
Note: Some "non-returnable" parts may in fact be				AND PURCHASE. BE SURE TO MAKE CLAIMS
returnable to the supplier from who it was				AND REQUESTS FOR ASSISTANCE WITHIN THE
purchased, such as Delco, MotorCraft, Mopar,				TIME PERIOD SPECIFIED IN THE SALES AND
Napa, etc.				SERVICE AGREEMENT.
Do not mark on or damage original packages				If necessary, talk to a Realtor and list the facility
when inventorying or packing as some factories				on the market (lease or sale).
will not classify items in marked packages as				Find out where credit card monies are deposited
"returnable".				and move the account if it is in the same bank
Be sure to account for aftermarket items such				where the company's general account resides.
as Gas, Oil & Grease, Nuts, Bolts, Supplies,				Close out, or transfer to another dealer all active
Work in Process and Repair Order (Need to				service ROs. If possible, negotiate a referral fee.
collect A/Rs), Signs, Tools, Miscellaneous				Create a press release for store closing.
Equipment & Supplies.				Cancel all new vehicle orders that are not
Furniture, Fixtures and Equipment				scheduled, do not order any new cars.
The hard assets fall into two categories: (a)				Close out all service ROs so that work is
Those repurchased by the factory, such as				completed by date of close. Do not accept any
special tools, parts equipment, signs, some				work that can't be completed by store shutdown
computer systems, etc.; and those not				date.
repurchased by the factory, such as desks,				As always, when closing a dealership, you should
chairs, etc.				always consult with a qualified attorney and
Repurchased and non-repurchased items should				accountant.

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Death of an Automobile Dealership