In the world of auto sales, branding is everything. Disconnects between the brands you sell and your market’s demographics — or between other brands you offer — could jeopardize your new car sales and profits.
Economic conditions, levels of competition, brand images and market demographics change over time. So it’s smart business to periodically review your brand offerings to determine whether it’s time to add a franchise or swap a mismatched brand with another dealership. A change in brand might more effectively leverage your product mix and maximize your return on investment.
You survived the recession. Now economic conditions look promising. Perhaps it’s time to add a franchise to expand your sales base. If so, you could apply for a new franchise or take over an existing franchise from another dealership. Both options require diligent market research.
When picking the best brand to add, never rely on instinct. Base your decision on historic and projected sales volume, recent demographic trends and objective third-party data. Your Dealer 20 Group can provide comparable market data and “war stories” of good (and bad) branding experiences. Also ask manufacturers for assistance in gauging the viability of your expansion plans — they have a vested interest in your success and deep pockets.
A swap transaction
Some brands are like oil and water. Others complement each other. Ideally, you want the right mix of products to appeal to a broad market without cannibalizing existing sales or sending an inconsistent marketing message. Also, some manufacturers have similar rules and service agreements, making certain combinations more compatible than others.
If your current product mix isn’t working, consider swapping franchises with another dealership. For example, Tom operated a combination Honda-Acura dealership. Jerry operated two stores that sell General Motors and Nissan, each in stand-alone facilities.
Last year, Tom’s uncle died, bestowing him with a Dodge-Jeep franchise. The inherited store seemed like a poor fit with Tom’s other brands. So, he swapped it with Jerry’s Nissan franchise. This arrangement allows both dealers to offer more consistent images: Tom focuses on Japanese models; Jerry sells domestics. So far, both dealers are happy with their realigned product line-ups — but it took more work than either anticipated.
Swapping franchises requires more than trading keys and moving vehicles. Other assets, such as signs, parts, accessories, prepaid advertising and manufacturer-specific service equipment, may need to be transferred. You also may swap certain employees, such as sales, finance or service professionals trained to work specifically on one brand. Similar to adding a new franchise, swaps also require approval from manufacturers, lenders and licensing boards.
Most manufacturers are highly selective when it comes to granting new franchises or approving franchise sales or swaps. Manufacturers spend millions of dollars on promoting a distinct brand, and they’ll prevent franchisees from doing anything that might cheapen or compromise their image. They also won’t allow you to open a store that might cannibalize sales from other franchisors that offer their brand.
Review your franchise agreements carefully before adding another product line to the mix. Your existing agreement(s) may require you to designate dedicated sales and service professionals for each brand — or even operate stand-alone facilities. Manufacturers also may ask for leasehold improvements as a condition to approving a new franchise. These requirements can make your plan cost-prohibitive.
State boards and lenders
Dealerships typically must be licensed by the state for each brand you sell — and immediately notify the state board in writing if you plan to add, swap or drop a franchise. You’ll also have to pay fees and complete an application packet that includes such documentation as financial statements, affidavits of extended service contracts and dealer agreements.
In addition, you’ll need to work with lenders to transition the franchise’s debt obligations. If you’re buying or swapping a franchise, the original owner may retain some of its debt, but floor plans transfer with their respective collateral. Also beware that banks may change loan terms, depending on market conditions and the financial health of the new borrower.
Look before you leap
Adding or swapping franchises can enable you to grow and realign your product mix to better serve the market. But poor planning can cause these plans to fall short — or fall apart altogether. Successful plans require extensive research and buy-in from external parties, such as manufacturers, lenders and licensing boards.
Accounting for business combinations can be tricky
If you acquire a franchise from another dealership or enter into a swap, you’ll need to report it correctly on your financial statements and tax return. This includes allocating the purchase price among the assets and liabilities you acquire based on their respective fair values. Purchase price allocations affect how much depreciation and amortization expenses you can recognize in future periods for tax and financial reporting purposes.
Determining the fair value of intangible assets, such as franchise agreements, customer lists and goodwill, can be especially challenging. So, contact a financial expert with appraisal expertise to ensure the job’s done right.