Roadmap for employees buying a dealership: Dos and don’ts to make the transition possible

Buying a business is never an easy process. But with the right tools and solutions in place and a strong team backing you up, it can be made straightforward

As dealerships continue to increase in value, with more owners across the country looking toward retirement and relentless consolidation within the industry, management has a unique opportunity ahead of them.

Buying the dealership you’ve worked at for years, or even decades, may initially seem like something too large and complex to pull off. But this can be done in most cases, even if this requires new and unique approaches.  

You likely know the ins and outs of the operation and already have a vested interest in the success of the business. You’re in tune with the industry and know what it takes to keep the dealership going and growing. In most cases, managers helped build this value through hard work and good decision-making.

But there are some critical considerations you’ll need to make before committing to a dealership purchase.

Whether you have an established plan to purchase the dealership outright, of if there’s an Employee Share Ownership Plan (ESOP) in place, or if you’d like to be part of an ESOP development, you’ll want to keep a few things in mind to help the transition to ownership goes smoothly.

Five things to prepare/establish before moving forward with a purchase process

If you’re already part of an ESOP, you’ve likely had many conversations with the owner about their objectives and timelines for handing over the keys. If not, get involved in the process as soon as possible and commit to having open and honest conversations with the owner.

If your employer has expressed interest in developing an ESOP but has not done so yet, MNP’s SMARTshare™ program offers a comprehensive system for business owners to bring their employees into the ownership of the business and plan for their own future exits. Financing and ownership structuring, two key aspects of the SMARTshare program, will help both the seller and potential buyer find a win-win solution, even if the implementation has to unfold over many years.

Once you know the future ownership and exit strategy of the owner, you can build a more informed assessment of the situation, including:

1. OEM requirements
   • Invest the time to understand the role and influence the Original Equipment Manufacturer (OEM) will have in the sale of the dealership. OEMs typically have very specific criteria on who may be the principal dealer/ owner and what percentage of shares they need to own. They also have the final say on many aspects of a sale and can veto a sale if their conditions are not met. Begin having conversations with the OEM and the current owner, as early as possible to ensure you’re all on the same page and that a purchase would be viable.
2. Support team
   • Having a trusted business advisor will be instrumental in ensuring all of your ducks are in a row and that you’re in a good place to make the transaction successful. In addition to learning more about the financial side of the purchase, an advisor can help determine what sort of structuring you’ll need to have in place to facilitate the purchase, if you need to incorporate a new company, and what financing needs to be in place to enable you to buy the business in the most tax-effective manner. If you plan to sell the dealership down the road, structuring it to facilitate a more tax-effective sale will benefit your retirement and future goals.
3. Financing
   • Knowing where the financing is coming from to purchase the dealership is obviously a critical step, especially given the high valuations we see in dealerships. Having bank or vendor financing in place is important to provide a clear roadmap to all stakeholders. The current owner may be willing to structure the sale either partially or entirely as a type of vendor take-back loan that may not require full bank financing. All of this will depend on the timing of the sale, the vendor’s own retirement and tax planning, and clarity around the cash flow required to make it work. If the owner wants to sell and cash out fast, a bank will need to be involved. The financing structure can look completely different if shareholders are comfortable with receiving their proceeds over several years. If your financing plan is contingent on outside investors, be sure you’ve received permission from the current owner to share confidential information before approaching third parties, especially as word may travel fast in the industry.
4. Assets vs. shares
   • Is the purchase going to be an asset purchase or a share purchase? Depending on the answer to this question, there are many variables to be considered, and the structure will need to reflect that, as will the conversations with the current owner. Keep in mind that if you’re buying the shares of the dealership, i.e., all of its operations and assets, you’re also buying all of its liabilities and past history. Like many aspects of purchasing a business, this may have legal ramifications. For example, if someone comes back years later to sue the business, the responsibility may land on your shoulders. An asset purchase will leave all the history and the responsibility that comes with the past with the vendor.
5. Due diligence
   • Don’t rely only on the current owner to do your due diligence. Your inside knowledge may not be sufficient to understand all of the business risks yet. Due diligence is more than just understanding the risk: it ensures that you have everything in place with systems, legal issues, etc., to ensure that any transaction is transparent.

There are many moving parts to own and operate a successful dealership long-term, to retain good people, and to build equity and value for the new shareholders. Develop a plan that helps you work through these large structural pieces; it will greatly increase your chances of success.

Things to watch for throughout the purchasing process

Any business deal comes with risk and reward. While finding a balance between the two is ideal, ultimately, it’s up to you to determine if a purchase is the right move for you.

It will require a renewed effort from the purchaser to understand the nuances, risks, and transaction flows of the dealership in much more detail.

If you are currently a member of senior management, recognize that the current shareholders/owners are working through some of their own questions and big decisions around succession planning, valuations, and financial risk. Some of these discussions you may be party to, some not, and thus some patience is required to ensure the process moves forward with intention – but without stakeholders digging their heels in under pressure.

Finally, there are a lot of new implications that come with becoming a shareholder of a dealership. While each purchase will be unique, you’ll want to consider your own eventual family succession, agreements between shareholders, financial, tax, integrity, and cultural nuances.

What’s next?

The earlier you can start planning for this process, the better. Assuming you’ve already begun or have been involved in conversations with the current owner around their intent to sell, be sure to get any agreements and commitments made in writing.

Few parts of a purchase and sale process can be done in isolation. You’ll need to speak with all of the shareholders and, in the case of an ESOP, be involved in any parameter setting as it relates to a down-the-road sale. This is especially important when you are purchasing a minority stake or an ownership stake that will grow significantly over time.

Engaging with MNP early can help you explore all of the options available to you and work towards finding the most suitable and beneficial course of action for everyone involved.