Expert Insights: Dealership Succession Planning

Dealers can become so focused on success that they forget about succession—and not the television series. With all the demands imposed by the ever-evolving automotive industry, succession planning seems as if it can be put off into the future—and then tomorrow becomes today. Many dealers also are reluctant to begin a process that is, in a sense, the first step in letting go of their business. To help those skittish dealers take those first tentative steps toward a comprehensive succession plan, Automotive News Canada spoke with Farid Ahmad, Founder and CEO of DSMA; and Chris Schaufele, National Leader, Dealerships, at MNP. They offer guidance for a successful succession that preserves the dealers’ legacy of service and sweat equity.

Q: Dealers have the unique and complex task of succeeding in a fast-paced industry where they must also direct extensive long-term planning across all divisions of their business. If they don’t already have a succession plan in place, what do you think may be holding them back?
 

Farid Ahmad: It can be a combination of fear and indecision or simply a feeling that it is too early to make this kind of decision. Succession planning involves looking ahead and making important decisions, which tends to be a complex and emotional process. So, the fear of change and uncertainty may indeed deter dealers from initiating succession planning. They could still be running their businesses and in a state of assessment of what the future holds. Not to mention that some dealers may not fully understand the importance of succession planning and underestimate the time and effort required to develop their comprehensive transition plan.

Chris Schaufele: There could be many factors holding a dealer back from initiating succession planning. For some, the immediacy of day-to-day operational decisions can overshadow longer-term planning for their future; and for others, they may not want to lose control over the decision-making within their dealership, as it is a big part of their identity. The fear of the unknown and a lack of understanding the importance of succession planning can also prevent these important conversations from being had.

Q: According to DesRosiers Automotive Consultants Ltd., from an article in Automotive News Canada, more than half of all new-vehicle sales in Canada are controlled by large auto dealership groups. When we think of dealership succession planning, are we referring to individual dealers, or are there dealership groups that still require an exit plan as well?
 

Ahmad: Both. Many groups across Canada are structured with one single owner overseeing multiple stores. It has been noted across the board that we often see succession planning being delayed because dealers assume it signifies retirement and the end of their journey. However, succession planning marks a new beginning, providing owners with strategies for achieving personal and business goals. The key is to determine the right strategies specific to the unique visions, set by either a family- operated business or a large automotive group. The visions may vary depending on the size of the company and the competitive landscape, affecting competition and growth projections. No matter the size and ownership structure, it is critical to ensure that you have a strategic plan in place to carry the business forward.

Schaufele: Every organization and individual should have a succession plan, no matter how big or small their group or single store might be. From our experience, however, it is often the small groups or single-store operators who are least likely to have any planning in place and could therefore benefit the most from having conversations on their retirement.

Q: The term is “succession planning,” but the underpinnings are tied to years of hard work and family dynamics. For dealers, is there an emotional element to working through a dealership succession plan? And if so, how does it factor into the final agreement?
 

Ahmad: Talking about succession planning can make people feel uncomfortable, particularly when it comes to family. This process is a very emotional one for the dealer, as they have to deal with the future of their baby—the business. Ideally, dealers would prefer to pass on the business to one of their family members, such as their children. This could be because it is the best solution for the dealer from a tax perspective and from a retirement perspective, as with recurring income. A lack of qualified family members to take over the dealership or group is also a common reason family business owners decide to sell their business to an outsider. This can be extremely emotional for the dealer as well as their family members.

Schaufele: Emotional and relationship considerations are as important to a successful succession plan as financial considerations. In many cases, the dealership carries the family name, and they want their legacy to carry into their retirement. While the new owner, be it your kids or a third-party group, may not run your store exactly like you did, it is often important for dealers to know their legacy will be kept intact.

Q: Dealerships are some of the strongest independently owned businesses in Canada. Once a succession plan has been finalized, how often does the plan need to be reviewed, given the long-term probability of the organization?
 

Ahmad: Business succession planning is an ongoing and evolving process. Once created, the dealer should review the plan annually to ensure he or she is still on board with the decisions made. The business is changing rapidly; a good succession plan should remain somewhat fluid until it is time to execute. Regular reviewing and updating of the plan can help ensure its effectiveness and alignment with the dealer’s evolving needs and goals.

Schaufele: Succession plans should be continually revisited. Size and profitability of the dealership, goals and intentions of the owners, and family dynamics can all change, along with a myriad of factors that will continue to evolve after the plan is initiated. The most important part is beginning the process, but it is a fluid document that will evolve over time.

Q: Automakers each have their own distinct corporate culture. How much of a factor does the OEM play in succession planning?
 

Ahmad: If a dealer plans to transfer ownership to the next generation, he or she must consider whether these individuals will be approved by the OEM—who will need to be informed and subsequently, choose to approve or disapprove the candidate. Unfortunately, securing this consent is not always guaranteed, adding an additional factor to succession planning for dealers.

Schaufele: Different OEMs will have different requirements regarding placement of a new dealer principal, and overall ownership requirements will be different for each OEM. Each manufacturer will require various levels of input to determine what the succession plan might look like. Typically, the OEM has final say over who the store or group may or may not be passed on or sold to and what the new franchise agreement might look like. It is also important to note and be aware of the specific requirements of your OEM early in the succession planning process. You do not want to be caught by surprise when the OEM does not approve your succession or your sale.

Q: On average, for a single-point dealership or a small group, how much time will a succession plan take to develop and finalize from start to finish?
 

Ahmad: The timeline can vary depending on the complexity of the organization, the number of business owners and the readiness of potential successors. While there is no fixed schedule, it typically takes several months to a few years to complete. As mentioned before, succession planning is an ongoing process rather than a one-time event.

Schaufele: A succession plan is an evergreen document that should be continually evolving and updated as facts and situations evolve. However, working with a succession adviser to develop an effective plan will consider the input of many parties, including the current owner, spouse, children and other family members, key employees and potentially other key stakeholders. From there, the plan can be developed by your succession advisers and include input from your accountants and lawyers. This process can take a significant amount of time to get right and should not be rushed. Allow several months to years to see this process through from start to finish.

Q: What are some of the changes you’re seeing with succession planning in 2023 compared to five to 10 years ago?
 

Ahmad: Manufacturer dealer agreements have changed a lot in some cases. The economy has also recently had an impact on values that can affect the dealer’s walkaway number drastically.

Schaufele: Ever since the onset of the pandemic, many business owners, including dealers, have been more actively considering what their future and their retirement plans might look like. Where succession planning and retirement for many was previously a distant future thought, it is now much more front-of-mind for some dealers. However, many still have not taken steps to formalize or even initiate this planning.

Q: For dealers who do not yet have a succession plan, what would you recommend as the first step?
 

Ahmad: Succession planning is a process every dealer needs to think about and is undeniably important. Exit planning starts with a vision for the future. Thinking ahead about the next phase of their life will allow them to implement positive changes and make important decisions. We suggest that dealers create a wish list of how they envision the succession of their business. From there, they need to start involving their professional advisers, such as legal and accounting teams, to focus on tax implications, family dynamics, key employees and their effect on the manufacturers.

Schaufele: Talk to your trusted adviser and engage a succession planning specialist as soon as possible to get the conversation started and the process moving forward. If you do not have a plan in place, it is never too late to start one, but do not delay.

ABOUT THE PANELISTS
 

FARID AHMAD

Founder and Chief Executive Officer, DSMA

With over 35 years of global auto industry experience, Farid is considered a genuine industry expert by dealers and OEMs alike, with his finger on the pulse of the automotive marketplace across North America. Farid is founder and CEO of DSMA, an automotive intelligence and M&A advisory service with more than 1,000 years of combined industry experience and over 1,500 valuations and over 400 transactions completed. For the second consecutive year, DSMA has placed on the 2022 Report on Business ranking of Canada’s Top Growing Companies. www.dsma.com

CHRIS SCHAUFELE CPA, CA

National Leader, Dealerships, MNP

Chris is MNP’s national dealership service leader and a business adviser with the firm’s assurance and accounting group in Surrey, BC. With more than 15 years of experience in the automotive industry, Chris oversees a team of professionals and MNP’s delivery of dealership services across Canada. He helps dealers and leasing companies as well as business owners in other industries, ensuring they have the information to make strong business decisions. He delivers services including reviews and compilations, helps with tax planning and compliance and advises on a range of business issues. His expertise in accounting and assurance standards and keen understanding of the industry allow him to identify opportunities to help his clients succeed. www.mnp.ca/transition-your-dealership