Expert insights: The keys to successful dealership succession planning

In communities across Canada, the positive impact of the local dealership has extended across generations. Behind that longevity, more often than not, was a well-executed succession from one owner to the next. That takes more than good intentions and a handshake. It takes a plan. Farid Ahmad, the founder and CEO of Dealer Solutions Mergers and Acquisitions, and John Chisholm, his director of Canadian sales, have more than three decades of experience in the industry and in dealing with the emotions and financial logistics involved in succession planning. Together, they offer their guidance to ensure a successful succession.

Q: What are the key areas that a dealer needs to consider in developing a succession plan?

John Chisholm: Putting together a succession plan takes as much time and planning as selling a dealership. It is important that a dealer makes the time to get professional advice to do it right. Key areas to consider include:

Dealership valuation. It is important that you know what your business is worth. You can begin by getting a professional valuation done by your M&A partner or an auto-focused accounting firm. Understanding the value of the business and goodwill is important in helping identify a suitable successor. At the end of the day, a succession plan is a business deal; therefore, it is important to know what the business is worth, and you need to be certain that your potential successor will be able to afford it.

Identifying a successor. A successor can be a family member or member of the management team whom you have been grooming or who has exhibited good potential. It’s important to have your family’s support in your selection, since they, too, will inevitably be affected by the decision.

Will the potential successor be approved by the manufacturer? Naturally, it is essential that the manufacturer approve any potential successor. Manufacturers tend to prefer a candidate who has an auto-focused education, is an NADA Academy graduate and has an adequate number of years of experience in the business. If the potential successor is not approved, it should subsequently be determined whether something can be done to influence a change in this decision or whether another successor will need to be identified.

Finances. This, step, which can also occur simultaneously with earlier steps, determines whether the successor is well-capitalized enough to take over the responsibility of the dealership.

Preparing the management team and employees. Most people are averse to change, especially when they are comfortable with the current situation. As a result, it is best to start laying the groundwork in advance in order for everyone to be aware of what the succession plan is. This helps prevent valuable employees from leaving suddenly due to unexpected changes.

Preparing other partners. It goes without saying that partners, such as bankers and lawyers, need to be advised to help support the deal.

Farid Ahmad: Cost of real estate. This is a bigger issue today than it was in the past. There may be different options to consider when transitioning through succession, so it is important to be well-informed before taking any final decision.

Q: When is the right time for a dealer to develop a succession plan?

Chisholm: If you haven’t done one in the past year, now is the right time. However, ideally, you should develop the plan before you buy a dealership or shortly after you take over a business. As a rule, successful business owners know how they are going to get out of the business even before they get into it. A succession plan takes a lot of thought and time to put together. You need to start laying the groundwork for your succession plan with your team and family members as early as possible, so you have time to groom the successor and acclimate the team to the upcoming changes.

Q: How can a dealer ensure that a succession plan is followed if something catastrophic happens to that person and he or she is to implement the plan?

Chisholm: As with any good plan, there should always be a backup to the succession plan—a contingency. If your successor isn’t ready to take over, appoint someone else in the interim to handle the transition. Share your contingency plan with managers and key partners. Sometimes, an option of mitigating such a risk is to give your management team fractional shares in the business.

Ahmad: Make sure that professional advisers, such as attorneys and accountants, know what the contingency plan is so they can support it.

Q: When selecting an entity to help develop a plan, what are key skills and capabilities that the entity should possess?

Ahmad: Whether you choose to get help from an accounting firm, legal firm or M&A partner, it is critical for that entity to have auto industry experience. Advisers with industry experience not only have a proven track record; they also have templates and frameworks that can save a lot of money and time as you go through the process.

Q: What happens if a succession plan is not in place and a sudden “change in circumstance” occurs with the dealership owner?

Ahmad: Not having a succession plan in place can be disastrous. A sudden change in circumstance can have a huge and negative impact on the business if nobody knows who is in charge or what to do. If this does happen, seek immediate guidance from a professional. Ask your banker, accounting firm, M&A partner and manufacturer for support.

Q: Is succession planning handled differently when the plan is to keep the business within the family versus transfer it to an outside entity?

Ahmad: Yes. Transitioning ownership to a party outside the family requires a completely different strategy and a different corporate structure from transitioning ownership to someone within the family.

When the successor is a member of the family, the succession plan tends to be a lot more complicated, primarily because of tax issues. When a family member inherits a business, he or she will have to deal with inheritance tax and tax liability issues. This requires more planning upfront. If the successor is outside the family, the sale tends to be more straightforward.

Q: What succession planning considerations that dealers confront today didn’t exist years ago? In that same vein, what considerations appear likely to emerge in the years ahead as the automotive landscape adapts to online retailing, electric vehicles, and such?

Ahmad: Years ago, manufacturers were not quite as involved in the transfer of business ownership. Today, manufacturers are very engaged in these transactions, and most have a rigorous approval process.

Also, transaction costs have risen a great deal. When we represent dealerships that sell for over $100 million, the financial structure and approvals needed for figures such as these take some planning and a well-articulated strategy.

The cost of real estate is another consideration. When a successor takes over a dealership, real estate must be appraised at fair market value, which can result in a significant property-tax increase.

Other issues include human resources, labor laws and litigation issues. Employee lawsuits are much more prevalent than they were years ago, and these can affect the succession plan.

Finally, successors need to consider the future of retailing and whether the changes will be affordable.

Q: What are some common mistakes that dealers make or factors they overlook when they are creating a succession plan?

Ahmad: Not keeping key players involved throughout the process. Most problems tend to occur when a succession plan is announced after the fact.

Another mistake is not having the right corporate structure in place before implementation or being transparent about any outstanding potential liabilities.

Q: What do the automakers look for in a solid dealership succession plan?

Ahmad: It is our opinion that manufacturers look for a candidate with the knowledge and operational experience specific to this industry. It is important to note that manufacturers often provide support to dealers to prepare and prequalify a successor.

Chisholm: Other things automakers appear to look for are the propensity for good customer service (CSI), community involvement, leadership skills and whether the brand will be represented by the successor. Naturally, the relationship between the candidate and the manufacturer will also play an important role.

Q: What are the factors to consider if a succession plan involves a cross- border transaction?

Ahmad: Cross-border transactions don’t usually present any problems. The primary issue is expertise and resources, as well as knowing the local market.

Q: Once you have a succession plan in place, how and how often should you evaluate the success of the plan for possible revision?

Ahmad: It is healthy to reevaluate a plan often—annually, perhaps. It is often best for all advisers or key players to thoroughly go through the review process with you.

ABOUT THE PANELISTS
FARID AHMAD 
Founder and Chief Executive Officer
With more than 35 years of auto industry experience in Canada, the United States and the UK, Farid is considered a genuine industry expert by dealers and automakers alike, with his finger on the pulse of the automotive marketplace across North America. He was educated in the UK and is a graduate of Brooklands College and the prestigious NADA Academy, a program that prepares current and future dealership leaders.

JOHN CHISHOLM
Director, Canadian Sales
John’s 35 years of retail experience began in the service department of his father’s Chrysler dealership. He has owned several highly successful, award-winning dealerships, and his automotive passion led him to become president of the Ontario Automobile Dealers Association (OADA) and join the Canadian Automobile Dealers Association (CADA). He is intimately aware of the emotions and financial logistics involved in succession and growth opportunities, having undergone the buy/sell process several times in his own career.