How to pass the family dealership to the next generation

If you own a small- to mid-sized dealership, you’ll likely start to think seriously about your legacy and the family name on the dealership as you approach retirement age. Making the right decisions now, and engaging in succession planning early, will open doors for a painless and stress-free exit from your business when the time comes. Succession planning helps you foresee the unexpected and answer crucial questions about how to value your dealership, how to involve your family in the transition, and how your exit strategy impacts you long term.

What becomes of your dealership — in some cases your life’s work — after you leave will be determined in large part by your succession plan. You have many options for who your successors will be; if your goal is to pass ownership within your family, you’ll need to balance financial considerations with other considerations that are often less tangible, but equally important.

Financial considerations

The basic principles of succession apply to dealerships just like any other type of family business — transitioning ownership to your children will almost always mean you’re getting bought out over time. You could likely get a large, one-time payment for the full price of your dealership if you sell to a third party acquiror, but your kids would typically acquire it over the course of a decade or more.

A share freeze or estate freeze is the most common method of passing ownership of your dealership to the next generation in your family. This approach allows you to freeze your ownership shares at their current value. That way, your family members can accrue any future growth in value while you slowly get bought out.

When deciding between selling to a third party versus being bought out by family members, it’s important to remember your cash flow needs. An external buyer will almost always pay more for the business than family members. Is your preference to manage a single lump-sum payment, and make it last through retirement, or to have a steady stream of income through progressive redemption of the shares?

There are also financial risks of being bought out over time that can’t be ignored. If the valuation of your dealership declines after your share freeze, be it through mismanagement or external factors like a recession, you run the risk of not being paid the full value of your dealership.

A final consideration to keep in mind is the lifetime capital gains exemption, which can provide tax savings on the sale of eligible shares. Planning opportunities are available under current rules to access the capital gains exemption on sales to either non-arm’s length parties or third parties.

Non-financial issues

Finances are rarely the only consideration, or even the most important one, when family is involved. You need to think carefully about protecting relationships and family harmony. Generally speaking, your best chance at avoiding family conflict during the succession process is to talk about succession early and often, get everyone on the same page, and put plans in writing.

Legacy versus money: Having your kids take ownership and control of your dealership should be a proud moment, especially if the dealership bears your family name. Even in retirement, the dealership’s performance and quality will be tied to your legacy. Do you trust your children to carry that legacy? How involved do you want to be in decision making during your retirement? While protecting your legacy is important, also acknowledge that the dealerships industry is evolving; your successors may not choose to, or be able to, run the business exactly as you did.

Multiple roles for multiple children: Perhaps one or more of your children already work at the dealership in different roles before you transition out. Not everyone has the skillset to be a Dealer Principal or president of a dealership, nor is it always possible logistically to share those roles. Ask yourself if giving the title of president or Dealer Principal to one child will create resentment among the others. Have open and honest conversations with your children about their management prowess, as well as their desire to manage the business, or even inherit it at all. Because these conversations are so crucial and sensitive, consider getting the support of a third-party facilitator.

Dividing assets fairly: Consider this hypothetical scenario: you have three children, but only one has made their career working alongside you at the dealership. Is it fair to give each child an equal third of the ownership shares when you exit, or should the child who has put more into the dealership’s success get a larger stake? Can you “equalize” by giving the other two children different assets other than ownership shares (cash, property, etc.)? The successor who has worked there may be more invested in the success of the dealership and would therefore want to pour more money back into it, while the other two would prefer to put the money to other uses. Succession planning allows you to manage these dynamics early.

Succession is a family matter

Your exit from the dealership impacts both you and your loved ones, which means your family members should be informed and involved, as appropriate, in the decision-making process. A family office practitioner’s role is to help you have productive discussions with your family about the future of your dealership, using both a financial and non-financial lens.

To learn more, contact:

Kerry Smith, CPA, CA, TEP | National Leader, Family Office Services | 778-374-2189 | [email protected]

Chris Schaufele, CPA, CA | National Leader, Dealerships | 604-542-6768 | [email protected]