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7 steps for dealers to take to weather the economic storm

November 15, 2010

By Ronald Sompels, CPA, Crowe Horwath

To address the challenges of the current market, dealers nationwide need to determine the path that will allow them to get the most out of their dealerships. Here are seven steps dealers can take to help protect their businesses and reputations from today’s difficult economic environment.

1. Build a plan for the worst-case scenario and make the proper adjustments now.

Be realistic and honest with yourself. All indications are that the current crisis is not going to end soon. Even the most optimistic forecasts predict no rebound until late 2009 or early 2010.

At the National Automobile Dealers Association Convention and Expo in New Orleans in January, a panel of experts reached a consensus that the seasonally adjusted annualized sales rate (SAAR) would be about 9.5 million units in 2009. Dealers need to evaluate what this SAAR means to their dealerships and work with their accountants or other advisers to build an all-inclusive forecast to help determine the best options going forward.

For some dealerships, the best decision will be to discontinue operations. Although deciding to close down the business could be hard, doing so can prevent personal wealth losses beyond what already has been lost. Use caution before providing personal guarantees for debt and risking personal assets.

2. Understand your options in the worst-case scenario.

Understanding state franchise laws, including inventory buyback provisions, is key. Get legal counsel to ensure that you completely understand all the options available per your franchise agreement. Domestic franchises in particular need to understand the impact a manufacturer’s bankruptcy filing would have on their dealerships and the enforceability of the franchise agreements.

3. Make sure your financing and credit relationships are secure.

One disturbing recent trend is creditors looking for any excuse to exit a credit relationship. Today more than ever it is extremely difficult to find lenders willing to enter into new agreements, so maintaining a secure relationship with your existing lender is essential. To do so:

• Do not go out of trust.

• Do not violate any covenants of the agreement. If you have already violated a covenant or cannot avoid violating a covenant in the future, work out a solution with your creditor as soon as possible. Do not expect covenants to be waived as they might have been in the past.

• Remove the element of surprise from your relationship. Keep your lender informed about any foreseeable problems.

4. Manage your balance sheet – particularly inventory – at optimum levels.

Businesses have enjoyed extremely low interest rates for several months. A sharp increase in these rates could prove disastrous to some dealers. Keep inventories at a reasonable-days’ supply by declining manufacturer allocations when appropriate. Resist the incentives that entice you to take on more inventory than you can sell.

5. Cut expenses as much as possible and focus on the two largest expense categories: employee compensation and advertising.

Critically evaluate every position in your operation and make the tough termination decisions where necessary. If possible, save costs by reducing paid benefits like healthcare, time off, and retirement contributions.

Shift your advertising mix as much as possible toward more targeted electronic media. Web advertising and e-mail messaging can be more cost-effective for both ad creation and placement. Focus on marketing to existing customers and re-evaluate all advertising campaigns.

6. Consider consolidating your operations and other acquisition alternatives.

Determine the savings to be derived from consolidating administrative and management functions into one area. In addition, analyze what additional gross revenues might be purchased through an attractively priced acquisition that could be added to existing facilities to take advantage of excess capacity in your dealership.

7. Be a leader.

Become more engaged in your operations and lead by example in terms of your time commitment to the dealership, compensation, and attitude. Everyone is going through tough times, and empathy and understanding go a long way and can only benefit your organization.

Maintain a positive attitude. Develop a plan based on research and insight from experts and be optimistic about working toward achieving the goals set forth in the plan.

There is no arguing that these are tough times and budgets everywhere are being cut to improve results, but there is a silver lining: When the market turns around, there likely will be fewer dealers in business. The survivors will be lean, enjoy a higher level of throughput for their franchise than ever before, and able to employ the best and brightest in the industry.

By taking the steps discussed above, you increase your chances of having a dealership among those left standing when the current crisis is over. Then you will be in a position to reap the rewards of having survived during the toughest of times.

Ron Sompels is an executive with Crowe Horwath LLP in the Tampa, Fla., office. He can be reached at (813) 209-2401 or