When GM announced they will “phase-out,” sell or otherwise eliminate the entire Pontiac, Hummer, Saturn and SAAB divisions, the value of these dealerships dropped to record-breaking low levels.
 
We believe dealers should be compensated for the full value of their GM franchise. General Motors has already begun negotiations with certain dealers and have reached agreements with some regarding closure.  Dealers do not have to accept GM’s offer. A well-documented and independently supported claim for additional settlement dollars is necessary to place a fair value on the business. There are many other matters that must be addressed (e.g., inventories and floorplans, ongoing long-term contracts, personal guarantees, rebates and warranty claims, auction access, parts, facilities issues, exclusivity agreements, etc.) 

We are working with some GM dealers to develop the best solutions for their unique circumstances. We have built and are continuously updating a network of communication and data to stay ahead of this dilemma and find creative solutions to this very complex issue.

Members of our professional Litigation & Valuation Team perform numerous dealership valuations each year and have provided litigation support and expert witness testimony for our many dealer-clients.  In addition, we have helped negotiate fair settlements with GM in the past, without the expense of courtrooms or litigation. 

We welcome you to contact us for help.

Chrysler will likely be selling essentially all of their assets to a new company (a possible alliance with Fiat).  A hearing relating to this sale was originally scheduled for May 21, but has recently been pushed back to May 27. Since protocol indicates that the dealers are to be notified 13 days prior to this hearing, dealers who were expecting to learn their fate on Friday, May 8, will most likely find out on Thursday, May 14, instead.

Nonetheless, interim financing arrangements are currently being extended to most dealers by GMAC; however, please be aware that these are just interim agreements and GMAC will determine, sooner or later, whether to modify existing agreements. At that time rates may go up, security may increase, personal guarantees may be required; all while lending limits decrease. GMAC may even terminate some dealer floorplan arrangements while continuing with the same floorplan terms for other dealers.
 
On May 14 Chrysler dealers will find themselves on one list or the other…either remaining a Chrysler dealer or their franchise agreement will be terminated. On whichever list dealers find themselves, pitfalls abound.
 
The professionals at Somerset have worked with dealers for 25 years. Our professionals helped over 100 Oldsmobile dealers reach fair settlements with GM when they were in similar circumstances. While the current situation is indeed different than the one experienced by the Olds dealers, there was much learned during that time that will be beneficial in helping navigate this difficult road ahead. An added benefit of working with Somerset is the fact that we “speak Chrysler.” One of our staff members spent time as the general manager of a Chrysler dealership.
 
The bottom line: Chrysler dealers have spent many years developing and investing in the future of their businesses. We can help them receive the compensation they deserve for their hard work and devotion. We have built and are continuously updating a network of communication and data to stay ahead of this dilemma and find creative solutions to this very complex issue. 
 
To receive timely updates as this matter develops, add yourself to our email list by sending a message to info@somersetcpas.com, or to discuss your specific situation, contact me at 317-504-7900, 800-469-7206 or rcollins@somersetcpas.com.

1. Shop Floorplan Lenders– The captives, especially the domestic captives, are in a cash crunch and many of the national and regional lenders familiar with dealerships are staying away from the retail automotive sector. However, many local lenders are offering very attractive rates.  Some dealers are seeing tens of thousands of dollars in savings each year by actively managing this major expense item. Furthermore, dealers who have made the switch dispel the myth that the captive is buying deeper than other lenders. According to one dealer, “I can get every deal bought that should be bought, so I don’t need to pay [the captive (in the form of excess floorplan costs)] to buy paper.”
2. Eliminate Paper Print-Outs of Your Monthly Books – If your DMS will not allow you to save the ledger and schedules in an electronic format that can be accessed and is acceptable to the IRS, invest in a CD-based product such as One View. The savings from paper to printing costs to extra maintenance on equipment can be substantial. Another benefit is that a tool like One View helps dealers and their office managers easily analyze the financial performance of the dealership.
3. Audit Your Advertising – Make sure that you get everything that you pay for. When you purchase advertising, the station is guaranteeing you a minimum viewership (which is quantified as rating points) for each ad placed. Obtain a report from your ad agency to determine if the minimum number of rating points was actually delivered. If not, ask for additional ads to be run the following month, at no cost, to make up the difference.
4. Negotiate Flat Fees with Your Ad Agency – Many dealers have reduced their advertising commissions without affecting their sales by eliminating the 15% commission agencies receive from TV and radio stations. By paying the agency based upon the number of units retailed or the gross that the dealership generates, any bias that the agency may have toward using those mediums that pay a commission is eliminated. Furthermore, a portion of your advertising costs rise and fall as your business rises and falls.
5. Use Rental Agency Vehicles as Loaners for Service Customers in Lieu of Your Inventory – Simply running the numbers relating to the costs to own, maintain and keep fuel in these vehicles will quickly reveal that you would be ahead financially by eliminating your loaner fleet. Another benefit that dealers who have made the switch report is that their CSI scores have risen. These dealers say that customers would often issue a poor CSI report for something as simple as the loaner not being clean. Now that they have partnered with a firm that handles rental vehicles full time, not only have loaner costs been dramatically reduced, but these problems have disappeared and scores have improved.
6. If You Are Going to Continue Using Loaner Vehicles, Offer Them for Sale– Consider hanging a tag on the rear view mirror with a price or monthly payment on it (don’t forget to include all of the required disclosures when quoting a payment). You may be surprised at the number of loaners you turn.
7. Effectively Shop Your Insurance– Obtain quotes from the various carriers on as close to an apples-to-apples basis as possible. If you don’t know, the insurance market is currently soft, and dealers should be benefiting from this soft market. Some of these carriers are very hungry for business, and you may realize a reduction in your premium. Give us a call or send us an e-mail at info@somersetcpas.com to request a sample letter that we use when we handle our clients’ insurance renewals.
8. Offer to Detail Customer Vehicles – You may find an uptick in the monthly profits of your recon department if you display a sign in your service lane and customer lounge offering this service. 

Some manufacturers are being aggressive in reviewing warranty claims and are assessing significant chargebacks.  Here are a few ideas to help you keep your hard-earned cash.

Some of the items that frequently result in chargeback are as follows:

1. Customer signatures.
2. Repairs to dealer’s inventory and other items not covered.
3. Add-on repairs.
4. OLH time.
5. The three “C’s” (complaint, cause and correction) and other documentation.
6. Record retention.
7. Parts retention and other parts issues.
8. Sublet.
9. Self-authorizations.
10. Repeat repairs.
11. PDI claims.
12. Batteries.

Dealerships should have a financial person who makes sure every required detail by the manufacturer concerning warranty categories are known and followed. In addition, each month dealerships should review the manufacturer’s expense report to identify areas of potential concern before an audit occurs.

Another item that is tripping up some dealers…dealers should remember that a technician is supposed to perform the appropriate documentation, not a service advisor. Any gauge or instrument reading needs to be documented and attached.

Here are additional ways to protect yourself if an audit occurs:

• Keep only one year’s worth of records for warranty review purposes. (Check with your CPA on other record retention requirements.)
• Using non-genuine parts is generally prohibited, including fluids. Go through scrap bins and make sure no after-market packaging is there.
• Parts departments should not give out a new part until they get the old one.
• Don’t claim repeat repairs.
• Ensure that claim procedures are followed concerning batteries.
• You can’t make money if you use a vendor that charges less than what the warranty allows…in other words, for most manufacturers you cannot mark up sublet bills.

There are times that a review, in addition to preserving the income already claimed, may result in additional profit opportunities. In particular here are three areas that dealers many times overlook that can help the income statement. Remember, you can claim time for transporting vehicles (most often for sublet purposes). Also, many manufacturers permit a claim for administrative time relative to sublet repairs.  Finally, many dealers do not make claims for items such as topping off fluids when they are performing warranty repairs or when they are performing the initial new vehicle inspection on a vehicle.

Please comment if you have any questions or would like to share your experiences.

I recently wrote an article that was published in the March 2009 issue of Construction Equipment Distribution magazine. The article’s title is “Get a Grip on Expenses.” Here’s an excerpt:

Surviving and even thriving in these tough times is possible–but dealers must take a hard look at everything. The financial markets, automotive industry and housing markets aren’t the only U.S. business segments to stumble this year. Nearly all construction contractors, regardless of specialization, have suffered through 2008 and the start of 2009, and the future doesn’t look any brighter. However, most dealers have the opportunity right now, if they take advantage of it, to:

1. Right-size the dealership.
2. Change sales and marketing processes that will maximize their return on investment.
3. Take a closer look at all expense items that will result in a stronger bottom line.

So let’s take some time and explore some of the things that dealers across the country are doing right now to positively impact their dealerships.

When it comes to fixed expenses, the big five are personnel, data processing, interest, insurance and advertising. However, don’t stop your examination of possible cuts with these five items, as there are probably more cuts to be found. Recently one dealer thought that cutting out $400,000 from fixed expenses was all that could be done at his dealership. However, after he dug deeper, another $100,000 in fixed expense was identified for the chopping block.

For the complete article, please follow this link or contact Somerset for a PDF.

In this difficult time, many dealers are finding sales opportunities under their own roof. A good tactic is to run a list of your best sales customers and run a list of the dealership’s best service customers. Compare these lists; a dealer will often find a very good sales customer is not a service customer at all (and vice-versa). By identifying the differences on these lists, the dealer has the opportunity to cross-promote the dealership to those individuals found only on one list. This tactic may also help you find out why a customer is only on one list and give you an opportunity to correct processes or procedures to maximize the revenue from existing customers.

Many dealership customers are having a difficult time making ends meet; accordingly, many dealers are experiencing record levels of accounts receivable write-offs. When an account is written off, a dealer is required to file a Form 1099-C with the IRS indicating the amount of debt forgiven. Many dealers have experienced success in collecting past due accounts by sending a letter (via regular mail) as one last chance for the customer to pay what is owed. In this letter the dealer clearly communicates that a Form 1099-C will be sent to the IRS should the bill not be paid immediately. It is surprising how many customers will at least make a phone call in order to settle this potentially bad debt.

If you have tried this tactic, let us know how it has worked for you.

With the tightening of the credit markets and bankruptcies on the rise, many lenders are enforcing often overlooked provisions in their dealer agreements. When reviewing your agreements, look for the following items at a minimum.

• All of your representations and warranties should be limited to “the best of the Dealer’s knowledge and belief.”
• All of your indemnity provisions should be limited to “valid, binding and enforceable claims or defenses only.”
• Any EFT or ACH agreements should be limited to credit entries only…do not allow the lender to take funds from your account.
• You should not provide any warranty with regards to the vehicle or the servicing of the vehicle.
• Closely examine the lender’s definition of a down payment…some lenders do not include traveler’s checks or credit cards in their definition.
• Ensure that only the owner can sign any recourse paper.
• Verify that the bank will take responsibility, as required, under all of the privacy regulations.

If you have any questions or comments about this topic, please let us know. We’d love to hear from you.

A dealer in the southeast recently experienced a $95,000 theft loss as the result of the following scheme. The perpetrator of this theft, we’ll call her Betty, made entries to the cash clearing account via the purchase journal. The cash clearing account is used to process each day’s parts and service sales and should balance to zero at the end of every day. Betty’s entry allowed her to short the daily deposit by the amount of her entry without the books being out of balance. 

The entry made via the purchase journal “represented” a bogus credit memo from a vendor. Instead of reducing the cash sales account, a real credit memo would have reduced the parts inventory. In order to reconcile the vendor statement to the dealership’s books, Betty showed this bogus credit memo as open at the end of the month. The following month she recorded the entry to eliminate that credit memo and set up another credit memo for the same amount. This second entry’s purpose was to give the appearance that the open credit memo was from the current month and, therefore, looked appropriate on the outstanding list.

Ultimately, a vendor (not necessarily the same vendor) actually issued a valid credit memo. Betty then relieved some of her bogus credit memos and plugged the balance as a reduction to the parts inventory (where the entire credit should actually have been posted anyway). In essence she covered her theft by applying the valid credit memo to various vendors instead of the parts inventory.

Eventually, Betty no longer went through the laborious process of posting items through accounts payable and falsifying the monthly vendor reconciliation. She simply reduced the cash sales account and increased the parts inventory balance. In this way she was still able to reduce the daily deposit amount and pocket the cash.

There are many other ways that dealership employees have been stealing from their dealerships. Please ensure that your dealership’s internal controls are in place and functioning.

Many dealers are looking for ways to cut expenses in order to help them make it through these difficult times. One of the expense areas that is being consistently reviewed is data processing.

A dealer in the Louisville area recently experienced an $80,000 theft loss perpetrated by the office manager. This theft occurred while the dealership was going through computer system changes. These changes created an element of confusion and chaos in the dealership, which enabled the office manager to take advantage of the dealer. In this case the office manager took money out of sales deals and deposited the funds in her own account. This office manager was in charge of all accounting functions and was able to easily cover her tracks.

This post is intended is intended to be a simple word of caution to remind you to be sure that you have the proper system of checks and balances in place at all times but…especially in these difficult times.