Why having a solid foundation is key when it comes to succession planning
It’s that time of year again, when I remind all dealers that its time to review their succession plans, wills, and contingency plans. I know that it is quite presumptuous of me to believe that all dealers in fact have one or all of those plans in place. In fact according to the recent CADA survey contained in the 2011 CADA Year-in-Review, only 57 per cent of you believe you have done proper planning. Furthermore, 43 per cent really have no idea what will happen in the future. For some, swinging for the fence is just too much.
PREPARE FOR THE UNEXPECTED
I’d like to tell you the story of Bob and his two brothers Bing and Frank. These are not their real names but the story is true. When I met the brothers they were in their 60s and had been in the car business for over 40 years, first as garage mechanics then as import new car dealers. Bob was the planner but his younger siblings Bing and Frank were not. As a partnership, they never faced the tough issues and certainly never resolved them.
Bing was the fixed operations guru, could fix anything that moved. Bing was also the dealer principal on the DSSA. Both Bob and Frank worked the retail business, one new and the other used.
All was going well until Bing was diagnosed with a terminal illness. The disease progressed rapidly and Bing passed away within three months. Bob and Frank were devastated and really were quite lost without their brother working by their side, day in and day out, leading the management of the store.
Although the brothers knew that one day they would have to break up the act, they never talked about it and avoided the topic.
Bing died without a will and only had limited life insurance. His whole life had been the business. Other than his house, that he had owned free and clear, Bing’s only other asset was a one third interest in the dealership. He had lived a good life, but the business never generated big profits after everything had been split three ways.
LOOKING FOR A SOLUTION
After a few months of trying to make a go of it, looking for a fixed operations manager to replace Bing proved overwhelming. One day Frank got a phone call from Tony, a long-time acquaintance and also a fellow car dealer. He asked how things were going and Frank indicated that they had just paid out Bing’s widow and their line of credit was maxed out. They were selling used cars to bring some cash back into the business. They could have gone to the bank but they did not like that idea.
It turned out that Tony was a low profile type of guy that had built a dealership empire of some 11 stores. Offering to help, Tony and his CFO met with Frank and Bob, looked over their financials and assessed the market opportunity. Out of the blue, Tony made them an offer. Frank and Bob, also simple guys near the end of their working careers, were surprised at how little their dealership was worth to Tony. They had worked all their lives and believed that their business was increasing in value. The offer was less than 50 per cent of the value that they had based their payment upon to Bing’s wife for Bing’s shares.
Tony explained that their facility was old, too small and not located in the right part of the neighbourhood. It would cost him millions to relocate the store and even then, there was no guarantee that the customers that had been loyal to Frank, Bing and Bob would continue to do business at the new store. He had to completely overhaul the store management. Tony also wanted Frank and Bob to sign a consulting contract to work for Tony for two years.
Bing had been the dealer principal and had had meetings with the zone. The zone had formally requested a new facility and relocation as a condition of continuing as a dealer. Bing had told Frank and Bob that he could delay this until the zone manager changed and the new guy would certainly be more reasonable.
To make a long story short, Frank and Bob felt too much pressure and decided to sell rather than comply with the zone demands.
NOT MUCH LEFT
After the sale and having fulfilled the consulting agreement, Bob and Frank retired. In the intervening period, they had sold the dealership property and paid back the mortgage that they had taken out to pay for an image upgrade about five years earlier. Much to their surprise there was not much money left over since the purchaser did not place any value of the image upgrades, coupled with the fact that there was no business operating out the store for 14 months to offset building carrying costs.
Lucky for both Frank and Bob, their spouses were school teachers and had good pensions. Even though there was an investment portfolio, returns were very low and taxes on drawings from their company did not yield much after tax disposable income.
How could this have turned out differently?
As dealers we should always be planning for the unexpected. Had the brothers planned for an unforeseen event, things could have been very different.
First of all, there should have been a shareholders’ agreement that clearly outlined what would happen in the case of disability or death of one of the partners. The “risk” should have been funded by group insurance covering both disability and life insurance.The insurance should have been sufficient enough to cover the value of the shares and also provide additional working capital for the business to weather any downside that the untimely event might cause.
Secondly, a management succession plan should have been drafted that provided for continuing operation of the business, uninterrupted. In this case, Bing, nearing retirement age anyway, should have had a strong assistant that easily could have stepped into his shoes.
Thirdly, on a regular basis, the brothers should have had their accountant calculate the value of their investment. In this way, they would have known the downward pressure on value of the impending dealership relocation.
Fourthly, the brothers should have maxed out the annual RRSP deductions and focused on paying down the mortgage on the building.
Lastly, The brothers should all have had a will and that will should have mirrored the shareholders’ agreement and DSSA provision to ensure continued operation of the business.
Although the brothers felt an obligation to Bing’s spouse, they did not have to pay her out in one payment. A secured loan or an annual dividend plan could likely have satisfied her ongoing cash needs and not created a situation where Frank and Bob backed themselves into a hole.
SOONER, RATHER THAN LATER
Succession has many aspects and for many it is difficult to wrap their arms around it. Procrastination is a very bad thing. Succession plans take many years to develop and then constantly change. For some, this is too much of a task to ask.
You do not have to hit the home run. A single will get you started, After all, you have to pass first base before you get to second, third then finally home.
Getting to first base means having a solid plan for the unexpected. This is called a contingency plan and is the first step towards developing a succession plan. At least being at first base, you have some assurances that you are not out of the game. If first base is as far as you go, then so be it. At least your business and family are protected. Getting to second base however is much easier if you are already at first.
If you have not done so already, you should read the CADA Succession Planning Guide — a roadmap to your future. It is filled with solid hints and tips on how you can get started.
