It seems that the signs are everywhere for the single point dealership owner.  Shrinking margins and looming industry disruptions from car-sharing and direct-from-the-manufacturer electric vehicles, among other factors, are leading more dealers with one, or even a few, dealerships to decide not to continue on with their current model, leaving them with the prospect of either selling to a larger operation, or expanding their operation through the acquisition of additional points and line makes.

The sale of an automobile dealership for many, if not most dealers is a transaction that they only experience once.  Dealers on the buying side can also be faced with a transaction process that they have never been through before.  This series will provide an overview of the process to give you some idea of what you can expect in a buy/sell transaction.

Buy/sell transactions can be divided into six general phases.  The first phase occurs before a buyer and seller make contact, when the parties are evaluating the possibility of buying or selling a dealership.  During this time the buyer is making the decision to expand their operations and determining what size or type of dealership they would like to acquire, or what opportunities they hope to find.  A seller is making the determination that they will sell, preparing the dealership for sale, generating a financial profile of the business and determining what they believe their business is worth.  Developing realistic expectations on both sides of a transaction during this phase can make the rest of the process much easier, though it can be hard for dealers new to the process to know what to expect.

The second phase of the transaction begins when a potential buyer and a potential seller initially make contact.  At this stage of the process, the seller and buyer usually enter into a confidentiality agreement, which will protect both of them as they move through the process.  A confidentiality agreement will limit the potential buyer’s use of any information it obtains about the selling dealership, and will restrict the potential buyer from discussing the fact that the dealership may be for sale with any third parties.  While some business information will be shared between buyer and seller at the outset, a seller should be mindful that, without a confidentiality agreement in place, the buyer has broad discretion in its use of any volunteered information.  The buyer might want the confidentiality agreement to contain a “no shop” provision, which would lock in the potential buyer’s exclusive right to negotiate a deal with the seller for a period of time, usually 30 to 90 days.

During this 30 to 90 day period the potential buyer will evaluate the condition of the dealership and its financial performance, in order to determine how much they are willing to pay.  A well-prepared seller will have gone through this exercise themselves and will have a realistic expectation of what a buyer should be willing to pay for their operation and the ability to support that valuation to the buyer.

In addition to the all-important question of the value of the dealership, other items to be negotiated usually include: (i) whether the transaction will be a sale of assets or a sale of the ownership interest in the entity that owns the dealership; (ii) whether the real estate on which the dealership operates will be sold as part of the transaction or leased by the buyer; (iii) whether there will be any written employment or consulting agreements involved; and (iv) whether the buyer will expect the seller to execute a non-compete agreement.  Once the basic outline of the transaction is agreed upon the parties will need to determine if they formalize them in a letter of intent or whether they will just proceed to negotiating a definitive purchase agreement.  A letter of intent will generally set forth the basic terms, including whether it is an asset or stock transaction, basic price terms (including the method for valuing inventories), how real estate will be handled, and any other items that have been specifically agreed to.  The next part in this series will address the negotiation of the definitive purchase agreement.