We all hope that 2010 will be a better year for the auto industry. Get a good start. Make sure that you have in place safeguards to help you hold onto the money you make. Be sure that the dealership uses best practices to protect against losses and lawsuits.
Here is a list of 10 protections for 2010 that a dealer should have in place to minimize the risks that most frequently lead to costly problems.
Protect your assets and affiliated businesses in the event of future bankruptcy. If dealers learned one thing in 2009 from the cataclysmic events affecting Chrysler and GM, it is that sometimes the worst can happen. Sometimes a franchisor’s problems are so severe that they can drag down dealers. If your dealership must one day declare bankruptcy because of problems with your franchisor or because of other problems, be in a position to protect your assets and your affiliated businesses.
Distribute excess cash and personal assets. If your company must go bankrupt, distributions to shareholders within the year before bankruptcy can be “clawed back” by the bankruptcy court. So, if you wait to distribute excess cash and personal assets until trouble is looming, it may be too late. Consult now with your accountant on the net worth and working capital you need to operate and to comply with the requirements of your franchisor and your lenders. Consult with your attorney on distributing any personal assets unrelated to the business and excess cash.
Compartmentalize your businesses. Each of your businesses should be in its own entity. If one business fails that is part of a corporation or LLC housing many businesses, all businesses that are part of that entity are likely to all be dragged down. If each business is in its own corporation or LLC, the failure of one business is less likely to ruin the others.
Use your state franchise rights. Franchisors are strong-arming dealers by telling them to look at what happened to disobedient GM and Chrysler dealers in bankruptcy. The implication is that any franchisor may choose to do a tactical bankruptcy to shed dealers. However, it is not practical for a distributor or manufacturer to go into bankruptcy to simply get rid of dealers. The government support that was so critical to the success of the GM and Chrysler bankruptcy resuscitations will be unavailable to import brand distributors and manufacturers. A distributor that goes into bankruptcy could wind up losing distribution rights to its own vehicles, and the damage to the prestige of the brand will be incalculable. “Tactical” bankruptcies by franchisors are so risky that they are improbable. Do not succumb to threats for fear of a tactical bankruptcy by your franchisor.
The Virginia auto dealer franchise laws are there to protect you. But they are not self-enforcing. You must use the laws to enjoy the benefits.
Don’t listen to empty threats. Just like the empty threat of a tactical bankruptcy, the threat that a franchisor won’t “renew” you is empty. Under Virginia law, a manufacturer must have the same good cause to refuse to renew you that it must have to terminate a dealer. A dealer will remain a dealer until the manufacturer has grounds to terminate the franchise and it goes through state termination processes to obtain state approval of non-renewal.
Know and use your rights in a franchisor audit. Franchisors are increasing their sales and warranty audit activities in an attempt to find scarce dollars. Know your rights. Know the time period a manufacturer may review for an audit –twelve months for a warranty audit and eighteen months for a sales audit. Insist that the manufacturer not violate that time limit. Attend the opening meeting to learn what the auditor is looking for. Be courteous and professional with the auditor, but don’t be afraid to justify your dealership’s actions. Challenge any incorrect assumptions and positions of the auditor. Attend the closing meeting and make the auditor explain the audit findings. Use your internal appeal process that the franchisor provides. Use any state processes to challenge chargebacks that are inappropriate.
Implement an F&I compliance program. The most frequent sources of litigation at dealerships are problems in F&I. Suits can arise not just from improper practices, but also from customer misunderstanding of F&I processes and the terms of the deal. Develop a policy and train your employees.
Do a regular audit of your forms used in selling vehicles and F&I. Are they updated? Do they provide you the latest protections?
Have a set closing presentation. F&I people must be trained to lead customers through a deal in a meaningful way. If disputes arise about the nature of the closing process and the representations, having an established process can be valuable if you must justify the dealership’s practices.
Make sure that your F&I personnel fully explain the deal. Many lawsuits arise simply because of customers’ failure to understand their obligations.
Use a deal completion checklist. Often, disputes arise when customers feel they are being called unnecessarily for documents or materials that they feel they should have signed or been asked to provide in the closing office.
Have a deadline for deal funding. The longer a deal goes unfunded, the harder it gets to finalize it.
Spot check compliance. Review completed deals to judge the performance of F&I personnel.
Hire soundly. With turnover, dealers are always hiring, and hopefully increased business in 2010 will increase your opportunities to hire new personnel. Expensive employment claims arise most often from poor hiring decisions. Train managers to recruit, interview, and select employees wisely. Make sure that managers understand the qualifications they are looking for in an employee. Make sure that they interview appropriately to determine applicants’ qualifications.
Pay minimum wage and, where applicable, overtime. When sales are tough, sometimes sales people don’t earn minimum wage for each hour worked based on their draws. Sometimes employees who should earn time and a half overtime are misclassified. Wage claims, especially class action wage claims, can be expensive including treble damages and attorneys’ fees. Make sure that salespeople and other employees earn minimum wage for each hour worked. Make sure that non-exempt employees are not mistakenly classified as exempt from overtime pay requirements.
Prevent discrimination and harassment claims. The most expensive personnel claims against dealers are claims for discrimination or harassment. Have a strong policy. The law may give you some protection if an employee does not let you know of a problem, but only if employees know how to make their complaints known. Be sure that your complaint process is in writing, preferably in your personnel handbook. Cover it in meetings from time to time. Treat every employment problem seriously. Properly investigate a potential claim. Candidly assess the situation. Take action consistent with actions you have taken under similar circumstances. Have zero tolerance for retaliation.
Know your customer. Implement and use your Red Flags program. Compliance with the FTC Red Flags Rule is important to help your dealership know your customers and avoid becoming a victim of identity theft. Many dealers have put off compliance with the FTC Red Flags Rule because they view it as a costly government mandate. But compliance with this rule is important to help the dealership avoid becoming a victim by delivering a $20,000, $30,000 or $40,000 vehicle to an identity thief.
Safeguard your customer information. You are mandated by law to have an information safeguards program in effect. This is for the protection of your customers’ identities, and if you don’t have a program in place the potential legal action can be quite expensive. More importantly for your dealership, your customer records are your assets. A salesperson who leaves your dealership with your customer information to work for a competitor is improperly taking your assets. Protect your customer information as you would any of your other valuable company assets by making sure it is safeguarded.
Comply with a strong policy on supplier contracts. Products or services you pay for month after month but that you don’t need can be a drag on dealer resources. Make sure that you have a policy in place for entering contracts with vendors who supply everything from your computer services to hazardous waste removal. Be sure that only specified senior managers can sign contracts. Do a cost benefit analysis of every contract. Avoid long term agreements unless necessary. Avoid contracts with automatic rollover provisions. Make sure you can sue or be sued only where your dealership is located. Follow your vendor contract policy and enforce it.
Audit monthly retail lender statements and carefully analyze repurchase demands. Retail lenders are looking for dollars today, just like everyone else. The retail lenders to whom you sell retail installment sale contracts may improperly charge to you losses and expenses. Audit retail lender reserve statements immediately when you receive them. Understand the charges and challenge those that appear to be incorrect. Challenge repurchase demands. Lenders make demands based on their views of what the dealer did wrong. Understand the representations and warranties that you made in your master dealer agreement and the reason the demand was made. If you believe that the demand is improper, challenge it.