Reprinted from the August 2008 Team VADA eViews
It is not a pleasant subject, but sometimes franchised dealers decide to give up their franchises and close the dealership. When considering termination, dealers should carefully analyze their rights and the financial results of this decision. Dealer assumptions about what the franchisor will repurchase often turn out to be wrong, sometimes disastrously so.
If you are considering turning in your franchise, understand what the franchisor must repurchase, what costs are involved, and how long you will have to wait for your money.
WHAT MUST THE FRANCHISOR REPURCHASE?
Virginia law details what a franchisor must repurchase. Almost all dealer agreements address the obligation of a franchisor to repurchase in the event of termination. The dealer can depend on the more advantageous provisions of either the dealer agreement or Virginia law.
KNOW WHEN THE FRANCHISOR'S OBLIGATIONS APPLY
Some dealers simply want to sell their franchises to other dealers and send inventories and assets back. However, some dealer sales and service agreements and Virginia law provide that franchisor repurchase obligations do not apply in the event of a termination of a franchise followed by the issuance of a new franchise agreement to the dealer’s transferee. Translation: if you sell the “franchise”, the franchisor may not have to repurchase anything.
WHAT VEHICLES MUST BE REPURCHASED?
Virginia law requires a manufacturer to repurchase current model year new vehicles and new vehicles of one prior model year shipped to the dealer within 120 days. Other new vehicles are exempt from the repurchase obligation. The same is true for demonstrators and damaged vehicles. That means that these vehicles cannot be returned to the franchisor, and the dealer must find a buyer for them, often at very steep discounts.
WHAT IS THE FRANCHISOR'S OBLIGATION TO BUY PARTS AND ACCESSORIES?
Generally, franchisors only have to repurchase returnable parts and accessories. That means they must be labeled returnable on the current franchisor parts list and they must be in a returnable condition, meaning that they are not damaged and do not have broken boxes. Franchisors generally strictly construe the definition of returnable parts and accessories. Dealers have to find a market for parts and accessories that they cannot return, and that is often at a small percentage of value.
SPECIAL TOOLS.
Generally, franchisors buy back special tools. However, understand the pricing terms. Pricing for the tools is often within the discretion of the franchisor and Virginia law only requires the franchisor to pay “fair market value”. This can lead to expensive mark-downs.
DOES A FRANCHISOR HAVE TO BUY SIGNS?
Generally speaking, agreements provide for repurchase of signs with the brand name or logo only, and Virginia law provides the same.
WHO PAYS FOR THE RETURN?
Often, dealer agreements make the dealer responsible to pay shipping. Virginia law will apply, however, and it requires that the manufacturer pay shipping.
CAN THE DEALER AUTOMATICALLY TERMINATE OTHER AGREEMENTS WITH THE FRANCHISOR, SUCH AS SIGN LEASES OR RENTAL CAR LEASES?
Often that is the case, but not always. Understand the agreements and whether you can simply cancel them when you terminate the franchise.
WHEN WILL A DEALER GET ITS MONEY?
Most dealer agreements provide for a lengthy period between the time of return and the required payment. During this time, floorplan interest and other interest accrue.
DO THE TERMINATION DOCUMENTS PROTECT YOUR RIGHTS?
Be sure you will be paid for pending warranty claims and incentives. Be sure your rights to indemnification in the case of a product lawsuit are maintained. Make sure that any promises to you are reduced to writing.