After reading the title of this article, your first question was probably “What are organic documents?” They are your records critical to the existence and operation of your dealership such as structure documents (corporation or LLC charter and related materials), the various parts of your franchise agreement, documents guaranteeing your right to occupy your dealership premises, loan and other financing documents, and agreements with suppliers.
In these difficult times, it is important that you understand your rights and obligations as you make decisions to cut expenses and restructure relationships. If you want to determine your rights with respect to your franchisor, you and your attorney will want to review your franchise documents. If your finance sources are demanding repayment or revision of the terms of your loans, you must know those terms. If you want to trim certain expenses, you will have to know how far you can go under existing agreements.
The United States government carefully protects our organic documents. The U.S. Constitution and other important documents are stored at the National Archives. They are kept in lead-lined cylinders underground except when it is necessary to display them.
While storage in lead-lined cylinders underground is probably not necessary for your dealership’s organic documents, there are some simple precautions that you should take.
- Document files should be well-organized and kept in your dealership. They should be clearly labeled, they should be updated, access to them should be limited, and a trusted employee should be familiar with them so that appropriate documents can be retrieved if necessary.
- A duplicate set should be kept by the dealer at his or her home. In the event of an emergency at the dealership, hard copies will be readily available.
- Virtual copies should be maintained. Have copies made and stored in an Adobe or other similar format. If you do not have the ability to make virtual files at your dealership, take the documents to a commercial copy house that does have that ability. Store the files on disk and keep the disk in your fireproof safe. Store the files in some virtual storehouse to which they can be uploaded. Ask your computer vendor about the appropriate way to do this.
What documents should be kept?
1. CORPORATION OR LLC DOCUMENTS
- Articles of Incorporation/Organization
- S-Election (for corporation only)
- Bylaws/Operating Agreement
- Annual Minutes of the Board of Directors/Managers meetings
- Annual minutes of the shareholders/members meetings
- Annual state report completed and signed
- Stock ownership/member certificate register
- Listing of directors/managers and officers
Explanation:
The formation and ongoing validity of a corporation or a limited liability company is critical to shield owners from the company’s liabilities. If the company’s separate organization can be attacked, then the limited liability for owners provided by the entity structure may be compromised. That can lead to personal liabilities for the owners. Compliance with state law is critical. Documenting the formalities required by state law, such as annual meetings by a corporation, is important.
State law requires that every corporation or LLC obtain a charter from the state. To do that, articles of incorporation or organization must be filed. That is the constitution of your organization. The bylaws of your corporation are the equivalent of laws enacted by a government. In a limited liability company, the operating agreement serves the same purpose.
State laws generally require that there be regular meetings of the shareholders and directors of a corporation. State law is generally less demanding of LLCs, but to the extent meetings are held those should be documented. Elections and other important company actions at those meetings should be documented and maintained. Most importantly, the company should be able to identify at any time its owners or members, its directors, and its officers.
2. FRANCHISE MATERIALS
- Dealer sales and service agreement and all amendments.
- Franchisor performance reports and evaluations.
- Franchisor policy letters and memoranda
- Correspondence from and to the franchisor
Explanation:
In these difficult times, franchisor/franchisee relations can be difficult. A dealer who is in the midst of negotiations with its franchisor must know what the dealer sales and service agreement requires and what rights the dealer has. Franchise agreements generally consist of an agreement personalized for the dealer, standard terms and conditions that apply to all dealers’ agreements, and schedules, addenda, or attachments. From time to time, there may be amendments that are issued. From time to time there may be policies issued that expand upon or explain agreement terms.
A dealer who seeks advice concerning rights and obligations when dealing with a franchisor must have these documents available. Without a full package, no lawyer can give a confident response.
From time to time, dealers may enter specific agreements with manufacturers, either formal agreements or simple letter understandings. These must be available for reference.
Disputes are generally previewed in correspondence by mail or email between the dealership and the manufacturer. This correspondence can be critical to understand the dealer’s rights and obligations.
If there are holes in your dealership’s records, request the documents from your franchisor. Explain that you’ve asked your lawyer or accountant to audit your organic documents and that the auditor discovered that critical documents are missing.
3. FINANCE AGREEMENTS
- Copies of all floorplan documentation
- Copies of indirect finance and indirect lease agreements with finance and lease companies
- Copies of lines of credit documentation
Explanation:
The most critical financing issue facing dealers today is floorplan. Floorplan arrangements are generally demand notes secured by the dealer’s inventories and other assets. A dealer who is receiving demands from his floorplan source for additional security or even for a payoff must have available the relevant documentation to get good advice. Reviewing the terms of any floorplan agreement, the related note, and any related security documents will be important.
Dealers assign retail installment sale contracts and leases to finance sources for the cash they need to pay off vehicles and to provide working capital. From time to time, a finance source may demand that a dealer repurchase a RISC or a lease alleging a breach of the representations and warranties that accompanied the assignment. Without a copy of the indirect finance agreement or indirect lease agreement (which are sometimes called “master dealer agreements”) a dealer cannot know what representations and warranties it made to the finance source.
Many dealers have lines of credit for working capital or other purposes. In these difficult times, dealers may be getting demands with respect to those lines of credit. It is important that a dealer understand the terms of the lines of credit to evaluate lender demands.
As with the franchise documents, dealers who have holes in their finance agreement files should request the necessary copies of documents from their finance sources. Get them, copy them, and save them.
4. REAL ESTATE DOCUMENTATION
- Deed
- Deed of Trust, loan agreement, note, and related financing documents
- Lease
A dealer must be sure that its right to occupy its dealership premises is undisturbed. Many dealers own their real estate, often through affiliated companies. The dealer should have a copy of the deed.
Generally, the real estate is financed. It is critical that a dealer understand the terms of the financing in the event restructuring or refinancing is necessary or appropriate. The note, deed of trust, and loan agreement should be available.
Finally, whether a dealer owns its own real estate or not, there must be a lease. The dealer should maintain the lease for easy reference.
5. VENDOR AGREEMENTS
- Computer (DMS) agreements
- Equipment leases
- Advertising agreements
- Other vendor agreements such as cleaning contracts, uniform contracts, environmental waste removal, etc.
Explanation:
The ability to trim expenses will be dependent upon the terms of the agreements to which dealers have committed. Generally, we recommend that dealers do month-to-month agreements whenever possible. That way, a dealer can simply threaten to terminate its relationship unless the supplier goes along with the dealer’s wishes. However, there are circumstances such as computer contracts and equipment leases where short term agreements are not possible. In those events, it is important that dealers understand their obligations and what changes may be possible.
If you do not have copies of all agreements, get them. Simply notify your vendor that you are working with your accountant to audit your payables, and the auditor has requested copies of all payable contracts.
6. OTHER IMPORTANT DOCUMENTS
- Trade name registrations
- DMV/MVA dealer license is displayed/filed
- Business licenses are displayed/filed.
- Occupancy permit is displayed/filed
- Insurance policies are filed and available.
- Insurance claim information is filed and available.
- Equipment warranties are maintained and filed.
Explanation:
The trade names under which you do business are your property. Make sure you protect your trade names by filing with the appropriate governmental body and that you keep documents in a location where they can be readily identified.
As a dealer, you must have a state dealer license. That is critical to your operation. The same is true with other state and local business licenses and your occupancy permit.
If you are going to make an insurance claim, you must know what your rights are. You may even have to seek legal advice. Without a copy of your full policy, you will not understand the coverages and you cannot get adequate advice.
The same is true with respect to warranties on your business equipment. From time to time something may break and you will want service under a warranty. That will not be available to you unless your warranties are available so that they can be reviewed.