A Checklist to Protect Dealership Assets

Team VADA eViews

The Digital Newsletter of Your Virginia Automobile Dealers Association

July 2008

 

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We know that many dealers spend time, effort and money on sales and F&I compliance. However, many of the most frequent and serious losses suffered by dealerships are from other causes.

 

The following is a list of twenty items that are critical today to protect the dealership’s assets. How does your dealership fare?

 

 

 

1.         The dealership’s sales and service agreement and related documents are properly filed. Dealers face a number of pressures today from franchisors. Whether it is pressure to renovate or build new facilities, to sell to other dealers, to buy related franchises of other dealers, or for any variety of other issues, dealers can only properly protect themselves when they know their rights. Virginia law is critical in this area. However, the dealer sales and service agreement is the constitution controlling the dealership’s relationship with the franchisor. Policies, addenda, amendments and communications issued in connection with the sales and service agreement are the equivalent of “laws” issued within the constitutional framework governing your relationship. A dealer cannot hope to know its rights without having a complete set of documents. Make sure the dealership has properly filed copies of the sales and service agreement, and all addenda, amendments, policies and communications with the franchisor.   The dealer should personally maintain a separate set off premises.

 

2.         The dealer knows its rights in an audit. Many dealers feel, in today’s atmosphere, that franchisors treat audits as a profit center. Whether it is a warranty audit or an incentive audit, chargebacks can be expensive for a dealer. A dealer must know its rights in an audit. Virginia law says that a manufacturer can only go back twelve months for a warranty audit and eighteen months for an incentive audit. Under Virginia law, you are entitled to compensation if you can document that the dealership earned it even if you do not meet the exact requirements of the franchisor. Understand your rights to challenge chargebacks internally through the franchisor’s procedures. Understand your rights to challenge through state procedures. If you proceed with a challenge, Virginia law says that the manufacturer may not debit the proposed chargeback until you have completed the franchisors’ appeal process and the DMV process.

 

3.         Managers know the franchisor’s incentive programs. Today, the most expensive audits arise from incentive payments. Often, franchisor auditors seek to debit a dealer because of missing paperwork or simple mischaracterization of the deal terms. Employees must understand the terms of incentive programs. They must understand the time period of the program, the qualifications of the program, and the documentation necessary to justify the dealership’s right to the payment.

 

4.         The dealership does not sell to exporters of new cars. Some of the largest audit debits being processed today relate to exports of new cars. In today’s difficult business atmosphere, it is tempting to deliver a car that dealership employees know will be exported with the hope that the export will not be detected. However, when one sells a vehicle knowing it will be exported, it is not a question of whether it will be discovered but when. Manufacturers receive reports of exports going through the ports. If a vehicle somehow escapes a port report, the distributor in the country where the vehicle is imported will pick up the importation of the vehicle in that country and report it. Auditors walk into dealerships with lists of vehicles that they already know have been exported. In an audit, they process debits for holdbacks, incentives, and the like. More seriously, they may eliminate the exported vehicles from the “count” necessary to meet a stairstep program. This can lead to disqualification under the stairstep program and a large chargeback of the stairstep payment. Virginia law protects you in the event of the export of a new vehicle, but not if dealership personnel knew or had facts from which they should have known that the vehicle would be exported.

 

5.         The dealer knows its rights when pressured to make major changes. Manufacturers, particularly the Detroit three, are seeking to reduce their dealer count. It doesn’t appear to be relevant whether a dealer is a good dealer or a bad dealer or whether the dealer is well located or poorly located. If your dealership is being pressured to close, or to sell its franchise to another dealer of a related brand, or to buy the franchise of another dealer of a related brand, know your rights under the dealer sales and service agreement and the applicable laws. Virginia law protects dealers from a number of pressure tactics franchisors use by providing that a franchisor cannot refuse to renew a dealership’s sales and service agreement unless it has grounds to terminate the dealer, that it cannot coerce a dealer, and that it cannot offer dealer incentives that are not functionally available to all dealers of the same line make.

 

 

 

6.         The dealership protects its leads and customer lists. Most dealers understand the need to protect their vehicle inventory or their parts and accessories inventory from theft. However, are the dealership’s leads and customer lists less valuable? It is tempting for a salesperson who quits a dealership to leave with a list of customers that the salesperson can solicit at his or her new dealership. Salespeople are often tempted (usually financially) by used car dealers to forward leads. A dealership’s customer list and leads are valuable. Under the FTC Information Safeguards Rule the dealership should protect customer information and give access only to those with a reason to use the information on behalf of the dealership. This is a critical tool in protecting these valuable assets. Make sure that your protections are in place, that your program is regularly updated, and that you regularly check the compliance by your employees.

 

7.         The dealership protects against ID theft. When an ID thief buys a vehicle, most people think the victim is the person whose identity was stolen. In fact, the dealership is no less a victim. It sells a vehicle for which it may never be paid (or if paid by the finance company, it will sustain a chargeback). Have a “Know Your Customer” policy to protect yourself against ID theft. The FTC Red Flags Rule with which dealerships must comply by November 1, 2008 is a formalized “Know Your Customer” process. Understand the benefits to the dealership of protecting against ID theft loss and complying with the Red Flags requirements. 

 

8.         The Dealership Has a Test Drive Policy. Carjacking is still a prevalent means of stealing dealers’ vehicles in incidents that can result in injury to dealership employees.   There are several test drive policies that should be in place in every dealership to protect employees accompanying prospects on test drives:

 

9.         The dealership uses a deal completion checklist. You spend a lot of time and money to make sure that your deal documents are well designed and that they comply with applicable laws. You probably spend a great deal of time training sales and F&I personnel to use these documents. This is all wasted if the paperwork is not properly completed. Have a deal completion checklist that an F&I person can follow to make sure all necessary documents are completed. Audit deals to be sure documents are being properly completed and maintained in deal files. 

 

10.       There is one employee in charge of advertising who understands the laws and applicable rules. Advertising mistakes can be costly. A mistake in an ad can lead to unhappy customers and potential civil claims. Failing to follow the law can lead to governmental action. The resolution of governmental action generally requires a substantial payment to customers or imposition of civil penalties. Have someone in charge of advertising. Make sure that person understands the laws and the rules. Make sure that the person supervises the dealership’s ad agency or, if there is no agency, the media to ensure the rules are followed.   Don’t expect the advertising company or media representatives to be experts in advertising laws and rules. 

 

11.       The dealership has a policy for insurance acquisition and claims processing. The dealership should review its insurance policy terms each time a policy is renewed or a new policy is acquired. Does it provide coverage for the problems that are leading generators of large losses: for example, identity theft, misrepresentation under state Unfair and Deceptive Practices Acts, and discrimination and harassment claims. Are claims promptly and properly made? Are recovered vehicles promptly reported? (The arrest of a recent buyer of a vehicle previously reported as stolen and not reported as recovered can be quite expensive for a dealership).

 

 

 

12.       The Employee Handbook is up-to-date. Personnel laws change rapidly. As an example, recent changes to the Family and Medical Leave Act granted leave rights to relatives of service members undergoing medical care. The laws regarding technology issues change rapidly. Make sure that you regularly review or have reviewed your handbook to keep pace. What is your policy about cell phone usage while driving? Or downloading programs to the dealership’s computer system? Or emailing? 

 

13.       The dealership has a packet of pre-and post-employment forms and they are fully completed by new hires. Does the dealership have a set employment packet? Just as in a car deal, it is critical that a new employee fill out a number of documents. Those documents should be carefully divided between those that must be completed pre-employment and those that must be completed post-employment. Have complete employment document packets to minimize the temptation to short cut the hiring process.