You are healthy and enjoy the car business. You have no reason to be concerned about a succession plan, right? Well, not so fast.
Companies important to your business – notably your franchisor and your lenders – worry a lot about your succession plan. No matter how healthy you are, what will happen to your business if you step off a curb and get hit by a bus? Who will be in control of the dealership? Will you have quality management to successfully continue your business? Will your business have the financial strength to survive?
These are not questions for which your franchisor and your lenders should have to guess the answers. You should have a sound succession plan.
What should that look like? One cannot describe a one-size-fits-all plan to suit everyone. Each dealer will have his or her own situation, and the structure of the succession plan depends on what businesses the dealer has, what real estate is involved, the dealer’s family situation, and numerous other factors. Here are some things that all dealers should consider.
Planning Team
Sound succession planning requires teamwork. You must involve your estate/tax attorney, your business attorney, and your accountant. They must work together to develop an effective plan.
Estate Plan
The place to start is with your will. (Yes, you absolutely must have a will!) To whom will you leave your estate? Will you use trusts in your planning? How will your estate be structured? Should you be making gifts to family members? Only a qualified team can help you design this. With estate taxes returning with a vengeance in 2011, a state-of-the-art estate plan is a necessity.
Funding
If something happens to you, how will the transition to a new control and management structure be funded? Will unencumbered business and personal financial resources be sufficient so that there are no critical funding shortages during the transition? Will there be insurance funds available to help overcome short term financial dislocation? More importantly, how will you fund the payment of estate taxes that return as a major concern in 2011? Planning for this will require the combined efforts of your entire team working with an insurance professional.
Operating the business immediately after your death
If you die tomorrow, who will be in charge? How will the company continue? Answering these questions is a critical aspect of any succession plan.
You should have a dealer successor designated by your franchisor. That person will be in a position to step in as dealer if you are no longer available. To list a dealer successor, most franchisors require that the person have some interest in the dealership. Structuring an ownership interest for your successor should be considered as part of your overall plan.
It is not enough to simply name a successor. Your dealer successor must understand your wishes and should have a plan to keep management in place. What steps must be taken to calm fears in the event of your death? What incentives can be used to prevent loss of managers and employees during the transition to new management? These issues should be addressed in the succession plan.
Continuing Operations
How will the business be operated for the long run? Is your designated successor qualified to successfully operate to maximize returns? Will your franchisor have the faith in that person based on experience? Will your lenders have faith in that person so that they will continue to advance necessary funds? If your successor is not one of your heirs, will your surviving spouse or other heirs be qualified to oversee the management or will that structure lead to friction?
Due on death clauses
This brings us to the subject of due on death clauses. These are quite common in loans to dealers, whether one is discussing real estate loans or working capital loans. A due on death clause basically provides that if a dealer dies, the lender may call the outstanding loans.
If you die, your survivors already have enough issues without having the bank on the dealership’s doorstep calling your loans. Eliminate due on death clauses. This will require you to have a succession plan in which your lender can have confidence.
Operate or Sell?
Will your heirs be in a position to continue your business or is selling the appropriate strategy? If a sale is appropriate after your death, how can your heirs maximize the sale price?
Selling by necessity
There is no worse time to sell than when others think you have no choice. Consequently, your succession plan should not presume a sale, unless necessary. If possible, the succession plan should be geared around continuing operations. This will allow your heirs to best determine when a sale can take place at the most effective price and terms.
Operate as if You Will Sell at any Time
If your heirs decide to sell, will they be plagued by unfunded liabilities, questionable occupancy rights, suspected environmental issues, or other problems? Nothing causes a buyer to reduce an offer like questions about problems that can carry over to the new operation. Eliminate uncertainty. Run your business like you may sell it at any time. (Click Here to read the accompanying story.)
Future Planning
Lenders or franchisors that are unsure of your company’s future will factor this into any decision-making process involving your business. Don’t leave this to chance. A dealer with a solid succession plan is one in which franchisors and lenders can have confidence and can support in future endeavors.