Digital Dealer - November 2017 - 12

O WN E R S H I P

Continued from pg. 10

have very different philosophies (out of necessity)
in how they interact with
management teams,
particularly if things do
not go as planned.
CLEAN, PROFESSIONAL ACCOUNTING.

Generally accepted
accounting principles
do not typically drive
auto retail accounting. In
fact, dealership financial statements employ
a variety of accounting
methodologies to some
degree driven by dealer
or controller preference.
Unfortunately, accounting
variability will simply not
be tolerated with outside
investors, and will quickly
lead to misunderstanding and dysfunction.
Only a consistent GAAP
accounting method will
work for most investors.
If external investment
is something you are
seriously considering, it is
important to review your
accounting procedures
and improve areas where
GAAP is not currently
employed. Some dealers
will need to incur significant expense as it relates
to improving financial
controls, and overhauling
accounting procedures.
Dealers may also consider annual audits or
financial reviews of the
statements in preparation
for a capital raise.
NO MIXTURE OF
BUSINESS AND
PLEASURE. Most

dealerships are privately
owned, and often
owned by multiple
family members.
These businesses are
sometimes used as an
extension of the family,

12

NOVEMBER 2017

funding the lifestyle and
priorities of the various
owners, including cars,
boats, charitable giving
and other types of nonbusiness expenses. With
outside investors, it is
important to separate
business and pleasure,
and business and family.
Such a change can
make a capital partner
unattractive for some
dealers and auto retail
families.
Willingness to assume
the goals and priorities

growth, expansion and
divestiture when investors
have a seat at the table.
OEM APPROVAL.

Finally, any outside
investment must be
proposed in a manner
that will achieve OEM
buy-in. There is no clear
checklist for this, as
OEMs have different
prerogatives and varied
relationships within their
dealer bodies. For example, OEMs that are highly
motivated to attain new,
expanded facilities or

...NO MATTER HOW
THEY DRESS UP THIS
LANGUAGE, CONTROL
INVESTORS NEGOTIATE
THEIR DOCUMENTS
IN A MANNER THAT
ALLOWS THEM TO
MAKE UNILATERAL
DECISIONS."
of investors. The prerogatives and needs of
investors shift over time.
A dealer who takes on
a capital partner will
need to evolve with their
investors to stay in step
with investors' strategic
goals. For example, a big
uptick in earnings that excites the dealer-operator
may prompt an investor
to start thinking more
seriously about when to
sell the business, even
accelerating their exit
plans by multiple years.
Conversely, some tough
down years could reverse
that logic. It is important
to recognize that a dealer
is not in a position to
make unilateral decisions
as it relates to funding

D I G I TA L D E A L E R . C O M

achieve "clusters" of dealerships owned by a single
group may be more
flexible in the approval
process. In other situations, an OEM's concern
about operational control
and ability to influence
dealers' strategies may
result in skepticism on
their part. Core to all
OEMs' evaluation will be
whether the partnership
dilutes the auto retail
experience running the
dealership and the OEM
retains significant leverage in the relationship.
Each situation will be
unique, and we suggest
framing these proposed
partnerships in a manner
that OEMs perceive as
win-win.

If the criteria set forth
above fits with your organization and management
style, and you desire to
grow your business beyond internally generated
cash flow, then seeking
investors is a sound strategic option to evaluate.
In our experience, some
of these criteria are difficult for dealers to accept,
and an outright sale is
typically a preferential
option when the time is
right to take chips off the
table. That said, we are at
an interesting point in the
buy/sell market, where
dealers and established
auto retail families have
many choices as it relates to monetizing their
dealership assets. As we
see it, options are always
good, as long as you understand the structure.
RYAN KERRIGAN is Managing Director at Kerrigan
Advisors. Kerrigan Advisors
is a leading advisor to sellers
of higher value dealerships
and dealership groups
throughout the U.S. Ryan
works with Kerrigan Advisors' private equity clients
advising them on their auto
retail investment strategy
and works with sell-side
clients seeking private equity
exit. Ryan has extensive
experience in both private
equity and auto retail, having
run his family's dealership.
He started his career at
McKinsey & Company as
a management consultant,
advising Fortune 500 companies on growth strategies,
organizational issues, pricing
and business valuation.
EMAIL: ryan@kerriganadvisors.com.
http://www.DIGITALDEALER.COM
Table of Contents for the Digital Edition of Digital Dealer - November 2017
