Every franchise relationship is a constant negotiation with the franchisors as they increasingly attempt to push more financial burdens onto their dealers. The “re-up” time is a perfect excuse to address issues and make demands on dealers. At least in the Northeast, the issue is rampant as Nissan, Audi, Toyota, Infiniti and Mercedes Benz have made huge pushes for facility upgrades, while at the same time the option of selling the dealership is unappetizing due to Blue Sky values discounted by the cost of the demanded upgrades. Whether seeking to increase a dealer’s sales through benchmarks or increase branding through dealer-financed facility improvements, manufacturers generally perceive renewal time as the most opportune moment to use the threat of a term agreement as a sword to extract concessions and commitments they could not otherwise obtain.
“Term agreement” is industry jargon that is generally misused or misunderstood, almost always to the detriment of dealers. The reality is that it generally refers to any franchise agreement that is for a period of time less than that which is offered to other same line make franchisees. Historically, it was the exception to a perpetual agreement, yet there are few perpetual agreements remaining, so in reality term agreements have now become the norm. The real question is whether a short-term deal or term agreement is any different than a long-term agreement.” The simple answer should be “No.” However, make no mistake, the general misunderstanding of this concept is why manufacturers continue to use term agreements as a weapon during negotiations with dealers.
How many dealers have been faced with a dilemma or offer such as “Either do the renovations or we will only give you a two-year deal” or “Your penetration needs to hit #% or we can’t give you the typical six-year extension”? It is important for dealers to remember that the rights of a dealer under a one-year agreement are exactly the same as those of a dealer operating under a 15-year deal. The hoops a manufacturer must jump through to terminate a dealer that is operating under a “perpetual” agreement are exactly the same hoops it must jump through if it is seeking to simply non-renew a dealer that has operated under a franchise agreement for a defined term of years or months. In most states, if a manufacturer seeks to terminate or non-renew a dealer, it must provide at least 60 days’ notice to the dealer of its intentions. In either case, a court or tribunal evaluates the various factors that go into whether or not a dealer should be removed from the market. This requirement and process is the same whether the manufacturer is attempting to terminate a shortterm agreement or a long-term agreement.
More recently, term agreements have been seen to include hard-line performance metrics or construction deadlines that distinguish them from the typical agreement that manufacturers hand out. These benchmarks, deadlines and detailed obligations must be reviewed and analyzed like the terms in any other contract — in other words, do not agree to do something if you know you can’t or have no intention of following through. Unless there is no reasonable alternative, dealers should always avoid agreeing to such terms as a condition to their continuation as a franchised dealer. Moreover, when a dealer agrees with the manufacturer on benchmarks that must be achieved for sales performance, many times the dealer has eliminated its ability to argue that the manufacturer does not properly evaluate its performance or value in the market.
Many dealers are signing LOIs with construction schedules without fully appreciating the consequences of missing hard deadlines. Previous “relationships” a dealer may have had at the factory that historically guaranteed him some leniency are now gone and have been replaced by executives with no sympathy for dealers that are trying to stall investments in the current brand image. As one client recently said, “No dealer should make what he feels is a questionable investment in a branded facility, unless he is completely comfortable with the fact that his manufacturer is already working on the image two versions ahead of what he is building.”
Unless a dealer has an up-to-date facility and has regularly hit the manufacturer’s sales performance goals, that dealer should be surprised to receive a renewal agreement without any additional terms and conditions. Instead, what can and should be expected in this market is a battle over the dealer’s “commitment to the brand” and a test of the dealer’s willingness to invest capital or agree to performance metrics for the perceived long-term security of a multiyear or perpetual agreement. The bottom line is that every dealer should be wary of the strings attached to term agreements, and remember that a dealer’s rights under a oneyear agreement are the same as those under an extended agreement. Don’t let a manufacturer convince you otherwise.