The buying or selling of an automotive dealership, usually via the purchase or sale of the dealership assets, has become an increasingly complicated and sophisticated legal transaction requiring expertise in many legal disciplines, including corporate law, real estate law (including leasing), banking and finance, environmental law, contract law, employment law, and tax law, often involves municipal zoning and permitting expertise. In reviewing the important components of the automotive dealership business transaction, the following are among the items that require careful consideration, due diligence and contractual inclusion:
- Confidentiality. Every dealer needs to carefully weigh the benefits and drawbacks of disclosing that his or her dealership is on the market. It is prudent to get a written confidentiality agreement signed to ensure that all relevant parties (including brokers and accountants) are covered if you think it will have a material impact on your dealership or with respect to your competitors, employees, customers, lenders, etc.
- Letters of Intent. Whether binding or nonbinding, a letter of intent is normally recommended in most transactions. The letter of intent will serve to flesh out all the important business points to ensure that the parties are in agreement before considerable time, effort and resources are spent in drafting and negotiating a purchase agreement and/or pursuing due diligence investigations.
- Manufacturers Notifying the Market. Various types of transactions may give a manufacturer reason to think it needs to notify dealers in a particular market area. The manufacturer’s belief is sometimes predicated on its experiences in other states or a misreading of the applicable franchise statute or, occasionally, an effort to appease local dealers for political reasons. However, the manufacturer’s desire to send notice that may not be technically required under applicable law is often inconsistent with the interest of the parties in the pending transaction; it can cause unnecessary negative impact that could be avoided through communications with the manufacturer and a joint understanding of whether or not a protest should be gratuitously invited by such a disclosure.
- Assets to be Sold. Assets to be included in the sale must be specifically defined and priced. The automotive franchise and seller’s goodwill (“Blue Sky”) must include seller’s customer lists (including service records), e-mail addresses, telephone and facsimile numbers, web sites, signage and the like. The valuation of special tools, parts and accessories should be carefully defined and require a third-party inventory and valuation prior to sale. New vehicle inventory valuation must be defined and exclude demos, loaners and used vehicles. The purchase of new but not current-year models and used vehicles should be optional to the buyer and carefully defined. Pending new vehicle orders require allocation of sales commissions and the computation thereof.
- Excluded Assets. Typically the sale of assets does not include cash, accounts receivable, amounts due from the manufacturer, incomplete repair orders and the like.
- Obligation Assumed. Most dealerships have existing equipment leases, contracts, computer or software leases, and conditional sales contracts. The assumption of these contracts requires due diligence and examination. Seller must recognize that if these contracts are not assumed they may be subjected to significant prepayment or early termination penalties. Included in this category are signage leases, which are independent contracts that typically do not terminate upon the sale of the dealership.
- Manufacturer Approval. The sale of a dealership is subject to approval by the manufacturer of the new buyer entity and its principals, and requires the transfer of the existing franchise or issuance of a new franchise to the buyer. The approval by the manufacturer will almost certainly contain conditions, such as required facility improvements or benchmarks, some of which may not make economic sense. Any agreement must provide for buyer’s approval of these terms and conditions and perhaps financial assistance for compliance therewith.
- Municipal Approvals. Any acquisition must contemplate required municipal approvals for the transfer or issuance of a Class 1 automotive license and for signage permits. The timing of such approvals must be consistent with targeted approval contingency dates and the indicated closing date.
- Real Estate Component. Establishing a long-term fixity of location simultaneously with the dealership acquisition is essential. This can be done by purchase of the dealership premises, lease, or lease with option to purchase or with rights of first refusal. The real estate component is integral to dealership profitability, long-term success and ability to resell the dealership and achieve the maximum Blue Sky consideration based on the ability to deliver to a buyer an appropriately priced property or long-term lease. Also, the ability to finance manufacturer-required facility improvements usually requires ownership or long-term control of the real estate. Investigation must also be made to determine whether or not a dealership property is subject to a manufacturer’s “control agreement” and, if so, the effect thereof as to value and the ability to transfer the real estate and/or the dealership.
- Manufacturer’s Right of First Refusal. Many standard manufacturer’s agreements contain an option to purchase or a right of first refusal in the event of the sale of a dealership. These requirements must be reviewed and notice compliance provid-ed for within the context of a buy/sell agreement. There are also strategies that can be used to avoid triggering these rights that should seriously be considered if the seller anticipates the ROFR will result in a significant reduction in the final sale price.
This article is not intended to be inclusive of all the components of the purchase or sale of an automotive dealership, but is intended to alert the reader to the myriad of complex issues that must be contemplated and addressed in any definitive asset purchase agreement. It is the authors’ strong recommendation that counsel experienced in automotive transactions be consulted or retained prior to the commitment to enter into any transactional negotiations.