Succession, or transition of ownership, is a key risk facing many dealerships. From single franchise operations through to large groups spanning several states and employing hundreds, if not thousands of individuals, planning for the ownership succession of a dealership business starts a long way out. In this article we share observations made over time on what can make or break a successful transfer of ownership between generations of family.
Start your succession planning early
Start now, even if transition is a long way off in your mind. Having early conversations to understand appetite to take on such a responsibility and set expectations from a very early stage is critical. This maximises your time to set a strategy for corporate structure including appropriate consideration of future property acquisitions, funding requirements for the transition and setting yourself up so that the business itself and any assets (e.g. property and rental income) you require for life after the dealership are easily separated.
Ensure your structure meets your needs
A common pitfall is failing to plan for common taxes such as Capital Gains Tax that arise on ownership transfer of assets. The financial consequences of such taxes, if not thought through and structured appropriately, can cause significant roadblocks to effective transition. A common and unfortunate outcome of poor planning can require the passing of the Matriarch/Patriarch before transfer of ownership can occur, promoting complications with the estate planning process and risking disruption to or eventual sale of the business. Considering tax treatments such as tax consolidation, Family Trust Elections, and consequences of loans that may give rise to adverse tax obligations, through to more commercial considerations such as property, debt gearing, lease arrangements and importantly, how the lifestyle of the outgoing generation will be funded - will rental income be an option, will it be sufficient or will dividends from the business be relied upon?
Finance appropriately for your succession plan
There’s no such thing as a free lunch. In order to respect and comprehend the scale of the financial components of a dealership, particularly the significant returns that can be available, a suitable financing structure should be in place as part of the transition. This begins with a market valuation of the business and a debt structure to fund the acquisition (potentially in stages) which should be carefully thought out by both the incoming and outgoing generations. A considerable asset such as a dealership received for no consideration is one of the fastest ways to diminish a legacy, often contributing to rash or ill thought out strategic decisions and poor day-to-day management.
Start at the bottom – work across the dealership
Primarily to gain respect of the dealership team and industry peers, it is not uncommon for the next generation to start off as a yard hand, an apprentice technician or sales cadet. Learning the ropes from the bottom up and working across every department is one of the most common threads we see in successful transitions. Not only does this promote a sound understanding of all facets of the business, it helps to curate close relationships to ensure effective management once the incoming generation take the reins of the business in more senior roles.
Let go - have faith your dealership is in good hands
When the time comes, nothing undermines the next generation making their mark like having someone override or question their decision making. It’s vital to recognise that the next generation will make mistakes, just like those who came before them. This is a critical part of the learning process and freedom to set and execute strategy is a base to maximise value in a changing environment such as automotive. The next generation might well consider the impact of changing business models (such as agency or independent distributors) or even the shift to ‘CASE’; Connected, Autonomous, Shared and Electric.
Have a mentor for your successor
One option to consider depending on the maturity of the incoming generation as well as the complexity of the business, is to create an advisory board or introducing an independent mentor to support the new incumbent. This could include external advisers such as accountants or lawyers, family friends with relevant experience, but should exclude direct family.
Look at your family governance
One hurdle often overlooked is the impact of an ownership transition with broader family members. Take a scenario which involves multiple children, one taking control of what is perceived to be the ‘family business’ can cause friction among these relationships. If one sibling is taking an initial step to succession as becoming Dealer Principal or CEO of the dealership or group, and there are other siblings who have no involvement in the business, is there clarity around remuneration and future strategy? Or are there perceived ‘free kicks’ to the CEO sibling that should be smoothed out. It may be suitable that for a period of time, all siblings are involved at a board level in understanding the assets of the family, promoting clarity on the succession of one or several components. Too often this is left too late in the process or overlooked entirely, becoming an awkward situation at family gatherings.
We’re here to help
Ultimately a smooth succession has the foundations that underpin a successful business; it is well managed and supported by a team of quality advisers. If you have questions about establishing a successful succession plan within your business, or would benefit from an initial discussion, please get in touch with one of our automotive specialists.