This will not be your typical issue of “Counselor’s Corner.” I will not be writing about distinct legal issues or updating you about burdensome laws and regulations. Instead, I wish to deliver a slightly different message and provide some constructive guidance about buying or selling a motor vehicle dealership.

I have been doing buy-sell transactions for over 15 years and have been involved in 40 to 50 dealerships being bought and sold across the eastern United States. In the past five years, we have seen a significant increase in the buy-sell market. The particulars of any Letter of Intent, Definitive Purchase Agreement, Real Estate Purchase Agreement and ancillary documents are all subject to negotiation to fit each transaction’s unique situation. That said, the goal of this article is to provide you with a general understanding of the process and to highlight issues for you to consider along the way. Obviously, depending on whether you are a buyer or seller, certain aspects and positions are going to be more important than others. Regardless of which role you occupy, I hope this “Counselor’s Corner” will make the journey a little less stressful by showing you what lies ahead.

To begin, be careful about relying on the national publications for multiples to determine a Blue-Sky number for your dealership. While they admittedly are a guide, they do have limitations. If you read the fine print, those published multiples are for dealerships that would sell at levels not commonly seen in West Virginia.

Usually, but not always, the initial transaction document is a Letter of Intent. It should state that it is non-binding. It should also have provisions related to confidentiality and bind the seller to no further negotiations for a specified period of time as the definitive purchase agreement is negotiated.

One common discussion is how detailed a Letter of Intent should be. It is important to always negotiate the price of assets for inclusion in the Letter of Intent. Articulating terms of how the parties determine the price of new cars, fixed assets and Blue-Sky numbers are key. If amounts can be agreed upon, it will prevent disagreements or other losses of momentum during the purchase agreement negotiations. Having these terms decided early also helps to prevent misunderstandings during the initial period when the parties are attempting to build trust.

Turning to the Asset Purchase Agreement, there are several significant topics you should consider:

1. Assets
   
   1. New Cars: Determining what is being paid for new cars is very important. Generally, a buyer will negotiate a price below or at triple net pricing, further reduced by floorplan financing credits and advertising. While commonly accepted, this can leave the selling dealer with a deficiency in the floor plan balance, depending on how many units are on the lot or in transit. During COVID, this was not a significant issue as inventories were sparse, but as the industry gets back to its pre-COVID inventory levels, this is the significant negotiating point that a dealer on either side of the transaction needs to consider. A seller should attempt to hold as close to the invoice minus holdback as much as possible. On the other hand, a buyer will certainly wish to have all the credits on a purchased unit.
   2. Used Cars, Service Loaners, Demonstrators: Sellers should consider whether they have an additional dealership to which used cars can be transported if a purchase price agreement cannot be reached with the buyer. If you do not own an additional dealership, then the buyer will have additional leverage on used car prices. Service loaners also need to be addressed. Various manufacturer programs will impact the price paid for service loaners. If the service loaners are titled in the dealership’s name, they are considered used cars, and prices will need to be negotiated accordingly. On the other hand, if not titled, they may be considered new cars and will be priced as such with some deduction for mileage. Importantly, the buying dealer does not wish to be without service loaners on day one of operations, and usually, these matters can be worked out by reasonable parties.
   3. Furniture, Fixtures and Equipment (FFE): Commonly, this asset category is all the furniture, office equipment, special tools, lifts, EV chargers, shop service equipment and everything related to the service department, and, if applicable, the body shop. I caution any selling dealer to be careful about agreeing to the price of depreciated value as most dealers have their furniture, fixtures and equipment depreciated near zero, although the FFE’s value is much more. Any relatively modern dealership will have hundreds of thousands of dollars in furniture, fixtures and equipment. The parties can generally agree upon a price to be paid for the FFE but may negotiate a provision to retain an appraiser to determine fair market value.
   4. Parts: The primary issue here is to determine what inventory is current and what is obsolete. Usually, the parties negotiate the time frame when a part will no longer be considered current (typically 12 to 18 months) and if non-returnable parts will be considered obsolete. The purchase price is usually at wholesale after an appraisal, but the parties can agree upon a price to avoid the cost of a parts appraisal. A dealer also needs to think about non-manufacturer parts and whether they will be purchased at dealer cost or a negotiated price after an inventory, which usually occurs the day before closing. Obviously, in the latter situation, the buyer has the leverage and if an amount can be negotiated in the purchase agreement, then disagreements can be avoided at the closing table.
   5. Assumption of Contracts: This can be particularly important for the selling dealer as many contracts do not allow for termination, even if the dealership is sold. This is particularly prevalent with dealer management systems, and I would encourage discussions with the buying dealer on whether these contracts can be assumed or perhaps some price agreed upon if not. Importantly, consider negotiating an addendum to your dealer management system contract so that in the event of the sale, the contract may be terminated with no penalty or at a significantly lower price.
   6. Intellectual Property: Discussions will need to be held about ownership and transfer of websites, phone numbers, etc. Does the selling dealer keep the dealership name or sell to the buying dealer? The point is that IP concerns need to be considered so that practical operational issues do not arise post-closing.
2. Representation and Warranties: It is difficult to provide too much in detail here due to the practical constraints of this article, but when negotiating warranties and representations, parties need to be thinking about how the representation is presented and, interestingly, how the word “knowledge” is defined for the party making the representations. Also, the seller must decide who will make the representations, the selling entity only or also the dealer principles. Warranties and representations will substantively address a party’s authority, clear title to assets, current litigation, tax liabilities, environmental issues, employees, employee benefit plans, working condition of assets and brokers, etc.
3. Indemnity: Indemnification is important for both parties; the buyers want unlimited indemnity from a seller while the seller is attempting to limit the length and scope of indemnity. Considerations can be made to what is referred to as a “basket.” This basically means that indemnification obligations do not accrue on behalf of any party until a certain agreed-upon amount of loss has occurred, for example, $10,000. Ultimately, dealers can negotiate caps on indemnity, limit timeframes for indemnity claims and establish procedures for handling indemnification requests.
4. Miscellaneous Considerations: These may include termination provisions, contingencies to close, deposits, escrow, allocation of the purchase price, confidentiality of the agreement and provisions to prohibit additional negotiations by the seller until the agreed upon closing date passes.
5. Contemporary Close: If real estate is purchased, whether initially leased or purchased at closing, there should be provisions related to the requirements that the dealership and real estate closings must be contemporaneous or both transactions are voided.
6. Real Estate Agreement: In the real estate agreement, you will articulate a legal description of the real estate and set forth the proration of taxes, utilities, environmental investigations, inspections, expenses and transfer taxes. The latter is one of the most expensive items that occurs at closing. An average transfer tax for a West Virginia dealership can amount to tens of thousands of dollars. The parties need to negotiate who will pay these transfer taxes and fees.
7. Conditions for Closing: The purchase agreement will address certain conditions that are to be met before closing. For example, whether representations and warranties remain true and correct, approval by the manufacturer, financing obtained by the buying dealer, whether the buyer has been licensed by the Department of Motor Vehicles or the State Motor Vehicle Commission, execution of a dealer sales and service agreement, and whether any necessary third-party consents have been obtained.

Once a definitive purchase agreement is signed, it generally takes 90 to 120 days to close. On the buyer’s side, there is significant required due diligence to perform regarding the seller’s dealership assets and financials, along with the real estate due diligence. A buyer is also focused on obtaining financing, floorplan and manufacturer approval. A seller, on the other hand, is focused on providing all the documents, keeping the transaction confidential until closing and trying to address the multiple vendors contracts that have to be addressed. There are a lot of moving parts.

After manufacturer approval is received, closing can normally take place within two weeks. During this time frame, there is a whirlwind of activity between the buyer and the seller as details are being completed for lenders, manufacturers and other third-party vendors. The parties will need to be prepared to sign various documents at closing that may include a bill of sale, a deed or lease agreement, promissory notes, consulting or employment agreements, corporate resolutions, an assignment and assumption agreement, various representation letters and a post-closing agreement. The parties will also likely provide certificates of good standing/existence, updated schedules for the purchase agreement and closing notices to the manufacturer(s).

As you can see, a buy-sell is quite an adventure. Sellers need to understand that even though the dealership may be sold, it is not uncommon that the three to six months post-closing will be rather busy wrapping up closing business details, working with state agencies to close various accounts, and perhaps handling consumer warranty issues and other matters that arose prior to closing. Further, manufacturers routinely do not release open accounts to the selling dealer for three to four months post-closing. This is normal and expected.

I hope you find this article useful if you are considering such a significant decision. As always, the Association and I stand ready to assist you with any legal questions that may arise and help you stay in compliance with our challenging legal and regulatory system.