Posted on Mar 16, 2017

If you’re like many dealers, your vehicle inventory may have yo-yoed over the last few years. You likely experienced a glut of new cars during the recession, while used cars generally continued to move — sometimes with not enough supply to meet the demand. Then, typically, your manufacturer adjusted production, sending fewer cars — and far fewer trucks and SUVs — your way.

Perhaps more than ever, you must stay focused on your inventory. Here are five tips to help your dealership keep its supply at a realistic level.

1. Avoid overstocks in the first place.

One way is to regularly evaluate your inventory control tools and establish some best practices for sustaining a feasible volume. Consult with your technology adviser, for example, to see what new vehicle-tracking hardware and software have hit the market.

Also reassess any inventory rules of thumb you may follow. One line of thinking holds that an inventory-to-sales ratio should be about 2-to-1. If you plan to sell 50 units, you should keep at least 100 vehicles on your grounds. But which formula works best for you in today’s market?

2. Share your stock.

Consider teaming up with other dealers selling the same brand to reduce your new-car stock. Just be sure these “pooling partners” are close enough geographically to make sharing practical, but far enough away to avoid direct competition.

3. Order only what you know will move quickly.

Closely track pattern failures in any or all of the vehicles you stock. Meet with your CPA regularly to discuss whether you’re getting the inventory data you need and assessing it properly. And do what you can to make your inventory turn.

If a used car customer is interested in a particular vehicle that’s out of stock, for example, keep a record of the request in case the vehicle comes into inventory later. Put this document in a shared (electronic) place that all salespeople — including your auction buyers — can reference.

4. Evaluate your website and online practices.

If business at your dealership is still slow, use the extra time to assess your website and overall Internet presence with the simple goal of moving more stock. Remember, most buyers do homework on the Internet first, and you want potential customers to linger on your site — not skip off to your competition’s website. Consider using video, which can be effective in getting potential customers to act. Web research firm eMarketer estimates that currently, 88 percent of all Internet users are video viewers.

Some dealerships feature sports stars or other celebrities in their videos to attract viewers. And video customer testimonials can be a powerful tool. Also be sure to evaluate your e-mail responses.

5. Do your homework.

Always do your homework to make sure your prices are competitive, and that these are the prices you’re advertising. One strategy holds that you should price vehicles for subprime (and other) buyers. Some dealers, for example, look for vehicles they can buy $1,000 to $1,500 under wholesale book, believing that allows them to cover their lenders’ fee structure and still make a good gross profit.

Posted on Jan 23, 2017

Are You Savvy About F&I Employee Fraud?

A few years ago, several employees from the same dealership were convicted of defrauding their customers, lending institutions and warranty companies, and some received stiff prison sentences. Their crimes — many originating in the finance and insurance (F&I) department — could repeat themselves in your dealership if you aren’t aware of the possible F&I schemes.

Prevention, Prevention, Prevention

Training is essential to guard against fraud in any department at your dealership. Train all employees as to what is considered a fraudulent, unethical or unacceptable practice. Make sure that they know you have a no-tolerance policy toward wrongdoing, and make them aware of the consequences of fraudulent behavior.

Are Employees Padding Costs?

In this fraud, an F&I department employee includes items in the vehicle price that the customer didn’t agree to, such as destination fees and, most frequently, warranty costs. The salesperson quotes a price that doesn’t include the warranty fee, and then gives the customer the monthly payment amount that does include it — without getting the customer’s consent.

If the customer questions the warranty, the salesperson may say it’s required in order to lock in a certain interest rate. This is false: The interest rate depends on only the customer’s credit history.

To help prevent schemes such as this one, have customers fill out and sign a checklist acknowledging that they’ve approved or rejected your dealership’s various products (gap insurance, extended service contracts, rustproofing and so on). Then have accounting personnel compare the checklist against individual sales and finance contracts to verify that the information is accurate.

Is Financing Approval Legitimate?

This scheme involves telling the customer that he or she has been approved for financing, delivering the vehicle and letting the customer drive it for a few weeks. But then the other shoe drops: A financing department employee calls back to say that the loan fell through and, to keep the vehicle, the customer must pay a premium and a higher monthly payment.

Crooked employees usually practice this rip-off on customers with poor credit, who they assume feel shaky about their creditworthiness. The employee knows the real payment amount and the interest rate offered by the financing institution before delivering the car. But he or she assumes that, after driving the vehicle for a time, the customer will develop a certain comfort level and agree to pay more to keep it.

To catch employees doing this, watch your contract-in-transit schedule to see if any deals are taking too long to be funded. You also can send out customer satisfaction surveys and read any responses received carefully. If you notice several buyers — or even one — complaining that monthly payments went up unexpectedly, investigate further.

Another internal control: Almost all lenders provide some type of approval process for customer loans. Create a document for customers that acknowledges they’re aware of the lender’s financing terms. Make sure that the document contains the bank’s approval code for the loan.

Then have your accounting department compare the customer’s acknowledgment of the loan terms with the bank’s approval. Accounting also should compare the acknowledgment document with other documents in the deal — sales contract, financing agreement, bank approval of loan and so on — to ensure that everything is spot-on.

Are Credit Scores Accurate?

In this fraud, a financing department employee lies to the customer about his or her credit score, saying it’s lower than it really is. The employee then charges the customer a higher interest rate, increasing the dealership’s income from the sale.

Crooked employees try this on customers who won’t be too surprised to hear they’re having financing problems. Most consumers with strong credit ratings would know they were being duped.

One way to prevent this scheme — and, indeed, most financing-related schemes — is for an F&I manager to review all customer agreements. If a customer’s credit score doesn’t mesh with the interest rate being charged, foul play could be to blame. Just be sure to rotate reviewing duties among several F&I managers. If you don’t have more than one, randomly review customer agreements yourself on occasion.

The After Effects

If you detect F&I fraud in action, the end result might be a conviction of your crooked employee. But think of the inestimable damage to your business’s reputation as word is passed from the unhappy customers around your community. The best defense is a strong offense, they say, so safeguard against F&I fraud in all feasible ways. As a dealership owner, your customers’ loyalty is the trump in your hand of cards.

Posted on Dec 20, 2016

If you’re looking for a way to lower your tax bill and your dealership owns real estate, a cost segregation study may be the answer. Read on to see if you qualify.

What Is a Cost Segregation Study?

You may be eligible to retroactively save taxes through accelerated depreciation if you purchased real estate, built a new showroom, renovated your facilities or expanded your property anytime since 1987.

Traditionally, dealers depreciate nonresidential buildings and improvements over 39 years using the straight-line depreciation method. A cost segregation study, however, works differently. It identifies, segregates and reclassifies qualifying property into asset groups with shorter depreciable lives of five, seven or 15 years. These shorter lived personal assets are eligible for MACRS accelerated depreciation schedules, rather than straight-line depreciation.

Cost segregation studies are used for tax purposes only. Your GAAP financial statements won’t be affected by the study, unless your dealership uses tax depreciation methods for book purpose, too.

Which Assets Qualify?Take a look at what’s included in the value of your real estate. Chances are the gross amount will include such things as carpeting, window treatments, wiring, cabinetry, lighting, driveways, wall coverings and cubicles, landscaping and drainage. Soft costs such as architectural and engineering fees might also be lumped into the total. All of these items potentially can be carved out as personal property and depreciated more quickly than standard real estate.

For example, suppose a dealership purchased a new showroom for $5 million in 2003. In 2013, the dealership’s CPA conducts a cost segregation study and determines that the following assets can be reclassified:

  • Parking lot ($500,000);
  • Carpeting, blinds and wallpaper ($20,000);
  • Cabinetry ($25,000);
  • Lighting ($5,000);
  • Service equipment ($200,000); and
  • Landscaping and drainage ($50,000).

This study enables the dealer to reclassify and accelerate depreciation on $800,000 of its fixed assets. In 2013, the dealership can deduct all the depreciation it could have taken since the building was acquired 10 years before.

Auto retailers tend to achieve some of the highest savings from cost segregation studies compared to other businesses. That’s because dealerships own significant fixed assets — including display areas, lift and repair equipment, showrooms, and other specialized mechanical systems — that can be mistakenly classified as real property.

When Will Tax Savings Happen?By reclassifying assets, dealers can maximize their depreciation deductions in the early years, improving cash flow sooner rather than later. Cost segregation studies adjust the timing of deductions, not the total deductions taken over an asset’s life.

Since 1996, dealers have been able to capture immediate retroactive savings from cost segregation studies. Before then, taxpayers had to spread depreciation savings over four years. Today, you can deduct the full amount as soon as your study is complete, thereby dramatically lowering your current tax bill. Of course, if you’re buying, building or renovating a dealership currently, this also is an ideal time to perform a study.

By lowering the value assigned to real property, a cost segregation study also can help you save on real estate, sales and use taxes.

Why Do I Need a Formal Study?

Formal cost segregation studies are required to support the deductions on your tax return in accordance with IRS guidelines. An experienced professional can analyze a dealership’s blueprints, engineering drawings and electrical plans to determine exactly which assets qualify as personal property. Bottom line: A formal cost segregation study will prove its worth if IRS auditors come knocking.

Savings Varies

Tax savings will vary depending on the value of your property, its age and your effective tax rates. But, it’s not uncommon to convert 20 to 40 percent of total building costs from real to personal property. Contact your Cornwell Jackson CPA to discuss how much you can expect to save from a cost segregation study.

Posted on Oct 5, 2016

 

Consider this scenario: A small dealer isn’t looking to expand its business when an opportunity arises. A well-known-brand franchise in the area is up for sale. The franchise’s owner is losing money but the small dealer’s owners think they could turn the dealership around. New car sales are strong and financing is currently attractive. Should this motivated entrepreneur buy the business?

What Manufacturers Might Require

When considering a second franchise, you’ll want to take a close look at what the manufacturer will require. Is your existing manufacturer offering the second franchise? If so, it might allow you to stay in the same facility but require you to build a separate showroom or segregate your showroom area for the two brands.

Some dealerships are able to solve the dual franchise problem by hiring a receptionist to direct customers to separate showrooms as well as separate customer waiting and service areas.

If your manufacturer thinks you lack sufficient space, it may require you to open a second facility. It also might require you to dedicate one or more salespeople to the additional franchise and may try to make changes to your current sales and service agreements that you might not agree with.

If the second franchise represents a different manufacturer, the plot will thicken. The second manufacturer — or your existing factory — may have a long list of requirements that necessitate opening a new facility and running the new franchise separately.

Purchasing a second franchise is one of the biggest moves a dealer can make. Here are six steps to take in the decision-making process.

1. Choose the Right Franchise

Is the brand you’re eyeing likely to sell in your market? Just because you’ve always liked, say, Lincolns — and several of your customers have expressed interest — doesn’t mean they’ll sell well for you. Base your decision on solid data, not on instinct.

Consider whether the franchise is high-quality, is on the rise and matches up with your area’s demographics.

The manufacturer can provide sales projections and even assist in (and possibly pay for) market research. Don’t stop there: Seek hard data, including the failure rate, from objective third parties. Some financial analysts, for example, track auto manufacturer franchises, and your Dealer 20 Group may have additional information.

2. Determine if the Price is Right

The price of the franchise will probably be the deal maker or the deal breaker. As you evaluate the price, you’ll need to account for your short- and longer-term costs, including:

  • Altering or expanding your store, or building a new facility (see the right-hand box for some possible requirements from the manufacturer).
  • Adding to your sales force and back-end staff, and
  • Training staff on the new brand and manufacturer’s procedures.

One word of warning: A new franchise normally will operate under working capital constraints. Be sure that you won’t be strapped with too much debt service as a result of overspending.

Additionally, what is being purchased matters — that is, assets or stock. Asset-based purchases are more common for dealerships, but corporate stock purchases still exist. Future federal tax expense becomes a crucial consideration when determining how the deal is structured. An asset sale can favor the purchaser because costs can be recaptured more quickly through depreciation.

But the seller may prefer a stock sale because the tax paid on the gain often is levied at a lower rate. That means the seller may be willing to accept a lower price for a stock deal than for an asset-based transaction. For the buyer, a lower price might make up for missing out on the depreciation advantages of an asset sale — but the buyer also needs to be concerned about future unknown liabilities that could arise with a stock purchase.

Consult with your tax adviser about your situation so the best tax results are achieved.

3. Project Profitability Carefully

You should be able to find out the current franchise owner’s record of profits — or losses — fairly easily. But bring your financial adviser into the analysis to help identify any hidden losses or exaggerated profits. Annual losses, however, aren’t as much of a yardstick as you’d think, because the business is likely to be run very differently under your ownership.

What is extremely important when calculating profitability is the franchise’s purchase price and the value of its goodwill and potential sales volume. Is there enough opportunity for change in the business’s operations to achieve the profitability you’re projecting?

4. Assess the Impact on Your Franchise

If the second franchise is a standalone business, its profits and losses will be calculated separately from those of your first franchise. But if you’re putting both franchises together in the same corporate structure, you’ll need to assess whether the newcomer franchise will add value and profitability to your existing business.

Or will the second franchise rob your first franchise of sales? Be sure to estimate the retail impact of this “in-house” competitor carefully.

5. Weigh in on Staffing

You’ll likely have to hire additional staff for your new franchise operation. An exception: If you’re housing both franchises under one roof and can dedicate one or more salespeople from your current staff to the new endeavor. But you’ll still need to consider how the new line of business will stretch your management team, your back office and every other part of your operations.

6. Bring in an Expert

Your CPA can be a crucial peg in your decision to add a franchise. He or she can assist in:

  • Determining whether the franchise price is fair;
  • Performing due diligence to authenticate that what you’ll receive is what’s being represented; and
  • Conducting a sound business evaluation of all the factors mentioned above to determine whether the second franchise is a good idea or a bad one.

Last but not least, your CPA can assist in the submission of paperwork to the manufacturer for the approval of the sales and service agreement.

Opportunities and risks: Adding a second franchise is a way for capable entrepreneurs to take advantage of market opportunities and expand their businesses. But a second franchise carries just as much risk as any other investment, and you need a proven business strategy to make it all work.