Hello, everyone, thanks for joining me today. Today's webinar is the keys to successful dealership succession planning. My name is Rex Collins, I head up the dealership industry group for HBK. I'm probably one of the strangest CPAs you're going to meet. I've worked exclusively with dealers since 1987. I don't have a single client who's not a dealer. But what makes me probably the strangest CPA you'll ever meet is the fact that I'm probably the only CPA who's run a service department. I've actually GMed a store. I even owned a dealership and boots on the ground type of experience. This webinar, we spoke at the small dealer get-together conference in November that AED put together about succession planning. And this is going to be a condensed version of that. And you've got my contact info if at the conclusion you have any questions. Feel free to give me a call or send me an email. Hard as it may be for you to hear, you can't run your dealership forever. Every dealership gets transferred, if not before, then ultimately at the death of the owner. At some point, there's going to be a time where you're going to want or possibly need to step aside. And when that day comes, you'll need to be prepared. Transferring ownership in a dealership, that's real easy. However, turning over leadership in a dealership, that's not a simple task. It requires years of careful preparation. Quite simply, it requires a succession plan. A sound dealership succession plan addresses a long list of issues, including retirement income, transferring wealth to the dealer's heirs, transferring ownership, dealing with the income and estate tax consequences associated with an ownership transfer, addressing other key issues that are important to the ongoing success of the business, not the least of which, and frequently forgotten, is transitioning management. On the slide in front of you, you see ten points. I'm sure all of you have read ahead at this point. Those are the ten steps that we utilize in helping our dealers develop a succession planning strategy. Now, you can't address all of these issues at once. What happens with one will affect how you handle another. Ideally, a dealer begins planning with a third-party professional, one who has industry experience as well as succession planning expertise. This planning, our recommendation anyway, is that this planning begins at least ten years prior to an expected retirement date and should include a contingency plan should death, illness, another family situation or a change of heart require an earlier than expected transition date. Give me ten or 20 years to do the succession planning, and we won't have any concerns more often than not with regards to having left a successful business to the next set of owners, whether that's family, employees, or a third party. But it will also ensure that we maximize the value for you as the dealer who's transitioning out. For many dealers, the dealership is like their child. They're committed to their business, to its growth, to grooming it, its success, and their ties to the business are emotional, just like with their offspring. Therefore, succession planning has to consider these emotional items as well as the financial aspects of retirement, transfer, and transition. The first step in effective succession planning is to identify and prioritize goals. Succession plans have value for the dealers only if they meet their goals. Identifying goals includes determining that they are realistic, and prioritization comes into play in resolving conflicts between some of these goals, which may be mutually exclusive. For example, if you're selling to a third party, you want a top price for your business, but you also want to minimize the tax burden from the sale. It might not be possible to get both. We recently worked with a dealer involving mutually exclusive goals. The selling dealer wanted to reward his employees for their years of service with extended separation pay. But the results of that were reduced proceeds from the sale of the dealership. Ultimately, we helped them find a good middle ground, whereby the employees were treated very, very well, and the dealer was still able to receive funds sufficient to retire comfortably. The most common goals in planning succession, keep the dealership in the family, transferring to the next generation, if that's what the dealer wants, maintaining a successful operation and one that's profitable into the future, providing liquidity to the owner or to his or her estate, provide financial security for the dealer's family, minimize current tax liabilities and the potential estate tax liability, and finally to maintain family harmony. And I'll tell a story later where family harmony, the discord, actually came into play. Family transitions can be fraught with conflicting goals. A dealer looking to maximize ongoing income to his children learned that getting the income he wanted would burden dealership profits to the point of threatening the future of the business. Again, we had to make some difficult decisions with regards to balancing these conflicting goals. A more common issue arises is either the lack of interest or leadership skills on the part of an incoming family member. Owners, we get this issue frequently, and I talk frequently with dealers. We did four actual transactions the week of the Super Bowl, and two of those were situations in which the dealer had family members in the business, but in both instances the dealer determined that he either didn't want the family member in one case and in the other case determined that the family member, quite honestly, his son wasn't able to operate the business. So we caution and work with dealers all the time where you really shouldn't assume that your children's goals are the same as yours. They often have, even if they are capable, they may have other plans that don't involve the dealership. So succession planning must include determining which family members are in and which are out and consider the transition of management. We can transfer ownership to the kid, but management needs to be transferred oftentimes to non-family members. It can be treated separately is the point I'm trying to make there. In light of these goals, we can identify five different dealer succession profiles. Owners with children to whom they would like to transfer the business, owners who want to sell the dealership to a third party outside the family, owners who want to sell the dealership to invest the proceeds in another business or investment opportunity, where there are multiple owners, an owner who wants to sell to a partner or partners. By the way, such sales can present troublesome situations. For example, where one partner who is not capable of managing the dealership is left running the store, that can be a problem. We have seen long protracted struggles over these situations relating to control, value, and actual operations into the future. Then the fifth is owners who want to run the business until their death. For these owners, the contingency plan is particularly important. Basically, we need to deal with how to transition ownership and management in case of serious illness or the untimely death of the owner. Owners frequently think they're going to live forever. Even before identifying succession goals, you should work closely with a competent and industry savvy succession planning professional to create a succession strategy. Such a strategy must be developed, understood, and communicated, and that's really important is the communication with the family and with the employees in order to design and implement an effective and successful succession plan. What is succession planning? In this little intro, this 12-minute intro, if you will, I've kind of talked about some of the things, but what is it at its roots? A succession plan is a detailed dealership strategy that identifies potential leadership successors within the dealership and positions them to lead while also slowly transitioning out the existing leadership over a period of time. And this succession plan must be a part of your dealership strategic plan. Now, if you notice, in that entire definition, I didn't once talk about estate taxes or estate planning, and I didn't talk about selling the dealership, or I really didn't even talk about family members too much at all in this sentence, and that's because succession plans fail when we fail to train the next generation of leaders, whether those next generation of leaders are family members or whether they're non-family members. So that's why I'm pointing this discussion more towards that. Also designed to streamline the transition process, a succession plan ensures a strong business leaving one owner's hands remains a strong business under the next owner. Basically, guys, we're talking about ensuring that you've got something valuable that you're either handing down to the next generation or you're selling and maximizing the proceeds you get when you end up monetizing this business. You don't want your business to lose value the instant your child or a long-time employee takes control. Many times, future payments are due to the exiting dealer in the form of rent, director's fees, deferred compensation. There may be a note. You may be selling it to your family or employees, or you may be holding part of the note with a related third party where you're dependent upon the success of that business to make those note proceeds to you, payments to you. So it's important that the business can succeed going forward. For succession planning to work, owners and the successors must be specific in their expectations. We need to agree, for example, on how much time the successor and dealer are going to spend together. Even in a transaction, we talk about that because oftentimes in a transaction, the new dealer wants the exiting dealer to stay on for a few months up to a year typically, sometimes longer, and then they go into retirement. We certainly have done deals where the exiting dealer has remained an employee for years and years and years, but we've got to deal with that from a sales perspective but just a sale of the business perspective. But think about it if we're transitioning leadership. We need to determine how much time we're going to work together, how conflicts are going to be resolved, and who's going to make which set of decisions. We've got a dealer that we worked with, Jim, about 69 years old. He's got no immediate plans to retire. His view is, quite a common view amongst my dealer clients, my hobby is my business. About 20 years ago or so, Jim started planning to ensure his family is going to be financially secure when he died. That was primarily to make sure there were monies there. It was funded through insurance. About 10 years ago or so, he began grooming his sons to take over after they expressed an interest in the business. Then a few years ago, he hired us to formalize everything and to arrange a legal and orderly management transition for when he actually does leave the business. One of the problems a lot of people face when they're with transition planning is, both financially and personally, is you have to be able to contemplate your own death or at least giving up control. Realistically, both things have to happen. Our opinion is you might as well face facts and let's deal with this. They aren't fun discussions to have, but they're very important discussions to have. Without proper succession planning, a dealer could leave behind a legacy of litigation and failed business and family relationships. That's why many experts agree with us that most dealers need to start talking about this in their 40s or early 50s. I've got an example that I want to walk through. This is actually a client of ours that we helped through this process. It's kind of a story of what happens without planning, but we made a good result out of it. But I do want to talk about this. I intend to talk about other real-life examples such as Jim's as we go through here as well. But this is a different story. At the point we started working with this client, the current dealer owned 15%. I'll get to why it was only 15%. It was 57 years old. It was the only place he'd ever worked. His family name was on the building, if you will. It was founded in the 50s by his father and his two uncles. The first uncle and the father had died long, long ago. The second uncle died about 10 years ago. The second uncle had a second wife. We'll call her the step-aunt. But as you can imagine, with a lot of second wives, this wife was more than a little younger than the uncle. She didn't understand business whatsoever, and she certainly didn't understand dealerships. The uncle did very little succession planning, but he did do estate planning. I've got news for you. The estate planning attorney that did this probably thought he did a home run and did a perfect job. Why did he think that? He thought he did a perfect job because at the death of the uncle, basically no estate tax was due. The problem was how it was set up and what was left for everyone else. The estate planning that was done involved a trust for the benefit of the second wife and ultimately the dealer operator, the 15% owner, the nephew, would end up with 51% of the business. But the question was when. I said the second wife was quite a bit older. The second wife and the nephew were basically the same age. The dealer operator, the nephew, wasn't going to get 51% ownership, wasn't going to get control, until the second wife passed away, the step-aunt passed away. The step-aunt was likely to outlive him. Not a good plan. Furthermore, the step-aunt was receiving very, very, very small dividends, and rightfully so. She didn't understand the business at all, didn't understand dealerships, and didn't understand that typically there's very little excess cash flow for dividends. She ended up hiring, before I talk about the number of attorneys that she hired, she didn't understand nor did all the attorneys that she hired understand that we're in a business that gives us the opportunity about every seven years to lose everything we've ever made. The dealership spent hundreds of thousands of dollars every year. Keep in mind, the uncle died about ten years prior to that. Spending hundreds of thousands of dollars in legal fees every year in fighting with the step-aunt. In the last year alone, the dealership spent $600,000 in dealing with the step-aunt. And that was a short year. The step-aunt went through multiple sets of attorneys. They were charging more, my understanding is, than what the dealership was getting charged. We're talking about $1.2 million, $1.5 million a year in legal fees between both parties, and it all could have been avoided. Now, I got involved. I met with the dealer. We were talking about an ESOP, possibly, and we performed a valuation is what we did. I came up with the value. I met with the dealer. The dealer, then, after he had my value, met with a broker. The broker, the business broker, gave him an asking price that he felt he should start the asking for the business. Now, he's not going to get asking price, but that was the starting point. That broker's asking price was $22 million less than the value that I came up with. Well, the first thing I think is I've made a mistake. So I go back. I start working through. I look at things again. I go back to the dealer, and I say, Mr. Dealer, I think I'm right. I think this is the value. I feel good about my number. And his response was, you think you're right, huh? Yes, I do. Well, find me some buyers, then. So I did. I actually found two buyers. We closed the deal. I'm shortening everything. This is Reader Digest version. We closed the deal. We ended up with $23.4 million more than the broker had asked for or was going to ask for as his starting point. But here's the deal. That sounds great, right? But the dealer's emotions got to him at the closing. He knew that we were doing the right thing, but it wasn't his original plan. He was 57 years old, kids in the business. Junior, as a matter of fact, didn't speak to his father for a long time, okay, because Junior thought he was going to be in the big chair someday. But why did we do this? Sold the store because we couldn't deal with the step-aunts and her attorneys any longer. The family is financially set, but they're not happy. And it was all because the uncle resisted planning. Now, this is one of those situations where we resist planning and we came out with a good financial result. I've got plenty of other stories that are at the other end of the spectrum where there's been no planning done and the business is worth little. We had a situation, we're in the process of working through it right now, where the dealer principal went out for a run. He was about 58 years old, I believe, went for a run, came back to the store, and had a massive heart attack. He was very healthy. This was unexpected. He was dead before he hit the pavement. He left the business. His wife is now the dealer, but she has absolutely no understanding of the business, is angry at her husband for dying and leaving her with this, and then she feels guilty about being mad at her deceased husband. It's an emotional rollercoaster, and the business was not set. There are no internal managers of this thing. When the dealer passed away, the value of that business went away. We're in the process of working out a transaction right now to do the best we can for the widow. Quite honestly, we're getting her out of the business before she loses all of the life insurance proceeds by trying to prop up the business during this time period. There just aren't any leaders that have stepped up. Dealers resist succession planning for a litany of reasons, and this kind of dovetails behind the story that I just told. The dealer wouldn't do any estate planning. He's going to live forever. Not estate planning, succession planning. He had no leaders in the store. Those people that the wife thought were leaders have come to her with their hand out at all times, and they're just not performing, not willing to step up at all. At any rate, dealers resist the planning for a lot of different reasons. Fear of death, lack of successors, the cost to implement this, which can be significant, but the cost comes with a benefit. We're talking about spending thousands or tens of thousands of dollars to preserve millions of dollars in value. Despite an aging dealer body, which I get asked, why are you doing so much succession planning now? I point to the color of my hair as well as the color of the dealer's hair. There's a graying of the dealer body. Despite that, only about a quarter of U.S. dealers have really done succession planning, and I think that's probably a generous estimate. As you see on here, you do have a succession plan, whether you've worked one out or not. The best is green, a lifetime transfer of an ownership interest with management responsibility. Let's do this. Let's take ten years. Let's do this. Let's groom the successors. Let's groom the kids. Let's groom the employees, however we need to do that. The second option, this is in yellow, caution with this, don't do this, but at least do something. A lot of dealers feel like the uncle did. I did everything I needed to. I did my estate planning. You see what the results of that were, not good, but that is an option, an estate plan that implements the exit strategy, just not a succession plan. Finally, we do have a lot of dealers that just say, you know what, I'm going to let my family worry about that. Well, we see what happened with the widow who is having to deal with that, and it's not good. Good planning for succession purposes guarantees your family is going to keep the dealership if that is their desire, and we've got to deal with that. Is it their desire or not? A dealer who does a proper job of succession planning, including training a successor, can ease into retirement while maintaining a good standard of living, and when you die, you reduce your estate settlement cost significantly. Just turning the business over to a new owner, as I said before, is fairly easy, but doing it at the right price and in a way that preserves the business continuity and family harmony makes it very challenging. Let's deal with a couple of things I just said in that sentence. At the right price. Don't use a back of the napkin or my buddy from a 20 group got this or some rule of thumb. Don't guess at what the value is. You have one shot as the exiting dealer. You've got one shot at monetizing this, whether it's monetizing it through the transfer to the family or whether it's monetizing it through the sale to an outsider or the in-between route, which is a sale or transfer to a group of the employees. The other thing that I want to mention is not only at the right price, but we're doing this to preserve the continuity. Again, why do we need to preserve the continuity? Because oftentimes the dealer's financial livelihood is tied to that. If you're going to transfer it to the kids, if the kids tank the business, all of a sudden you're not getting paid the rent, you're not getting paid the value for the business, you're not getting paid the deferred comp that you were getting, all of your payments go away. That's not a good answer. So we've got to guarantee that that continuity between you leaving and whoever that next set of leaders are that are going to pick this up. We do it also as an aside, we do an awful lot of succession planning within the dealership. The question that we're asking there is, who's going to be that next branch manager? You're not going away, but is your branch manager going to leave, retire? What happens if he leaves suddenly, gets a better job? Do you have that branch manager trained? What about your service department? Specific managers within the departments, within branches. So we're doing a lot of that consulting and help with the dealers as well. And then beyond getting the right price and being able to monetize this to ensure your retirement income into the future and your family's wealth into the future as well as preserved, and the continuity that has to happen, family harmony. You have to have Thanksgiving dinner together at the end of the day and too many times we see this not happening that way. I tried to help a dealer up in Ohio. This was an Ohio dealer. I tried to help them. The father had three sons, two of which had stayed in the business and had spent their their life in the business. Father was 90 plus years old. He promised the store to the active kids who are do the math. They're now retirement age, okay? They've counted on the fact that they would have this business that that would fund their own retirement. Guess what's happened? Dad has now decided to give it equally. Initially he was going to give it equally to the active and non-active sons. Well that's not fair, okay? Because the non-active son, the third son, he is a farmer and he's already been given the family farm. So he's going to be getting more than what is actually a third. Plus basically as it turned out the father in this situation has decided instead of giving it equally to the the three kids, nope, I'm going to give it to my grandkids and that'll be a good start to their business. The only grandkids are the grandkids of the farmer's son. So in essence he's disinherited but he's not thinking about it that way because he's having memory issues now at 90 plus years old. It wasn't handled by the family, not an ongoing client of ours. It wasn't handled by the family when it should have been. Now we've got a father who's got dementia and he's wanting to help his grandkids get a good start and he's disinheriting two thirds of his family by doing that and he doesn't realize that he's done that. It's a it's a sad situation there. So we've got to do this and we've got to make specific plans and in making those specific plans it should define the dealer and the successors expectations and defining those roles are critical along with spelling out how the business will be affected when any partner in the business retires, dies, or gets divorced. You don't want to find out that the divorce judge has turned over some of the stock to an ex-spouse and now your partner's ex-wife is your partner. That's not good or you're in business with your ex-spouse. Okay we worked with another dealer Jerry down in Florida. He's 62 years old. He didn't want his children to suffer the same uncertainty that he did. Jerry's father started the dealership in 1955 but did not plan for a good proper succession. Jerry worked at the dealership for years with his future in limbo until he arranged a buy-sell deal with his father in 1981 that would allow him to own the dealership eventually. In working with the dealer he had to acknowledge with Jerry he had to acknowledge that he wasn't going to be around forever that he was going to decline and ultimately die and that was pretty upsetting for him and it was a difficult issue for him to deal with really but he but he felt in case something does happen to him he wanted his children to have peace of mind that what we have done with regards to previous planning wouldn't let them know about it. He wanted to have them the confidence that we'd looked at everything and that this was the plan. About a year ago with the manufacturer's approval Jerry started transitioning the dealership to his son mid-30s who is the store's general manager. Some dealers balk at price. I mentioned this earlier. Peace of mind oftentimes isn't isn't cheap. These costs easily run twenty to thirty thousand dollars to pay lawyers, accountants, us. I am an accountant. Everybody involved to get the paperwork done to do the proper financial planning and so just bear that in mind. I like to not only talk about what we need to do but what the costs are going to be so just keep that in mind and budget accordingly. But that expense I believe is a bargain compared with the financial and emotional costs again the story about litigation. If litigation arises or if inadequate succession planning hasn't occurred a lawsuit could cost into the high seven figures as evidenced by what I was the story I told earlier about the nephew and the uncle. And that's just in fees. Don't forget there's a settlement at some point because somebody's suing typically. Lawsuits arise over just about any detail left unchecked in a dealer's succession plan. A typical problem is infighting between the kids running the operation and those who are not. A common mistake is dealers leaving the business to one child and the real estate to another without any guidance on rent or lease terms. This often leads to arguments over the rent rate, store improvements, and so forth. I like to give the successor dealer but the active child or children operational control over what happens to the underlying real estate. And I do this through voting rights or other control mechanisms. It may just be a one percent extra in voting. What I'm trying to say there is the dealer operator may ultimately only have one percent ownership interest in the real estate entity but if that one percent represents a hundred percent of the vote so you'd have one percent voting and ninety-nine percent non-voting stock. The non-voting stock goes to the non-active kids so that some wealth is being transferred there but we don't end up with the siblings being able to evict their brother or sister who's operating the business. Ultimately I need the operator to control his destiny with regards to the real estate. Problems like this have become a major problem where if the architect of maybe it's just an estate plan hasn't really thought this through and designed a workable succession plan or estate plan all of this dovetails together that provides direction. The children might not like what they're hearing but at least they're going to be given direction on kind of where what mom or dad's thoughts and plans were. Approximately ninety percent of the businesses not just dealerships in the US are closely held. Unfortunately many you've heard the stories where they fail to survive many of these businesses fail to survive the death or retirement of their owner. Although owners often spend a lifetime building the business we found many neglect the plan for its eventual transfer to the successors. This failure to adequately plan for management and ownership succession is a leading contributor to the low survival rate. Although many dealers would like their children or other family members to eventually own and manage the business succession planning is much broader than transferring business ownership from one generation to the next. In many cases it involves transferring ownership to someone outside the family. Succession planning prepares the business its owner and the owner's family for the day when the owner no longer participates in the business. Without planning that day can create a crisis and conflict in both the dealership and the family which clearly have adverse consequences both emotionally and financially. Business succession planning for a dealership include developing an exit strategy for the dealer and the business. Whether the strategy involves transferring ownership and management responsibility to family members, fellow shareholders or partners or to a third party it should address the following six items. Provide financial security to the owner after retirement. Provide financial security to the owner's family in case of untimely death or disability. Ensure the business's continued success in the dealer's absence. Dealing equitably with children working in the business and those who are not. I oftentimes let everyone know that fair and equal or equitable and equal are not the same thing. An easy example that I use is let's say that I've got three kids and one of those children is a special needs child who is never going to be able to care for themselves. Is dividing my estate equally an equitable solution? Giving a third to each one isn't fair. I need to take care of the one child who can't take care of him or herself after I'm gone. Another item, the fifth item that I would say we need to talk about in this process is limiting ownership in the business to only those persons who are are capable and acceptable to the owner. And then developing, and this is vital, developing a solution that is ultimately approvable by your manufacturer. Many of you have manufacturer relationships that are very very close to one-sided relationships. I'm not telling you anything you don't know. The dealer agreements are very much one-sided and in many times very draconian in the controls that the manufacturers ultimately have. So we've got to deal with that as well. When we do the succession planning and when you as a dealer are dealing with succession planning, we address the overlap between family and business goals and relationships that are unique to family-owned dealerships. This overlap is often the source of conflict that can inhibit the entire succession planning process. An understanding of this overlap, the emotional with the financial, if you will, enables us to design a succession plan that balances family and business goals and minimizes the risk of a conflict. In addition, we may address several commonly encountered barriers to the succession planning process along with techniques and strategies for overcoming them. Oftentimes we're addressing emotional or family dynamic based issues that the dealer doesn't want to address or the dealer may know who of the kids is really the leader and should be running the dealership and the spouse may have a another viewpoint on how his or her children should be dealt with. Then we've got further issues with what they call them fractured families, kids and stepkids and those types of things. Ideally a succession plan is going to deal with this inevitable change that's going to occur and it's a comprehensive plan, as I said before, for working through this, the succession of ownership as well as succession of leadership. What do we have to deal with? We've got to deal with monetizing, number one, monetizing or converting the business wealth to assets that can be used to fund the owner's retirement. Number two, we have to transfer the ownership in the dealership to the desired successors at the right price. We've got to treat the owner's children equitably. Four, we've got to address estate planning concerns associated with the transfer of the dealership, including minimizing the estate and gift taxes, providing liquidity to the estate, and planning for a surviving spouse. The Trump tax bill that went into effect basically on January 1st of this year, for the most part, has changed in a very good way the estate planning concerns. It hasn't eliminated them, but has changed those concerns in a positive way for us. We have to also, I mentioned strategic planning earlier, but we've got strategic planning concerns for the business's success after transition with a focus on choosing and grooming a management successor to successfully run the business. Those five steps are what have to be included and ultimately resolved in a successful succession plan. Transferring ownership in the dealership is unlike transferring ownership in any other asset. Often a significant portion of a business value is attributable to the owner's personality, efforts, relationships. Thus, without planning, the value of the business is likely to decline drastically when the owner is no longer involved. This decline in value certainly can have an adverse effect on the owner's financial situation in retirement. In the event the owner's disability or death forces an ownership change early, and any decline in the business value can have a devastating effect to the owner's surviving spouse and family. Why am I saying that? I'm beating a dead horse. Plan early, plan often. Get your successor leaders lined up so you don't have the problem that we have with the dealer who passed away suddenly that the wife is dealing with. All dealerships have an exit strategy, as I said before. It may be just leaving it to the air is not a good one, and it blew up. It blows up more frequently than not. Lifetime transfers of ownership are optimal, but don't forget about developing a contingency plan. When we develop a contingency plan, I planned on saying this a little bit later, but when we develop, I'll say it now, when we develop a contingency plan, we know what we're doing. We know what plan A is, but what happens if somebody gets sick? What happens if the owner gets sick and is away from the store? Just dealt with a client yesterday. He's got six locations, and he had, very, very lucky, and he had an incident which the survival rate, his cardiologist told him, was less than 16%, and he survived it, but he was away from the store for a long time. Guess what? It exposed a lot of areas that we need to improve because functionality disappeared. Cohesiveness among his team disappeared. Some guy who doesn't have the, certainly doesn't have the authority and doesn't have the skills, is the guy who stepped up and started saying, I'm in charge here now. So a lot of bad things happened, including profitability during that time. So we've got to address these things, and again, letting the heirs worry about it is not at all a good solution and is going to create problems. Things that a dealer has to consider as we go through this is the ability, his ability, to give up control. We consider the age. An owner's age impacts the management succession and alternatives. How soon we have to do this, who it is, what skills need to be in that successor. The condition of the business is going to dictate what we're going to be doing, what we're going to need to do. And then the planning tolerance of the dealer. I had a dealership client who came to me. They are both, he and his brother own the business. They are both past retirement age, quite honestly. Looked at the business. The business has provided them a good job for this entire time. But when they are out of the business, there's no value to it. There's very little value. And buyers, today's buyers, look at that and they recognize that when Bob and Sam, the two brothers, disappear. I made up those names, by the way. But when Bob and Sam sell and are gone, the value of the business dissipates. Our customer relationships are gone. They haven't done a good job of ensuring that they can monetize this, that the value is going to be there. So what are we doing? We developed a five-year plan where we're going to strengthen the balance sheet. We're going to improve profits. Those are two good things. But we're also going to make sure that we've got a good, valuable business. Leadership, the employees are going to be there that somebody is going to want to have around. Had a similar situation with a dealer where the dealership had very low value, was in a dying community. No one was going to buy it. As a matter of fact, we talked to a couple of potential buyers, likely buyers, and they had no interest. It was just a small, small deal, not even impacting them. They really didn't care. And we thought we might have a successor internally. Unfortunately, well, first thing, my caution was, he's about the same age as you are, Mr. Dealer. I don't see that as a good, viable plan. Secondly, Mr. Dealer, by the way, didn't have any family members in the business. Secondly, this plan's successor ended up with cancer and has now passed away from cancer. So what did I do? I went out and found the successor for him. We hired a new general manager. This was before the perceived successor passed away from cancer. So they worked together. He was there. We brought him in to be the successor. They dated for a while. They've now gotten engaged, where they've gotten dating. They worked together, made sure this was going to work. We've worked out the agreements. They now have agreements in place, and the succession plan is working, where my buyer is Scott, the GM we brought in was Scott. Scott is...the contract works this way. He's going to get an opportunity to become a dealer, which he would never get, because he doesn't have enough money to do it. Number one, that's a big concern. So he's buying a small deal. That's a good opportunity for him. He...what did I do for my dealer? We had Scott put a down payment down. Now, that was not a big number. It was about $200,000, roughly. But it was all of Scott's money. He put all his chips on the table. He's got skin in the game. We know Scott's motivated to make this work, all right? What did I do? Scott gets some sweat equity. He's getting a little bit of benefit by working there, increasing the value. He's going to earn some bonuses by operating the thing. It's a good thing, okay, for Scott. Scott's getting in, getting some value for that extra value for his efforts. My dealer, we got a buyer. Otherwise, he'd have something worth exactly zero at the end of the day when he wanted to retire. He's got a buyer. He's got a buyer who's working harder than he is, creating more value for him on an annual basis. So as Scott buys 15%, then he goes to 25, and so forth, my dealer is going to get 85%, then 75%, then 65, and so forth of those profits. That's not a bad thing, okay? So it's a good deal. Furthermore, we have a single-purpose dealership. We have a single-purpose facility. That underlying facility isn't worth anything to anybody. We tied Scott down to a lease where he's got to lease it for, I believe it was 10 years. At the end of year 10, he's required to buy the real estate. Guess what? My guy now has monetized that asset. Good solutions in what otherwise would be potentially a bad result. So what are we doing at the end of the day here? I've provided financial security in retirement for my dealer. We've provided for him and his wife and their kids and grandkids. We've ensured the business's continued success. We've promoted family harmony because one of the thoughts were I was going to maybe have to drag one of my kids out of what they're doing right now and put them into business, which really wasn't going to go very far, but that was a consideration. And oftentimes, what we're seeing now is that the kids, sons and daughters, have gone to school, gone to college. They're doctors, lawyers, accountants, engineers. They don't want to come back to the dealership. They have no desire to work in the dealership. So there are a lot of different solutions. I'm going to wrap up with one final story of what we did for a dealer. The son was a 21% owner, active in the business. The daughter was a 19% owner. She actually lived out of state, not active in the business at all. The father incurred a huge loss from another business. So the dealer invested in another business. I've seen this many, many times. Dealers are very good at what they do. When they decide to invest in another business and set somebody else up, more often than not, that doesn't go very well. And that's what happened. This was theft losses from his partner, actually. It was $1.2 million in losses that he incurred because of that. The father then developed a drinking problem and is actually clean and sober for a long time now. So it's a good success story from that. But he joined AA, but he had to be away from the store for those reasons. We ended up transferring dad's ownership to the son. We did it in many different ways. We gifted some. We had a note where the note was basically between dad and mom to buy the stock of the dealership. The real estate was transferred by dad into some LLCs, which were owned by trust for the benefit of the grandkids, with control by the son. But son also had some ownership in it. The grandkids were the sons and daughters of both the son and the daughter, the 21% owner and the 19% owner. Management fees were provided to the dealer principal. That provided for his retirement income, partially, as well as those note payments from son for part of the ownership. And then we did some gifting as well. We also entered into a deferred compensation agreement with rights of survivorship for the mother. That was a 15-year agreement. Ultimately, we also ended up working out separate from this at a different time. Son bought the daughter's 19% out. So now son has 100% ownership in the business. The friction from that 19% absentee owner that was getting 19% of all the efforts that I'm doing as the son who's there operating it, that friction disappeared for the most part. We've got, that's just one example of how we can work through these things and create some continuity, turning again a sow's ear into a silk purse, taking a bad situation and making it good there. But again, son was involved in the business and was fully trained and fully capable. As a matter of fact, when he came back from working for the manufacturer, as a matter of fact, when he came back, he actually made the dealership much more profitable. So it was a good situation all the way around. Liz, we don't have much time for questions. So what I would do, and I've forgotten to implement these, advancing the slides, but you see as I've gone through here and you have copies, that we've kind of hit on all of these important points here. What I would, again, encourage anyone with any questions to contact the association or feel free to contact me directly, either by email or by direct phone call. And me, as I said, I head up our dealership industry group. I've got 41 people on my team working on dealerships, in dealerships every day. Feel free to give me a call. Liz, thanks for this opportunity. And for those of you in attendance, I think we had about 60 people signed up for this. Thanks for your attentiveness during this. Thanks again.

dealership succession planning

Rex Collins

HBK

transfer of ownership

retirement

retirement income

wealth transfer

management transition

communication

family