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Operating a New Car Dealership
Prior columns have focused on the initial financial requirements and costs associated with operating a new car dealership. Continuing with our example of a ?typical mid-sized? dealership (one that would employ between 60-70 individuals), in the Greater Toronto Area (GTA), this week I will outline some of the basic manufacturer?s requirements, including credit requirements.
The marketplace has changed dramatically over the past 10 to 15 years. So too have the opportunities surrounding the investments and operational requirements of a new car dealership. Today, a seven-figure investment is required to acquire a 'typical' mid-sized new car dealership located in the G.T.A.
When accepting a candidate to represent their product, manufacturers put much emphasis on both the character and the experience that the individual possesses. In fact, some manufacturers hire a 3rd party to investigate and perform thorough background checks, that exceed the standard credit check (i.e. criminal background check is quite common). A candidate's reputation, both in the industry and the community, their past business and employment history, are all important factors. When reviewing a candidate?s eligibility manufacturers weight heavily on business acumen as opposed to a higher education.
A qualified candidate would be one who has a proven track record in the management of a new car dealership. One must possess a strong knowledge and a thorough understanding of all departments within a dealership. This includes Sales, Service, Parts and Administration.
Competition amongst qualified applicants has increased significantly over the years, and as a result, has raised the bar for prospective candidates. A manufacturer can now select from a large "pool" of very diversely qualified individuals.
Qualification criteria can vary between manufacturers. Some manufacturers prefer an experienced "hands on" person who would be involved in and manage the day-to-day operations of the business. Others tend to offer available franchises to their existing franchisees first. Especially a franchisee who has proven successes. A relatively new phenomenon has surfaced due to the success of some multi-franchise ownership. These are dealerships operated through a corporate structure, owned primarily by an individual or family. This structure provides both experience and ?deep pockets?. A family member or qualified General Manager would be responsible for the operations of these dealerships. Some manufacturers will partner with a candidate and offer a minority partnership (thru a buy out program), eventually leading to 100% ownership of the dealership, by that individual.
Many of the dealership?s, which have ?changed hands?, have done so behind the scenes, and not on the open market. In order for one to find out about what opportunities may exist, an individual may have to contact the manufacturer or an individual dealership directly.
Often, (ownership of) dealerships are transferred to family members, but many situations exist where there is no interest in the business within the family. Some Dealer Principals (Owners) may partner with and offer a small percentage of ownership to the right candidate. With today?s aging dealer body, a qualified individual may find an opportunity to partner with this type of dealership with a longer term 'buy in', and eventually own the dealership outright. Depending on the demand for a particular dealership, along with tax implications, a dealer may be prepared to sell his/her dealership outright, receive a substantial downpayment and hold a mortgage for the balance of the purchase price of the business. The balance due would be paid from the future earnings of that business.
Your chosen financial source, whether the bank or the manufacturer's credit arm, will require an approximate debt-to-equity ratio of 6:1. This assists in evaluating risk by measuring business equity (goods, property, shares) to long-term debt (current and long term liabilities).
Your lender will require a current asset to current liability ratio of approximately 1.2 to 1. Remember, new vehicle inventory is deemed part of your current assets, therefore, $5 million dollars of financed vehicles will, on it's own, require cash or its' equivalent of $1 million to meet this requirement.
Your initial required investment must be unencumbered and should remain vested in your business, as per your lender's requirements.
One must prepare a business plan that precisely defines and outlines your financial requirements, marketing strategies, sales projections, and expense forecasts leading to a realistic, viable operating profit.
Due to costs and limited purchasing opportunities associated with a mid-size GTA new car dealership, one might consider starting with a smaller franchise, or one outside of the GTA. Through time, you will develop the experience and build the resources required to own a larger new car dealership.
As with any small business, the level of success (achievement) is driven by the individual(s) behind the business. An individual with the required financial resources, business experience, one who displays entrepreneual tenacity, and one who can execute and deliver results, will ultimately succeed in operating a profitable new car dealership.
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