Succession Planning

Why do automobile dealer owners find it so hard to sit down and plan for their succession? 

According to a survey conducted by a national accounting firm, only one-third of family owned businesses survive the transition to the second generation. And of these businesses, only one-third survive to the third generation. Pretty poor odds for your grandchildren taking over the family business.

There are three basic reasons why succession planning fails.

Procrastination
Like many business owners, automobile dealer owners are often too busy, too tired, too whatever excuse to sit down and plan for the transfer of the family business. In fact, it is my experience that most automobile dealer owners wait too long resulting in either a fire sale at the last minute or selling to an unintended third party. Or worse, chaos ensues due to illness or even death with no succession plan in place.

Lack of Successors

The second reason for unsuccessful succession transitions is the lack of qualified successors. Automobile dealer owners are notorious hoarders when it comes to delegating and hence grooming a successor. The reins are kept so tight that no one is identified early on and therefore nobody is ready to take over, or worse, the most qualified people leave the business due to frustration.

Poor Planning

The third reason for unsuccessful business transitions is due either to the failure of the business or poor planning. Just ask one of the unfortunate General Motors automobile dealers what they would have done differently if they could do it all over again. Their answers would by unanimous. Much better and earlier planning!

Creating a Successful Plan 

The key to a successful transition plan is taking the time to sit down and plan for succession. What should be my succession plan? Should I sell to my general manager or my children? Maybe my plan will be to run the dealership as long as I am physically able to do so and then sell. There are no hard and fast correct answers, but clearly the plan that involves leaving all planning to the end may result in insufficient or unexpected results when the dealership is sold. Planning early on for succession that involves either family members or qualified employees could achieve a better financial result.

First identify if there is a suitable candidate within your organization. Are any family members interested? If so, are they suitable and or qualified? If they need more time and experience, are you providing the leadership and opportunity for your children to succeed?

If no family members are interested you should review the talent you have within your organization. The best candidates are not always the ones that are constantly knocking on your door and driving you crazy for a “piece of the pie.” Consider hiring a human resource consultant to assist you in evaluating the potential of the candidates that you have selected.

Buying into the plan is the next important step down the road of successful business succession. Letting go is the hardest thing that a business owner faces when considering succession. I often hear clients say things like “I’m only 45 years old and not ready to retire yet and if I bring someone into the business that will certainly hasten my retirement.” No plan is perfect and your plan may need periodic tweaking to ensure that it meets or fulfills all of your succession objectives.

There are no rules as to when or at what age a succession plan should be considered and planned. My personal experience is that when automobile owners approach the age of 55 they appear to be ready to consider succession. Every individual’s situation is different and the succession plan must be customized to each owner’s unique needs.

Establishing a timetable for the succession process is very important. Critical dates to consider are:

• When you are considering retiring,
• Timing of selling the share ownership of the business. 

There are many planning techniques that could provide you with control over the dealership after you have sold your equity interest.

The next blog, to be posted the week of August 29th, will deal with the income tax considerations when contemplating a succession plan.

-- Jeff Carbell

Are you paying attention to your financials?

With over 15 years of experience preparing, reviewing and analyzing financial statements for owner-managed clients, I can tell you unequivocally that 90% of the time, financial statements are not reviewed effectively.

Reviewing financial statements is like getting a physical at the doctor – it can point out ‘issues’ that you may not have been aware of so that you can address them before they get worse. To continue the analogy, just as a doctor assesses one system at a time looking for anything out of the ordinary, when reviewing your statements, it is important that you know what normal should be so you can identify and follow up on irregularities.

As part of the year-end audit for one of my auto dealership clients, I met the owner for a morning coffee meeting and we reviewed the dealership’s interim financial statements. After looking at the financial statements, I noticed that the margins on used vehicles were up significantly year-over-year. When I questioned the owner about this he said the used car manager must have been doing his job, however it appeared irregular to me, and after a little investigation I found that there were some accounting irregularities and the profits on used vehicles were not at all what the owner had thought.

As part of the month-end review of the financial statements, there should be a set checklist that you go through so that you know what you are looking for. Staring at the numbers and stating that everything is in line with expectations is just not enough. Comparing to prior month, prior month last year and budget are only some of the overall checklist items that should be investigated, but this is a good starting point because this review of fluctuations can raise some ‘red flags.’

The financial statement review is not just meant to find accounting irregularities. Much like an investor reviewing an initial public company offering or a banker reviewing annual compliance; financial statements can uncover so much more. It can help identify liquidity issues, operational issues and potentially fraud. 

Don’t rely on others to do your dirty work, pay attention to your financial statements because they tell the story of how your business is performing. If you find something that seems out of the ordinary, keeping digging until you are satisfied.

I will be focusing on specific financial statement line items and ratios in upcoming blogs.