Ontario Apprenticeship Training Tax Credit

The Ontario and Federal Governments have offered the Ontario Apprenticeship Training Tax Credit incentive for a while now and although most dealership owners take advantage of it, there are still many out there that either don’t claim the credit or don’t feel it’s worthwhile.

There is an Ontario and Federal combined credit of approximately $12,000 for every year that a dealership employs an eligible apprentice. The credits are filed in connection with the annual corporate tax filings for the corporation.

There are certain nuisances to the credit that an accountant can work through, yet for the most part, as long as all conditions are met (which is generally the case for an apprentice hired to work in the service department of a new auto dealership), the credit can be quite significant as many dealers hire multiple apprentices over multiple years.

I am an accountant after all so humour me while I do a little math: let’s say a dealership hires 2 apprentices every year for 3 years – that’s approximately a $72,000 credit ($12,000 x 2 x 3), or ~$61,000 after taxes. That must be worthwhile to any dealership owner.

I think what prevents owners from taking action is the fear of time spent and wasted. However, even if you spend an hour or two with an account and it turns out you don’t qualify, you’ll know what you need to do next year to start qualifying moving forward. Or at least you won’t be left wondering if you’re missing out on significant money. Seems like a win-win situation to me.

Also note that if you have not filed credits for prior years, there is an opportunity to amend prior year tax returns and file the necessary paper work for the credit.

As a side note: it’s important that your dealership maintains the required records, including contracts, as it’s quite common for the CRA to request this information following the filing of the corporate tax returns. 

- David

Choosing the right advisor

Auto dealerships and major sports franchises have at least one thing in common: for both, building the right team is essential to success. When everyone in your dealership is on the same page the business runs smoothly, opportunities are identified and exploited and you achieve optimal business performance. Internally most dealerships are structured with managers of individual departments reporting to a general manager who then reports to the president/owner, but team work goes far beyond the internal structure. There are outside advisors who are part of your extended team, such as your banker, lawyer and accountant. This extended team works on your behalf with your best interest in mind.

So how do you choose the right advisors? A good place to start is referrals from contacts who share your values and operate in a similar business environment. The advisors for your best friend’s online cupcake shop may not be well-versed in the world of car dealerships. Once you have some relevant recommendations, the next step is to schedule a meeting with the prospective advisor. Think of the initial meeting as a job interview; you are interviewing the potential advisor as much as he or she is interviewing you. Key elements that you should evaluate in an advisor are: your degree of comfort with the advisor, the advisor’s knowledge, and size of the advisor’s practice.

How do I relate to this advisor?

When you are meeting a potential advisor, be it a banker, lawyer or accountant; think about whether you could see yourself in a long term relationship with them. You are embarking on a marriage of sorts and divorce is tedious and painful. The more time you spend getting to know your advisor, the less likely it is that you will need to change advisors later. The two most important questions you need to ask when considering how you relate to a potential advisor are: 

1. Would I be comfortable communicating anything to this person? 
2. Would I trust them to tell me the truth? 

Your advisors have specialized knowledge, but they cannot provide effective advice without knowing the entirety of your situation. Would you be comfortable telling your advisor about business failures? A rough spot in your marriage? Sticky situations with your employees or children? Your relationships with your family and employees can play a role in your succession plan and other planning strategies and, in order to take full advantage of your advisor’s knowledge and expertise, you must be able to talk about them. Through face to face meetings, you can quickly get a sense of how genuine the advisor is and if your personalities sync.

Your advisor shouldn’t be the person you turn to for flattery. While your advisor may pay you a compliment from time to time, it is important that he or she is honest and straight forward. You want someone who will tell it to you like it is, take time to explain your options and consequences, and provide an opinion. You also want someone who is available to answer any questions you may have throughout the year. You shouldn’t be scared that your advisor will charge you for simple questions. Your advisor is a member of your team.

Does this advisor understand my business?

Your advisor should be knowledgeable and passionate about dealerships and the auto industry as well as all the laws, standards and regulations that affect your industry. Knowledge of business is key in providing the best service and opinions to clients.

During your interview with a prospective advisor you may want to ask them how many auto dealership clients they currently work with, how long they’ve been working with dealership owners and ask them how they feel about a recent industry development. An advisor who is passionate about dealerships would be more than happy to talk shop with you and you would quickly learn how well they know your business.

Does size really matter?

We all know that fit matters more than size, and it is no different with advisors. In the professional world there are small, medium, and large firms and each has advantages and disadvantages. Many people gravitate towards larger firms as they are familiar with the brand which creates a degree of comfort, however brand names typically come with premium price tags.

Consider the size of your business compared to the firms you are considering. If you will be a relatively small fish in that firm’s pond of bigger clients, you may experience better service with a firm that caters to businesses of your size. Mid-size firms may offer a different customer service experience because your business fits their niche. You may even find yourself in the fortunate circumstance of being a big fish in a mid-sized firm’s portfolio which can lead to better customer service and a greater investment in your business.

Auto dealership owners have a niche business, and there are firms that specialize in your industry. They can provide a competitive advantage over other practices as they are more knowledgeable about your business and can therefore offer more useful advice due to their experience.

Running a dealership is complicated; having advisors who understand your business is essential for making critical decisions.

-- Bryan Redinger

Capitalizing my business?

Outside of tax planning and operational issues, how to better capitalize is one of the most common discussions I have with my auto dealer clients. Clearly one of the better ways to capitalize your business is by way of retaining internal cash flow in the business, but often this is not possible and as a result the owner must entertain offers for external financing. I have found that obtaining new financing and re-financing existing credit facilities is much more challenging as a result of the recent economic downturn as banks are more risk averse, especially in the auto retail business.

It is still possible to obtain financing in today’s market, but a well-structured plan is in order. The plan should consist of a strategic message to the bank as to why the financing is required and how the funds will be used. If the financing is simply to fund current and prior year losses, it is more likely than not that the bank will decline. However, if the funds are used to purchase additional inventory, pay off previous management or acquire new equipment, the bank is more apt to provide financing.

Business owners are sometimes so surprised that the bank is willing to provide financing, and so focused on the interest rate and loan-to-value ratio of capital property, that they forget to read the fine print on their credit facility agreement. Often there are significant terms in the credit facility that are overlooked by the business owner until it is too late. Commonly overlooked terms address personal guarantees, postponements, financial covenants, audited financial statements, and significant security.

Personal guarantees come into play when a business can no longer continue to operate and the bank calls the loan. If you have an agreement with a personal guarantee and there is not enough cash to repay the bank loan, the bank can seize your personal assets (i.e. your house!) as repayment.

Postponements require that the company postpone repayment of debts in favour of repaying bank debt. This term can be detrimental if your business runs into trouble and you have personally put significant funds into the business.

Financial covenants also pose a risk in that sometimes they can be impossible to meet and 1-3 years after the facility agreement is signed, the covenants may be breached and the bank can call the loan.

The terms may indicate that you will be required to provide the bank with audited financial statements within a specific period following your company’s year end. Audits can be costly, and you may be able to negotiate to submit reviewed financial statement (lower assurance than audited statements) which can save your company some money in accounting fees.

Another problem I see is business owners who don’t explicitly ‘shop’ around to different banks and compare terms. It is important to create a chart to compare the terms offered by different banks because more often than not facility agreements, especially for auto dealers, have a significant number of terms that are not easy to compare in your head. I suggest you write out the differences and compare all the options to make a decision based on the facts. Some points of comparison may be qualitative in nature, such as the reputation of the bank or relationship with the banking representative.

This is just a taste of what I have dealt with over the last several years with regards to capitalizing your business and I plan to write further blogs on this topic.

-- David Hertzog

Lessons Learned and Forgotten

It has been over a year since GM Canada began notifying many dealerships that they would be required to close their doors. Several of the dealers who lost their dealerships have experienced financial distress and may never recover. What is very sad to the outside observer is that many dealers saw, or should have seen, the writing on the wall years earlier, but were so ‘emotionally attached’ to their dealership that they were not able to react appropriately. Many kept throwing good money after bad until it was too late. Granted, the ‘dethroning’ of the largest auto manufacturer in the world may never happen again, but the lessons that could have been learned from this seem to have fallen on deaf ears.

Businesses, and more specifically auto dealers, continue to be emotionally attached to their product preventing them from operating objectively. The auto industry is becoming ever more saturated and individual dealers are seeing more and more risk in managing cash flow and liquidity. There are a vast number of dealers out there who feel that as long as they weather the tough economic climate, they will eventually prevail. Are they taking on too much risk for themselves and their families?

As an accountant, I profess that I have a conservative bent while dealers tend to be entrepreneurial risk takers. I agree that it takes risk to make money, but the risk needs to be controlled. Strong business plans and financial forecasts help entrepreneurs make informed decisions about the level of risk they are assuming, and strong creditor proofing can mitigate the amount of capital being put at risk, however often times little to none of this preliminary work is done. Usually it’s, “Let’s make a deal and then worry about the legal and accounting aspects.” I have found that the preparation of even a simple financial forecast can significantly change the decision making process and as a result I recommend my clients do this when budgeting for the following year or consider acquiring a business.

The demand for vehicles varies each month and fluctuates by manufacturer. Honda may be the hot product for 2011, but Hyundai could be the front-runner for 2012. Many dealers structure their businesses on the premise that they will attain certain sales numbers per month, however when those sales numbers don’t materialize, what is the back-up plan? Usually there isn’t one. I tell all my dealership contacts to ensure they have diversified their product lines so that when one hurts, the others can take over. A strong body shop, used car dept, leasing, parts and so on can help take over if new car sales drop.

Another way to weather the storm is to run a lean and mean operation. Too often I see dealers reacting to low volume in sales by suddenly cutting 10-30% of their overhead. Why is this only done when times are dire? If the dealership could survive on less, why would they maintain such excess? I guess GM set the tone by running ‘FAT’ for many years, and then, when sales volume plummeted, GM reacted just like the dealers by cutting costs and running lean. With increased competition, I hope that running lean will be the new norm rather than a cyclical short-term fix.

In conclusion, it is not only important to set aside money in the boon years, but it is also vitally important to critically review your dealership (with an outside advisor) to ensure you do not have tunnel vision and your rose colored glasses are not the wrong shade. In a later blog I will discuss some of the ‘savings’ options for your company.

What are you doing about fraud?

Eh, we’re Canadians aren’t we? We are an honest and polite country; so there is no way fraud is occurring at your auto dealership, right? Well, think again. I would suggest there is strong evidence that fraud is in fact occurring at your auto dealership. A study conducted by a major accounting firm and reported in the Financial Post suggests Canadian companies make great targets for fraud. In their latest global economic crime survey, Canada was the fourth most fraudulent nation in the world; behind Russia, South Africa and Kenya.

So what should you do and how can you best insulate your company to minimize the fraud risk?

Well, the first thing you need to do is recognize that fraud is a problem and accept that your auto-dealership is susceptible. This isn’t a case of admitting that you are paranoid, over reacting and in need of medical attention. It is a case of being prudent and honest with yourself and, most importantly, being vigilant in your oversight of the auto-dealership operations.

The next thing you need to do is identify the areas of your business that you think may be vulnerable to fraud and designing or tinkering with your current corporate organization structure to better insulate you and your company from fraud.

As an accountant I have witnessed various schemes and frauds in auto dealerships over the past 30 years. From relatively simple theft in the parts inventory and bogus warranty claims perpetrated by the service staff to the fraudulent refinancing of used cars and elaborate cheque washing schemes. It would appear that fraud is becoming more prevalent and more sophisticated. Know where your areas of risk are.

If you consider your parts inventory at risk, then make sure the stock room is in immaculate order and the perpetual accounting records tie into your general ledger. Initiating surprise physical counts a couple of times of year would not hurt and make your presence noted in the stock area; walk around talk to staff and consider installing surveillance cameras. However, I must warn you that installing elaborate surveillance systems is not always the answer. I believe when you resort to these measures you are admitting defeat. You may be better served by making a better effort at hiring and training your staff in the first place.

Consider requesting that all new staff provide you with permission to conduct a personal check; which would include a police criminal check. As well, make sure you set a good example and don’t blindly take parts inventory or any other item from the show and stock room without paying for it. I have heard many guilty employees comment, “If the owner takes stuff from the company, I guess it’s ok if I do it too!”

And lastly, make sure that you properly segregate the accounting duties of your employees. What does that mean? You should not permit one employee to make the daily deposits, prepare cheques, and access the company’s books and records. Don’t provide your employees easy access to perpetrate a fraud. Review the monthly bank reconciliations and at least review the sequential order of your bank return cheques to enable you to spot check the vendors and ensure the authenticity of the cheque signers. The steps are certainly no guarantee that you will be able to prevent fraud from occurring in your company but letting your employees know that you're constantly checking their work is a first step in preventing it in the first place. Also have a discussion with your bank manager about fraud. Most banks have programs that assist you in your fraud review.

The bottom line is that fraud is a fact of business life in Canada. Properly planning and consistently executing a plan to minimize the risks will not only bring peace of mind to you when you are sleeping at night or away on vacation, but it will also increase or maintain your company's profitability.