Getting a new car? Should you lease or buy?

The discussion of lease vs. buy has been discussed in various publications over the years and I am not going to bore you with the basics of a lease vs. buy analysis. I just want to write a little bit about my experiences with buying a new vehicle and hopefully some of my readers can relate and provide some feedback.

I will attest that the starting point of acquiring any new vehicle should be based solely on choosing the car you want to drive for the next 4 years or so, not based on manufacturer rebates, cash incentives, 0% finance rates and so on. Making a decision on that basis will undoubtedly ‘get’ you into a car that you will likely regret 1-3 months after acquiring it. Focus on the car you want and then look for every possible avenue to acquire this vehicle, whether it’s new, used or certified.

From a purely financial point of view, it is easy to prove that purchasing a vehicle is more cost effective than consecutive leases if you plan to drive the car long-term and you do not encounter serious maintenance issues. However, I, along with many other buyers, look at variables that have nothing to do with finance when buying cars. There is also value in the option of driving a new vehicle every 3-4 years, not having to worry about paying for service costs and so on.

To provide a very simple example, I will compare the cost of leasing versus buying if you:

1. lease a vehicle that has a $20,000 MSRP for 3 consecutive terms of 4 years each, with a 50% residual at a 0% lease rate; or
2. purchase the same vehicle and drive it for 12 years. 

Under a lease you will pay $30,000 to drive the car for 12 years, and under a 0% finance arrangement you will pay $20,000 to drive the car for 12 years. I have not built in maintenance costs or fair market value (FMV) of the used vehicle after 12 years, but holding these factors equal, you have saved $10,000 in this example.

Clearly if you are looking to buy a car and drive it for 12 years you need to ensure you do some homework and buy a car with low maintenance costs and high reliability. If you are leasing a vehicle, these factors are not relevant because most likely all maintenance costs, with the exception of wear and tear will be covered by warranty in the lease period. Once you start to cloud the formula with interest rates, expected maintenance and so on, you may end up with a different answer.

Over the last 20 years or so I have owned approximately 10 different vehicles. When I add up the cost of what I paid for those 10 vehicles, it’s about 5 times higher than if I had driven each car for 10 years. It’s not uncommon to see cars on the road that are 10 plus years old and, if they are well-maintained, they can look almost brand new. Each time I leased or purchased a vehicle I knew that I was only going to drive it for 2-3 years before I got bored and wanted something new.

This is where the advantage of a short-term lease comes in. If you don’t plan on driving the car for more than 3 years, a lease is your most cost effective option because it allows you to walk away after 3 years versus having to sell the car to the dealer. The lease arrangement builds in a residual value that should approximate the FMV of the vehicle after 3 years, but based on my experience the residual is typically higher than the actual FMV and therefore you will pay less in the end than you would have if you bought the vehicle and sold it after 3 years.

To further complicate the matter, several manufacturers have discontinued the practice of leasing vehicles and are pushing customers into a strong finance arrangement. This comes back to my discussion earlier on with regards to first starting with the car you want and then looking at how to structure the deal. If you are adamant that you want to lease a car and the manufacturer does not offer a lease, there is always the option of leasing from a third party leasing company. This option will cost more, but it will give you the option of moving out of your car earlier.

-- David Hertzog

Car Shows and Marketing Opportunities for Dealerships

It is Summer, finally, which means it’s car show season. Last Monday I attended the Thornhill Cruisers Car Club’s weekly Monday night meet. I was very impressed with the turnout of both classic 50’s, 60’s, and 70’s cars as well as some 80’s and 90’s vehicles from my era,. Although these cars are mostly “drivers” they are still cool to look at to see how car styling and car sizes have changed over the years. I was very happy to see that a local car dealer had sponsored the event. I thought to myself, what a great marketing opportunity for the dealer.

This particular dealer is getting exposure every week, with very little effort on their part. Car shows are a great marketing tool to attract car enthusiasts into your dealership to see all the new models that you have to offer. They are also a great opportunity to give back to the community by raising money for charity. In today’s increasingly competitive environment, stretching marketing dollars and increasing your dealership’s reach is vital.

The birth and acceptance of the internet has changed business forever. Consumers are more knowledgeable and are able to compare competing brands as well as competing dealers among the same brand, at the click of a mouse. Competition between different brands is natural; however competition among dealers of the same brand is not. How does a dealer differentiate itself from a competing dealer of the same brand? Dealers must analyze what their competition is doing and determine how they can do it better. Exceeding customer expectations is a great way to get customers to talk about your dealership and the incredible experience they had with you. This increases word of mouth advertising and promotes positive feelings for your existing customers (securing future revenue) and increases the likelihood of referrals which will generate new business for your dealership.

Managing your online reputation is increasingly important as more customers flock to the internet to research everything from their doctor to their dealership. Is your dealership monitoring online comments and conducting regular searches to make sure any issues or complaints in online reviews are addressed? As of yesterday, there were 24 results when I searched for Toronto dealerships reviewed on yelp.com, including a review that opens with “Recommendation: Do not buy a car here!” Many customers will go to a less convenient dealership to purchase and service their car based on negative reviews.

In addition to focusing on customer service, community presence is also very important, by way of sponsoring community events. The goal of both of these initiatives is to create positive buzz about your dealership that will generate referrals. In addition to marketing via events and exceeding customer expectations, individual dealerships need to have online presence through social networking tools such as Facebook and Twitter and through active involvement in brand specific online car communities, or forums such as RX8club.com and the 8thcivic.com. These sites provide a great marketing opportunity to a captive audience who is enthusiastic about your brand.

Having your existing customers “Like” your dealership’s Facebook page will allow you to easily communicate with your customers by updating your corporate page as your updates will appear in the newsfeed for anyone who “Likes” your page. In addition, your page will be on your customer’s profile as a page they “Like” and all their contacts and friends will be able to see that they like you. This invites discussion and the “Like” begins to function as a recommendation of your dealership. Twitter functions in much the same way with your customers being able to follow you and gain access to your dealership updates. You may want to let customers know when new models come in, if there is a promotion on service or vehicles, if you are holding an event or anything else.

When marketing your dealership against dealerships of the same brand you need to think outside the box.

-- Bryan Redinger

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. 

A car for every lifestyle

As we go through different stages in our lives our car needs change. In my early twenties my needs were very simple. It was me, myself and I living a lifestyle that allowed, even encouraged, driving two door coupes. I worked my way through a number of coupes, such as an 88 Shelby Daytona, 91 Honda Civic SI Hatchback, 89 Toyota Celica GT, and 2006 Honda Civic SI to name a few. My philosophy was: I sit in the front, so what do I care about how much room is in the back seat? I will never be sitting there.

Now, in my early thirties, thoughts of family are on my brain, and again I find myself reassessing my car needs. I am still driving coupes, alternating between a 2009 Honda Civic SI and a 2004 Mazda RX8, although technically my RX8 is considered a four door, but I am starting to fear the impending change. In a desperate attempt to hold on to my youth I try to convince myself that I can make the coupe work with a family. This dream was recently shattered when I had to take my nephew, with car seat, out for the day. After this trip, I realized making it work was just a dream and once the family comes, I will not only be adding a couple of little ones, I will also be adding two extra car doors.

Car companies realize that people’s needs change early on, thus the invention of offering different models by the same manufacturer. The core idea is that within the same brand, a buyer is able to move up to different models depending on needs.

Buyers must also realize, as I have done, albeit reluctantly, that your vehicle needs change over time and these evolving needs need to be taken into consideration before making any purchases.

Based on my calculations, it will be 20+ years before it will be practical for me to own another coupe, but I am a car guy and often not very practical.

Diversify your investments

It takes so much capital to start, maintain and expand an auto dealership that there usually isn’t much cash left for other investments. I have heard many auto dealership owners tell me their retirement will be funded by the ultimate sale of their dealership business and property. “I make the best return on my money through my dealership business; therefore why invest in anything else?” While I like the passion and confidence these dealers express, I must admit that I am worried for their futures.

In light of the changes in the auto industry over the last ten years, I would recommend that every dealership owner have some of their money held outside their business. Many of the dealers that had their dealerships cancelled or retired over the past couple of years lost their current source of income and the nest egg they had been banking on for many, many years. Just as you wouldn’t put all your extra cash in a single stock, you shouldn’t have all your cash tied up in a single business venture.

It doesn’t take much to have a diversified portfolio. Contributing to your Registered Retirement Savings Plan as well as the Tax Free Savings Account and investing in stocks, bonds, mutual funds or other securities that are unrelated to the auto industry will give you a degree of diversification and lower risk in your investments.

With maximum annual RRSP contributions capped at $22,000 for 2011 and $5,000 per year for the TFSA’s you can easily see that your investments in these types of vehicles can grow substantially over time. Make the commitment to fund these types of investments annually, and more importantly work with someone who understands your concerns and risk tolerance so you’ll feel comfortable with the investing process.

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.