—The arbitration decision on May 14 to reinstate long-time automotive dealer Lou LaRiche Chevrolet to the ranks of GM’s dealership rolls likely has important and generally positive implications for other dealers on the arbitration list, according to Jim Eagan, an automotive consultant and partner at Plante & Moran PLLC who has provided financial and management consulting to more than 200 automotive dealerships.
“Following the arbitrator’s lead on Lou LaRiche, I expect that other dealers will be reinstated in the weeks ahead, especially higher volume terminated dealers in larger metro markets,” comments Eagan, who also authored a Plante & Moran white paper on the U.S. Automobile Dealership Industry Outlook for 2010
Eagan notes that auto dealers like Lou LaRiche who are reinstated either through a favorable arbitration result or who have negotiated a non-arbitrated reinstatement with their manufacturer, have much to be joyous about; however, the celebration will be muted by the realities of the difficult road that dealers have journeyed since their original termination. Eagan cites the following factors as creating the greatest level of terminated dealer turmoil:
- Sustained emotional wear and tear since being informed of the original termination news, an emotional drain that, for many dealers and their families remains extremely high given the ongoing uncertainty of what the future holds for them.
- Decrease in the personal net income for the dealer and, in many cases, the dealer’s family members.
- Dealing with the negative cash flow as dealership operations wound down.
- Incurrence of penalties in cancelling contracts due to the cessation of doing business.
- Incurrence of losses in the disposition of inventory and equipment due to selling from a distressed position.
- Loss or deterioration of established customer base; loss of key managers and other critical employees.
- Cash drain of facility carrying costs: mortgage, property taxes, insurance, utilities, maintenance, security, etc.
- Higher tax liabilities due to the liquidation of vehicle inventories, especially for those dealers utilizing the LIFO inventory method.
- Cessation of established vehicle inventory floorplan and other lending relationships with their existing financial institution. For many reinstated dealers, they may have to work hard to re-establish a relationship with either their former lender or a new source of borrowing. The interest and willingness of financial institutions to lend to auto dealerships has significantly diminished from where it was before 2009. While some loosening in these credit markets is starting to appear, for many reinstated dealers, re-establishing a borrowing source will not be easy.
- Even if reinstated, a dealer may face agreed upon conditions to the reinstatement, such as facility upgrades. The cost of satisfying these types of conditions will further strain the dealers’ current financial condition.
Eagan adds that, even with reinstatement, critical issues such as market share and human resources will be a challenge to address.
“Full recovery of pre-termination market share may be impossible to achieve in some cases, and this will certainly affect personnel,” notes Eagan. “While some employees will likely return to reinstated dealers, all will not, and the dealer will never recover his or her investment in training and developing high performing mechanics and sales and management personnel.”
Eagan concludes that, despite obstacles, auto dealers as a group are survivors.
“They are like the giant redwood trees. They get hit by lightning from time to time and have the scars to prove it, but they survive and continue to stand tall. I’m betting that the majority of the dealers who have or will be reinstated, will find a way to get back in the car business and flourish in the years ahead,” says Eagan. “As I said in the Automotive Dealer Outlook in January
, ‘2010 will be a rough road to navigate but it also marks the beginning of the rebuilding years for the auto dealer industry’. The arbitration reinstatements, or non reinstatements in certain cases, are further proof of that.”
About Plante & Moran, PLLC
Plante & Moran is among the nation’s largest certified public accounting and business advisory firms, providing clients with tax, audit, risk management, financial, technology, business consulting, and wealth management services. Plante & Moran has a staff of more than 1,600 professionals in 21 offices throughout Michigan, Ohio, and Illinois with international offices in Shanghai, China; Monterrey, Mexico; and Mumbai, India. Plante & Moran has been recognized by a number of organizations, including FORTUNE magazine, as one of the country’s best places to work.