What it Takes

What's it take to obtain an automotive franchise these days if you're not already a dealer on the inside track? Well, if you're without considerable dealership management experience and a whole lot of money, you can pretty much forget it. Gone are the days when someone with limited experience and funds could get a franchise from manufacturers who doled them out freely in an effort to spur sales. But

October 1, 2002

12 Min Read
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What's it take to obtain an automotive franchise these days if you're not already a dealer on the inside track?

Well, if you're without considerable dealership management experience and a whole lot of money, you can pretty much forget it.

Gone are the days when someone with limited experience and funds could get a franchise from manufacturers who doled them out freely in an effort to spur sales. But it also led to over-dealering in many markets.

With most automakers today standing pat on the number of points, opportunities are few. But there are opportunities. Every year, dealers without children decide to retire or, in some cases, are asked by manufacturers to relinquish their franchises.

Left to individual entrepreneurs are dealerships that aren't scooped up by the big public companies and dealership groups, the top five of which own nearly 700 stores in total.

Most of the time, individuals who get franchises are general mangers with years of experience at successful operations. People with means, but no automotive retail experience, need not apply.

Wayne Carnahan took over University Chevrolet in Ypsilanti, MI and renamed it Carnahan Chevrolet in June.

It's his first dealership. He bought it after 37 years of automotive experience, including more than 20 years as general manager of Gage Oldsmobile in Ferndale, MI, north of Detroit.

“For years and years and years, we were always in the top four or five retail Olds stores in the country,” says Carnahan of Gage and, accordingly, of his qualifications to become a dealer in his own right.

He adds, “We were the number-one GMAC Smart Lease dealership in the country. I had the number one, two and three retail salesmen in the country. My CSI numbers were in the top 5% or 10% of all large metro stores in the nation. We ran one of the biggest wholesale parts operations. Our used-car lot was probably second to none.”

So, when Jim Fresard Pontiac-Buick in Royal Oak, MI, bought what was left of the Gage Oldsmobile franchise and added GMC to replace the moribund Olds franchise, General Motors put Carnahan into the fairly new, yet struggling Ypsilanti location. He took much of the Gage team with him to Ypsilanti, about 45 miles west of Detroit.

Carnahan had the qualifications GM looks for to fill the approximately 400 openings it has on an annual basis.

Ron Sobrero, GM's general manager of dealer network planning and investment, isn't specific about the level of experience his organization looks for in a candidate. But it's clear Carnahan had enough.

“We try to discourage people who have no automotive retail experience,” says Sobrero. “We tell people without automotive experience to go work in a dealership and see if it's what they want to do.”

They are asked to do that to grasp the complexity of an auto dealership.

Sobrero explains, “There are long hours. There are receivables. There are a lot of things that you don't deal with in the pizza business, things that could make or break you as a dealer. There are no used pizzas and you don't have to repair them.”

GM is specific about two criteria. 1. Convicted felons will not get a franchise. 2. Candidates must show the money.

“Where is the money coming from?” says Sobrero. “Do they have to sell a house to get the funds to buy a dealership or is it savings? They have to have unencumbered funds so they can at least own 15% of the dealership outright.

“You have to have capital and cash in the business because at the end of the day, you have to make payroll. We have a formula that we call capital standard, which says there are certain things for which you have to have cash. There are other things you can borrow funds on.”

Every deal is different, but there are rules of thumb, says Sobrero.

Among them: you need 30 days of cash to cover receivables, 30 days of cash to cover payroll, 60 days for parts.

“You've got to have 30 days to cover warranty because it could take time to get the money back if there's a question,” he says. “That's all based on a forecast based on history and broken down into an average month.”

A small GM dealership in a rural area sells for about $250,000. A thriving store in a major market can go for $14 million to $18 million.

“If somebody doesn't have $200,000 to $250,000, it's probably going to be difficult to get a good, medium-sized dealership,” says Sobrero. “If you're in a rural area of America, maybe $65,000 or $75,000 will get you there but you're buying a very, very small deal.”

The down payment on a big metro store can be a between $1 million and $3 million.

Those coming in with the minimum can borrow the balance from GM's Motors Holding Division, but must pay it back between seven to 10 years.

Toyota Motor Sales also requires 15% from its new dealer candidates. There are much fewer openings for Toyota stores.

Toyota has 1,200 dealership points. When the Japanese automaker entered the U.S. market and began building a dealership network, it carefully avoided overdealering.

It still is avoiding that, opening new points only “when it makes good business sense,” says Don Esmond, general manager of Toyota Motor Sales U.S.A.

“We get phone calls every day from people who want a franchise,” says Nancy Davies, Toyota's vice president of dealer development. “The problem isn't that we don't have good, qualified candidates, it's that we don't have that many opportunities.”

In 2000, Toyota oversaw 53 buy-sell transactions, 12 with public companies. Last year, 45 Toyota dealerships changed hands. Public companies got two of those.

“It's becoming very difficult for that individual entrepreneur to buy a Toyota dealership because of the public companies who are willing to spend money to acquire the metropolitan stores that we have,” says Davies.

A Toyota franchise can sell for between $500,000 to $15 million, depending on location and volume, she says.

Elsie MacMillan landed a coveted Toyota franchise. In June, she bought Sierra Toyota in Sierra Vista, AZ, 70 miles southeast of Tuscon. The previous dealer, Ron Slyter, wanted to retire.

MacMillan started in the car business 30 years ago in the accounting office of a Mercedes-Benz dealership in New Jersey. She moved through the ranks and had experience as general manager of both Mercedes-Benz and Lexus stores for 20 years before seeking her own franchise.

She learned from a trade publication advertisement that Sierra Toyota was available. It took almost a year of working through the broker who had placed the ad, interviewing and negotiating before she and her husband went west to sell cars.

“I was a gal who saved her money and I came in with more than the required 15%,” says MacMillan proudly. “I'm shooting to pay off the rest in possibly three or four years.”

Toyota expects repayment in five to seven years in most cases.

General managers have the inside track, but they better be good at their current job if they aspire to the next level.

Says Davies, “We look for a qualified individual who has relevant automotive experience in all areas of the dealership. Most of the general managers have that. Most are qualified if they're running a good operation.

“We look at the store they're in to see if it meets our performance criteria. If their current Toyota store isn't performing up to our standards, we probably wouldn't consider that general manager.”

Carnahan says only someone with a strong knowledge of the intricate ins and outs of dealership operations can make a go of it.

He explains, “You could pick a graduate from Harvard or Wharton Business School and they'd probably fail at running a dealership without the necessary experience.

“That includes not just knowing how to sell vehicles but also knowing about parts, service, warranties and all the governmental rules and regulations — and there are a lot of those from the local to the federal level.”

Toyota has a dealer development program to help general managers with lots of experience, but not so much money. Fewer than 10 dealers are currently involved in that program.

Ford Division calls its set of standards for potential dealers the “Four C's.”

“The first one is the price of entry, ‘character,’ which means they have to be an outstanding citizen with a clean record,” explains Joe Dean, Ford's western region dealer franchising manager.

“The next one is ‘capacity.’ We look very long and hard to make sure they have a proven track record. You can't get a proven track record unless you've run a dealership. A successful track record means sales and share need to be above the regional average. We want them clearly above average.

“The same is true for ‘customer satisfaction.’ We give preference to those who excel in those very objective measures.

“The fourth is ‘capital.’ This is where an awful lot of dealers get a little hung up, especially if they've not acquired a store in a while, because existing dealers need to know that it's a one-to-one debt to equity.

“They cannot borrow or cross-collateralize existing assets in one store to purchase another. That requires a great deal of capital. That's a pretty large hurdle.”

Ford stores sell for between $2 million $15 million.

“You can only borrow half of it, and that doesn't include any blue sky,” says Dean. The criteria for minority candidates is the same except for the one-to-one debt to equity stipulation.

In 1957, GM required Nat Shulman to put up only $12,000 to open Best Chevrolet in suburban Boston. But experience was essential to get his own franchise, recalls Shulman who first worked 10 years as a general manager at his brother's Buick store.

“Anyone who wants to become a dealer without dealership experience is an idiot to begin with,” says Shulman, who's retired from the store and now a columnist for Ward's Dealer Business.

Dean says 1%-3% of Ford's 3,900 dealerships change hands annually.

Every manufacturer's franchise agreement states that it has the right to veto a sale of a dealership to an undesirable candidate. Yet, many state franchise laws restrict the manufacturers. They need a good reason to reject a candidate. Private sales sometime create sticky issues between the outgoing dealer and the manufacturer.

“We don't always know every dealership that's available for sale,” says GM's Sobrero. “Many times we're the last ones to find out.”

Davies says, “Most of the time, the candidate whom the selling dealer brings in probably is going to be the one who buys the store. By the time it gets to us at headquarters, the field offices have done enough due diligence.”

Dean says smart sellers will involve the manufacturer from the get-go to ensure the deal goes smoothly.

“These are independent franchises and they buy and sell on their own,” says Dean. “We don't always control it. The really smart dealers try to involve Ford Division's local regional management early on in the process of trying to sell so they don't run into the issue of the candidate they're dealing with not being approved.”

Yet even a qualified general manager who has endured all the scrutiny and passed every test can fail as a dealer.

“I've seen some general managers who have become dealers and weren't successful because it's different being the general manager where you're not signing the checks every day and it's not your money,” says Sobrero.

But new dealers Carnahan in Michigan and MacMillan in Arizona seem to be doing well in their first year.

“We had a great July,” Carnahan relates. “GM was up 24% and this store was up 30% from the same time frame a year ago. We're profitable, did extremely well, which they weren't doing before here. I'm really happy with what we've done up until this point.”

Says MacMillan, “My goal is to sell more cars and we're trying to get the message out that buyers need not go all the way to Tuscon to get a good price.”

Sales in the first month compared to that of the previous dealer. Sales in the second month were about 20% ahead.

Dealership numbers keep declining

One reason getting an auto dealership franchise is so tough these days is that fewer stores are around. The decline continues as large dealership consolidators scoop up stores and as some manufacturers try to trim their dealership ranks.

The net dealership count in 2001 fell by 350 — the largest drop since 1993, according to the NADA. The worst hit occurred in the 1990-92 recession, when dealerships declined by about 600 a year.

In the past 20 years, small-volume dealership points have been hit the most. In 1982, there were more than 10,000. Now, it's less than 3,500.

He's ready to buy an Olds store — then GM breaks the bad news

Just before General Motors Corp. put the Oldsmobile brand on death row, Wayne Carnahan and Tony Gage had come to terms for the former to buy out the latter's Gage Oldsmobile store on Woodward Avenue in trendy Ferndale, MI, a Detroit suburb.

Carnahan, the store's general manager, and Gage had started buy-sell discussions in 1998. The T's were crossed, the I's dotted and approved by the manufacturer on Dec. 8, 2000. Then, on Dec. 12, GM announced it was pulling the plug on Oldsmobile.

“You go into a little mini-shock,” recalls Mr. Carnahan of his reaction to Oldsmobile's death sentence vis-a-vis his impending plan to buy an Olds dealership. “How do you buy something that's destined to go out of business?”

Carnahan, who started selling cars in 1965, immediately entered into discussions with GM's dealer organization.

“They said, ‘hold tight,’ there may be some opportunities coming,” says Carnahan, the new owner of a Chevrolet dealership in Ypsilanti, MI. “All of a sudden, this store came up. They offered it to me and here I am.”

GM had taken over the store, the struggling University Chevrolet, in January. GM offered it to Carnahan in the spring. He took possession in June. He's renamed it Carnahan Chevrolet.

“They were looking for a candidate,” says Carnahan. “I was the lucky one who got picked.”

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