There was a time when a bankruptcy in the car business was inconceivable. Dealers didn't go bankrupt because the factories did everything to prevent it. And a manufacturer bankruptcy was as unlikely as the failure of a financial rock like Lehman Brothers.
When a dealer bankruptcy was as inconceivable as a manufacturer bankruptcy, lawyers representing dealers (as I do) did not take issue with dealers setting up all their franchises as divisions of one corporation á la General Motors. We did not react with alarm when dealers kept excess cash in their dealership corporations or LLCs. What could go wrong?
Now we know. We learned the worst can happen. If GM and Chrysler can fail, so can any franchisor. And a factory bankruptcy can force dealers into bankruptcy.
All dealers should heed the lessons. As GM and Chrysler marched toward bankruptcy filings, dealers rushed to their lawyers and accountants only to find the things they could have done to protect their assets should have been done months before. If one day the worst happens to your franchisor, you don't want to be a dealer sitting with your lawyer talking about how you wished you would have done things differently to protect yourself. Do those things now.
- Put each dealership in a separate corporation or LLC
Each dealership that stands on its own should be its own entity. So should each piece of real estate you own. So should each affiliated company, whether it is a separate body shop, towing firm or supply company. Just as compartments below the waterline can be sealed off to keep the ship from sinking, seal off your dealership legally to minimize the impact on your remaining businesses in case of manufacturer troubles.
- Don't be penny wise and pound foolish
I have heard the arguments that using separate corporations or LLCs for each dealership may increase costs. There are more books to keep, more accountant fees, higher computer costs. Weigh those against the risk that the failure of one dealership will drag down the rest of your businesses.
- Put yourself in control of your financial strength
Some dealers argue that putting all their businesses in one corporation enhances their financial strength. Control the extent to which you put your businesses at risk. All businesses in one corporation will be automatically liable for the debts of a failing business. But if your companies are separate entities, you always can choose to have one or more cross-guarantee or cross-collateralize the debts of another. Make that your choice, not the result of poor corporate planning.
- Review cross-company liabilities
If you have committed all your businesses to provide cross-company guarantees and collateralization for each other, is that still necessary? Can you get away with a cross-guarantee by one or two of your businesses rather than by all of your businesses? If not now because of the tight credit markets, perhaps you can as credit loosens and finance sources compete for your business in the future.
- If you have excess funds or if you have personal assets in your company, get them out
When there is trouble looming, it may already be too late. Distributing assets to yourself in the face of a potential dealership bankruptcy could lead to claw-back by a bankruptcy court of distributions to yourself or to your family for a year (or even two years in some circumstances) prior to the dealership's filing for bankruptcy. Stay ahead of trouble.
- Personally guarantee only as a last resort
It's painful to lose one of your businesses. It's excruciating to lose all of them. Losing your businesses and your personal assets is a catastrophe. I know, sometimes you can't avoid providing a personal guarantee. If you must, just make sure the reward is worth the risk.
Attorney Michael Charapp, with Charapp & Weiss LLP, represents vehicle dealers. He's at (703) 564-0220 or [email protected].
