In many ways, preparing a dealership's real estate for sale is harder than selling the business itself. Here are some tips to make it easier.
Private-capital, family-owned dealerships should separate out the real estate from the dealership business.
Often, that hasn't been done. In these cases, the corporate entity that owns the dealership also owns the real property.
The business needs to be insulated from the havoc that the real estate may visit upon it, such as liabilities of environmental hazards, personal-injury lawsuits, condemnation, liens and various encumbrances.
There are estate-planning considerations, as well, which call for a pre-buy-sell separation of businesses and real estate.
What About Leases?
Many dealers lease their facilities and are contemplating a dealership sale. A pre-sale review of the lease provisions will avoid scrambling after the buy-sell agreement is signed.
Questions to consider:
How many years are left in the lease? Is the lease assignable? Must the landlord consent to a transfer required? Can I make a profit on a cheap lease? What if my landlord is the auto company?
A threshold question is whether the best future use of the property is automotive. Is it better suited for something else? Might I relocate the dealership to a different facility and sell the dealership to a third party from the new location?
On more than a few occasions in the past year, we have negotiated transactions on behalf of dealer clients where the end result was a surrender of the franchise back to the factory because the real-estate side of the transaction more than compensated the dealer for the value of the shingle.
Unreasonable Landlords
Many leases can be re-negotiated, even if the landlord is the factory. Often times a stubborn landlord is the easiest to bring to the negotiating table.
After all, what makes him unreasonable is his sensitivity to maximizing every dollar. A thoughtful presentation to a landlord, which demonstrates how his refusal to deal will jeopardize his leasehold, is often enough to get him aboard.
Do not assume that the factory will not entertain releasing a dealership. The automotive landscape is currently in a state of franchise re-alignment, particularly among domestic manufacturers.
We have seen manufacturers offer financial packages to facilitate the acquisition of, relocation to, and enhancement of dealership real estate.
Environmental Problems
Environmental issues can hold up many buy-sell transactions. What generally occurs is an arduous series of negotiations over which party should pay for remediation in the event the land contains contaminants, sometimes from improper disposal of waste materials by the service department. Often, the deal collapses because neither side feels they have a solid agreement.
The prospective seller should hire an environmental testing firm to determine the condition of the land. Then, the parties can address remediation with specific commitments and eliminate the escape clauses that often doom a transaction.
Right of First Refusal
Most manufacturers have the right to match the deal under a buy-sell agreement. There are two reasons why a seller should be wary of this. If a buy-sell agreement is not carefully drafted, a selling dealer may find that the factory is leaving the real estate out of the transaction.
Equally risky is leaving the buyer with the feeling that the factory may step in and take over the deal. The buyer will not proceed with the same dispatch and enthusiasm.
If the real estate is part of the sale of the dealership, it is unlikely the factory will get involved. Manufacturers generally aren't interested in acquiring real property.
Leonard A. Bellavia is a founding partner of the Mineola, NY, law firm of Bellavia Gentile & Associates. He specializes in automotive franchise law and represents hundreds of dealerships.
