Despite all the hard work and sacrifices auto dealers make to create and cultivate a successful business, developing an exit strategy is rarely top of mind. As in most businesses, day-to-day demands take priority over long-term planning. After all, those cars aren’t going to sell themselves.
At the same time, thousands of business-owning Baby Boomers will retire over the next 10 years — a phenomenon called the “silver tsunami” — creating space for a new generation of leadership to emerge.
"Additionally, if you plan on selling your business to partners or co-owners, they must be aware of a set of risks commonly known as the five “D”s: death, disability, divorce, departure and default. Any one of these could affect the sale and value of your business."
While many dealers may not be planning for retirement anytime soon, unforeseeable events such as an illness, disability, or even death can leave a business at risk and financial futures unclear. Dealers should have a succession plan in place early and should consider opportunities to ensure their financial security. The following are a few tips for making the process of developing a succession plan simple, straightforward, and effective:
1. Protect Your Assets: Before developing a succession plan, you need professional and liability insurance. Several states allow business owners to transfer assets to a trust as protection from creditors, even if the owner is the beneficiary of the trust. For auto dealers, establishing the dealership under an asset protection entity is a great way to ensure your business is secure for shareholders now and in the future.
2. Hand Over the Keys: Establishing a succession plan is especially important for auto dealers. Manufacturers often impose certain requirements and restrictions on the ownership transfer process. And keeping the business in the family, transferring it to a partner, or selling the dealership each presents unique challenges.
For example, if a dealer wishes to transfer his store or group to a child or children as a gift, he must also take into consideration gift tax liability. With the passage of tax reform legislation this past December, 2018 tax laws allow individuals to gift a cumulative amount of $11.2 million ($22.4 million for a married couple) of taxable gifts during a lifetime without paying gift taxes. Once you exceed this amount, the gift tax increases to 40%. Depending on the size of your business, this can be a substantial sum.
To avoid the gift tax, dealers can opt to sell the company to a family member, but the buyer must have the necessary capital to acquire it.
3. Take It Outside the Family: Transferring the business to someone outside the family also comes with a few considerations. Auto dealers need to explore the tax ramifications of selling stock in the company vs. selling the company’s assets, or a combination of the two.
Additionally, if you plan on selling your business to partners or co-owners, they must be aware of a set of risks commonly known as the five “D”s: death, disability, divorce, departure and default. Any one of these could affect the sale and value of your business. To counter these risks, you can create a pre-established buy-sell agreement that is automatically activated if one or more of the five Ds occur.
4. Cement Your Legacy: Like many business owners, a dealer may want to provide for future generations, including her children, grandchildren and beyond. But she also wants to minimize transfer tax consequences.
If the dealer’s grandchildren are simply too young to take over the business, she can utilize a tax-exempt, generation-skipping trust (GST), which can hold assets for a long period. Under this trust, a dealer’s grandchildren would not receive the assets, thus avoiding any estate taxes on the current business, and the assets would become available when they reach an appropriate age.
5. Stay on Track: Lastly, it is important for dealers not to get ahead of themselves in succession planning. They must consider their own financial goals and needs before thinking about handing the business over to someone else. Having a team of expert advisors, including an appraiser, accountant, private banker, tax attorney and wealth strategists, will help you achieve the best possible succession plan that fits your personal financial goals.
From flagship auto franchises to family-owned dealerships, a detailed succession plan is vital to the survival of a business and the financial security of future generations — no matter who takes the wheel.
Derek Comestro is a dealer financial services market executive at Bank of America Merrill Lynch. Contact him at [email protected].