Many GM and Chrysler dealers recently learned the hard way that sometimes the worst does happen. All dealers should pay close attention to the lessons taught by the factory bankruptcies.
As GM and Chrysler marched toward bankruptcy filings, dealers rushed to their lawyers and accountants to discuss how they could best protect the assets in their companies if their dealerships had to declare bankruptcy. Unfortunately, many found out that it was too late to do the things they could have done to better protect their assets. If GM can fail, so can any manufacturer. And 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 or towing company or supply company. Just as compartments below the waterline can be sealed off to keep the ship from sinking, you want to seal off your dealership to minimize the impact on your remaining businesses in the event of manufacturer troubles.
Reduced costs don’t help if you lose everything. Some dealers argue that using separate corporations or LLCs for each dealership may increase costs. There are more books to keep. There are more accountant fees. There are higher computer costs. Weigh those increased costs against the risk that the failure of one business will drag down the rest of your businesses.
Make the decision to have all your businesses cross-guarantee each other your own. If your businesses are in one corporation, they automatically cross-guarantee each other. The corporation, and all businesses in it, will be liable for the debts of any one division of the corporation. Some dealers argue that putting all businesses in one corporation enhances their financial strength. However, if your companies are in separate entities, you can always choose to have one or more cross-guarantee or cross-collateralize the debts of another. Make the decision to cross-guarantee your own, 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? Can you renegotiate existing cross-company liabilities? If not now because of the tight credit markets, keep that in mind as credit loosens and you shop for credit in the future. When credit markets loosen up, and creditors are once again negotiating for your business, negotiate to reduce cross-company liabilities.
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 or to your family in the face a potential dealership bankruptcy could lead to clawback by a bankruptcy court of those assets 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 your businesses. Losing your businesses and your personal assets is a catastrophe. Personally guarantee only as a last resort. It may be the case that sometimes you can’t avoid providing a personal guaranty. If you must, just make sure the reward is worth the risk.
Be careful of due on death clauses. Many banks and credit sources in real estate loans and working capital loans include due on death clauses. If the dealer dies, the loan is callable. If you are the dealer and you die, your heirs will already be dealing with a lot simply working with your manufacturers and taking control of your businesses. They do not need additional pressure from banks and other credit sources calling loans because you died. Again, this may not be something you can do at this time of tight credit. However, when credit loosens and you are negotiating deals, keep this in mind. You should have a plan for continuation of your businesses in the event of your death. Go over that with your bank and credit sources. Get due on death clauses removed from your paperwork.
Many dealers do not pay careful attention to the risk to which they put themselves and their other businesses. A franchisor failure dragging down a dealership is a possibility for which every dealer must plan. Pay very careful attention to how your businesses are structured, to what liabilities you incur for affiliated businesses and for yourself, and to the best way to protect your assets in the event the worst happens.