Occasionally, we write about myths in the car business – things that “everybody knows” that are not true. Here are some franchise myths we have been discussing with dealers.
My dealer agreement is expiring. I must sign a new agreement before it expires. That a franchise agreement can expire is one of the great myths of the car business. The factories rely on it to pressure dealers to sign new dealer agreements with terms they do not like. When your factory representative says you’ve got to sign whatever the factory demands before your existing agreement expires, that is nonsense.
Dealer sales and service agreements – franchise agreements – do not expire. Under Virginia law, a dealer’s right to sell and service a franchisor’s vehicles cannot be ended unless the franchisor goes through a termination process. This requires the franchisor to use state provided processes to prove reasons (or good cause as we lawyers like to call it) why the dealer’s performance is so bad its rights should be ended. If there are terms in the dealer agreement you do not like, you do not have to sign it just because your old agreement is expiring. Simply live under your expiring agreement terms. You will get painful and continuing pressure from your franchisor to do something about it, but your refusal to sign will give you leverage to work out terms acceptable to you.
My franchisor is offering me a term agreement. I must hold out for a full agreement. A term agreement is given for a limited period (usually a year) to determine whether a dealer can meet conditions imposed. Many dealers are offended by their not being given a permanent or multi-year agreement. They should not be. Simply because a term agreement expires, that does not mean that the dealer’s rights run out. The real issue of a term agreement is the quality of the conditions imposed. Can you meet the conditions? Are they reasonable? Will the franchisor cooperate to allocate the resources you need to succeed? Your negotiations over the term agreement should not necessarily be over the length. They should be over the conditions to ensure you can meet them.
A dealer’s case in a termination proceeding can be complicated by the written agreement to conditions it could not and did not meet. Unless you can meet conditions in a term agreement, do not sign it. And once you agree to conditions, monitor your progress carefully to be sure that the factory is cooperating with you so you get the support you need.
The factory is showing me as undercapitalized. That is really not a serious issue. Undercapitalization can be a big issue. If the factory wants to end your rights through a termination process, then measurable failures on your part can provide extra reason. Your franchisor’s position will be that your failure to properly capitalize your business shows continuing weakness which explains your lack of performance. That is usually a nonsense claim, but if your dealer agreement sets up capitalization goals you must meet, and you objectively do not meet them, a fact finder in a termination proceeding may well buy the factory’s argument.
So what do you do about undercapitalization? There are three things to consider.
- Is the capitalization requirement correct? The manufacturer’s calculation of your required capitalization may be wrong. There are many reasons. For example, if you are a dualed dealer, the factory may be overweighting the impact of the other franchise(s). Or your sales objectives may be heavily overstated because of an oversized area of responsibility driving a substantial overstatement of your capitalization.
- If you believe the franchisor’s capitalization demands are excessive, get the capitalization calculation from your franchisor. Have your accountant review it. If you are convinced that the capitalization requirement is overstated, request a review. If the review does not lead to a satisfactory result, challenge this through your state process for challenging performance standards.
- Make sure that the classifications on your financial statement are correct. Many dealers find themselves with capitalization problems simply because debt is mischaracterized or other statement entries are improper. Work with your accountant to review your statement using the franchisor’s process for calculating your capitalization. You may find that some simple bookkeeping entries can solve your capitalization issue.
- If you take these steps and you are still undercapitalized, consider contributing capital to solve the problem. Undercapitalization is something that can be objectively shown by the factory and may negatively reflect on your dealership. If there is a problem, solve it.
The manufacturer says I am not sales efficient but the geographic area I am responsible for is overstated. There is really not much I can do about that. Sales efficiency is important, and it is becoming even more critical as factories condition incentive payments and other benefits on achieving 100% of your sales effectiveness goals. Dealers who find themselves sales ineffective must ask why. Most often, the reason is that the area of primary responsibility is misstated. If your area of primary responsibility is too large, you will be responsible to deliver numbers of vehicles based on areas where you have no geographic sales advantage. Most manufacturers abhor unassigned territory, and they will assign territories to dealers whether the dealer should be responsible or not. The factory’s view is that if there is no closer dealer, customers will travel to get their brand. But if there is no convenient dealer, customers will buy a competing brand and the sales of competing brands will damage your sales effectiveness.
If you believe your area of responsibility is misdefined, then challenge it. You will need an expert in statistics that understands the method by which the manufacturer constructs your area of responsibility. Once you obtain that expert opinion that your area is misstated, there are remedies. Virginia law allows you to challenge a factory’s failure to establish a proper area of responsibility. If you believe you are being measured improperly, take action.