11 for ’11

We all hope that 2011 will be a year of solid recovery. Many dealers saw the 2009 expense cuts kick in fully in 2010, leading to a better profit year. 2011 can be even better as sales increase, but you should give attention to holding on to what you earn by protecting against losses. Here is a list of 11 areas to which you should give attention in 2011. 

Franchise Issues

It is your business, not your franchisor’s. New car dealers are experiencing increasing pressure by franchisors to control dealers’ businesses. “Build the facilities we want; make them look the way we want; run them the way we want,” are the themes of demands that dealers are receiving from franchisors. Some franchisors are using the mistreatment of many dealers in the 2009 GM and Chrysler bankruptcies as warnings to dealers that they better play along or the same could happen to them. But that is nonsense. 

  • Absent another government-sponsored bankruptcy which is highly unlikely in today’s atmosphere, your rights under Virginia’s franchise law are intact. 
  • Your franchisor cannot fail to renew you unless it does so by going through a state termination procedure and proving that your dealership should be terminated under Virginia law. 
  • A franchisor cannot force you to move or force you to sell.
  • Your franchisor cannot threaten you or coerce you under Virginia law.

Virginia franchise laws are there to protect you, but they are not self enforcing. You must know your the laws and use them to protect your business. Do not be afraid to stand up for yourself. Challenge franchisor threats and coercion. If a manufacturer is threatening you or strong-arming you, answer every communication and explain why you are complying with your franchise agreement and Virginia law.

Know your rights in a franchisor audit. Manufacturers are increasing their audit activity, almost as if it is a profit center for them. They are counting on dealers’ reluctance to challenge factory chargebacks, especially when the franchisor threatens findings of “fraud” with stronger penalties. You should know your rights and use them. 

  • Know the time period a manufacturer can review warranty payments and sales incentive payments — six months under Virginia law. 
  • Meet with the auditor upon arrival and understand what the auditor is reviewing. 
  • Challenge any incorrect assumptions.
  • Make sure all contacts with the auditor and your dealership are through a designated dealer representative .
  • Attend the closing meeting and make the auditor explain the audit findings. Question carefully anything that you do not understand or with which you do not agree.
  • Use any internal appeal process of the franchisor. 
  • Don’t be afraid to file a challenge with the Virginia DMV to chargebacks that are inappropriate.
  • Get legal advice if the auditor is throwing around the word “fraud”. Virginia law is clear that your manufacturer can only claim “fraud” as an excuse to expand an audit if it has a real basis for doing so.

Have a succession plan. What will happen to your business if something happens to you? Your accountant wants to know because January 1, 2011 saw the resumption of estate taxes that your estate must handle. Your family wants to know because they want to make sure that the business can continue to operate successfully if something should happen to you. Your banker wants to know how the business will pay for floorplan, capitalization loans, real estate loans, and other obligations if you are no longer running it. Most importantly, your franchisor wants to know since your franchise was granted to you based upon your operation of the dealership as the dealer. If you are no longer available to act as the dealer, and you do not have a qualified successor named, your estate’s likely sole option will be sale of the business to a buyer who knows you must sell. Protect against this problem. 

  • Name a qualified successor. 
  • Be sure the successor has been approved by your franchisor. 
  • If that approval requires an equity interest, sell an equity interest to the successor so that he or she can qualify. 

Make sure that your franchisor knows who the dealer will be if you are no longer able to act as the dealer. 

Federal Law Changes

Know what to do with federal information demands. Washington is newly energized to regulate your business. The Dodd-Frank financial regulation law enacted in 2010 will only accelerate that trend by creating a new Consumer Financial Protection Bureau and providing greater power to other federal agencies like the Federal Trade Commission and the Securities and Exchange Commission. Using enhanced powers under this bill, Washington is intent on changing the relationship between consumers and the businesses that provide them credit. 

Even though new car dealers may be exempt from direct jurisdiction of the Consumer Financial Protection Bureau, dealers will still feel the fallout of actions by this agency because of CFPB’s regulation of finance sources to which dealers assign retail installment sale contracts. The FTC has been granted broader authority to establish and enforce rules affecting dealerships, with F&I departments apparently the agency’s main focus. And the SEC even has a role in determining whether dealers who originate credit will have to maintain a “reserve” for retail installment sale contracts that are assigned and may be securitized.  

These agencies wielding enhanced powers will need more and more information to justify enhanced regulations. That means that your dealership may be the recipient of a federal demand for information, usually in the form of a civil investigation demand from a federal agency or even a subpoena issued out of a federal court. If you are the recipient of one of these information demands, know what to do. The bureaucrats issuing those demands likely have no knowledge of the burden that these requirements will place upon you. Get solid legal help. See if your legal representative can negotiate a response on terms acceptable to you. If not, be prepared to file a legal challenge. 

Watch for changes to your indirect finance agreements. As further fallout from the Dodd-Frank law, finance sources may find themselves facing strict regulation of the retail installment paper that they can buy from your dealership, including limitations on the finance spread, regulation of the type and pricing of extended service contracts and maintenance contracts, and limitations on sale of credit protection products. There may even be restrictions on arbitration provisions affecting transactions with retail installment sale contracts that the finance sources may buy. These finance sources are likely to alter their indirect finance agreements with your dealership to push down on you as many of the requirements as they can. 

Make sure that you are vigilant. There may be some changes that you cannot avoid since they are required by law. But you will want to make sure that your finance sources are not using this process as an excuse to advance their own positions against you beyond that required by federal law. Be on the lookout for these revised agreements and seek legal assistance.

Customer Issues

Make sure that you are protecting your customers’ privacy. There is no issue more important to your customers today than protection of their privacy. And it is even more important for you. 

  • Effective January 1, 2011, the Federal Trade Commission has commenced enforcement of its Red Flags requirement. You want to be sure you don’t sell a car to an identity thief, not only to protect the consumer whose identity is stolen, but to protect your dealership. Your dealership will be the real loser if you sell a car for which you don’t get paid and that you can’t get back. 
  • Your customer information is one of your greatest assets. So protect that information. Review your Information Safeguards program to be sure it is operating as designed. Make sure your customer information is not walking out the door with your salespeople or being sold to others who will profit from your leads. 
  • Effective January 1, 2011, the government has specified a new form of privacy notice that your dealership should use if you want to obtain the “safe harbor” of knowing you are in compliance with the FTC Privacy Rule. Use the new privacy form for your safe harbor benefits and make sure that your people are trained to deliver the privacy form with a positive message that the document describes how your dealership will protect consumer information from misuse.

Make sure that you have a solid procedure for handling every complaint.  One thing is common among all dealer defendants in serious lawsuits – at some point they say they wish they would have handled the problem early. Major consumer lawsuits almost always result from complaints that should have been handled when first received by the dealership. So what steps should you take to keep complaints from turning into more serious problems? 

  • Make sure every complaint to your dealership is logged in. 
  • You, as dealer or another senior manager of the dealership, should track and supervise the handling of every complaint.
  • Make sure that your managers are trained and empowered to handle complaints and know your instructions to solve problems.
  • Follow up to make sure every complaint has been handled and that the customer is satisfied. If the customer is not satisfied, investigate carefully to determine whether your dealership has exposure and whether you should be taking further action. 

Stop problems when they arise through a solid complaint handling process.


Maintain your expense control. Dealers who made it through late 2008 and 2009 did it primarily one way – by cutting expenses. Many dealers saw the beneficial results of those expense cuts in 2010 when they led to bottom line profits. Unfortunately, when times improve and business starts to rock and roll, people may take their eyes off expenses in the press of developing income. Do not fall victim to this. Maintain the pressure on expenses and use the same process you used in late 2008 and in 2009 to manage and reduce expenses. If you can continue to keep your expenses under control, the benefits to you should go straight to the bottom line in 2011.

Be sure your dealership is properly capitalized. As a franchised dealer, you have capital requirements. Know the level at which your business should be capitalized, and make sure you maintain an appropriate level of capitalization. Do not allow your net working capital to fall below that required by your franchisor. On the other hand, do not warehouse excess funds or personal assets in your dealership, corporation or LLC. If something happens to your franchisor leading to your fear that you may have to seek bankruptcy protection for your business, you will ask how you can protect your assets in the business. If you wait until financial disaster looms, there may be no way to protect those assets. So the lesson is simple, but it requires constant vigilance. Do not undercapitalize. Do not overcapitalize. Know your capitalization requirements and keep your capitalization adequate and appropriate. 

Employment Issues

Protect against wage and hour lawsuits. The vast majority of employment lawsuits today are filed under federal wage and hour laws. 

  • Make sure that every employee earns minimum wage. This can be a problem in the sales department during tough months. Know the hours your employees work and make sure that they earn minimum wage for each wage period. 
  • Be sure employees are properly classified. Salespeople, qualifying mechanics, and partsmen are exempt from overtime, as are employees in more traditional exemption categories. However, the employee must meet the qualifications for the exemption. Make sure that everyone you treat as exempt from overtime is exempt. 
  • Make sure that everyone who works for you is classified as an employee except those who clearly meet the tests as independent contractors under IRS guidelines.   The government wants people working for you to be employees so that you will withhold taxes, pay FICA, etc. If you misclassify personnel as independent contractors, you may have to pay dearly as a result. 

Use pay plan forms that protect your dealership. Nothing will be more upsetting to you than dealing with a lawyer for a salesperson who thinks that the salesperson is your business partner. Your salespeople only work for you, but they may have a claim for a bigger slice of your profits than you expect if your pay plans are not appropriately written to protect your dealership. 

  • Make sure each pay plan is written. 
  • There should be a disclaimer that it is not a contract. 
  • It should define the basis for the pay whether it is commissionable gross, to be determined in your sole discretion, or it is a percentage of some account or other financial base. 
  • Reserve to yourself the right to change the pay plan at any time and to correct errors. 
  • Reserve the right to establish and withdraw special compensation programs at your sole discretion.