Dealers regularly receive renewals of their franchise – the dealer sales and service agreement (“DSSA”). “It is a form standard for all states, so just sign” your representative says. To an extent, that is true. Franchisors have developed their form agreements consisting of the agreement granting the franchise, any standard terms which may be separate, and supplements or schedules to those agreements. The boilerplate terms in those forms are not subject to change.
The exception is what is filled in on those forms for your dealership, particularly in the schedules and supplements. Review the agreement carefully to be sure that the particular information is correct and something you can live with.
The renewal may come in the form of a replacement full duration DSSA. Or it may be a “term” agreement with conditions to extension. Regardless of the form, there are several issues you should consider.
Refusing to Sign Your Renewal does not End Your Franchise Rights
That a franchise agreement expires one of the great myths of the car business. Franchisors rely on this myth to pressure dealers to sign agreements not to their benefit. The fact: your DSSA does not expire.
Under the law of every state, regardless of a listed expiration date, a DSSA may only be terminated against the wishes of the dealer if the franchisor goes through a termination process. In a termination proceeding, a franchisor must prove there is good cause for a decision maker to conclude that a dealer’s lack of performance or failure to comply with its obligations is so severe that its rights to continue in business should be ended.
If there are terms in the replacement DSSA tendered to you with which you do not agree, do not sign it under the belief that your existing agreement is expiring. It is not. You can simply continue under your existing agreement terms until it is replaced with a document to which you do agree. You will get unrelenting pressure to sign a new agreement because factory reps are judged by their ability to check off the tasks they are assigned regarding each dealer. But your refusal to sign will give you leverage to work out terms with which you can live.
Full or Term Agreement
A term agreement is one for a limited duration so that a dealer can meet conditions imposed. Some dealers become upset when they receive term renewals, but the fact of a term renewal should not distress you. As we just discussed, a franchisor cannot terminate a dealer’s DSSA unless it goes through a full termination process even if the artificial expiration date of the term agreement passes.
The problem with a term agreement is the conditions imposed. Remember the checklist to consider any agreement with your franchisor.
- What is the purpose?
- Is it consistent with the existing dealer sales and service agreement?
- Is it consistent with state law?
- Does it make financial sense?
- Can the dealership comply?
- Is the boilerplate fair?
- What is the penalty if the dealership cannot comply?
Evaluate the conditions specific to your dealership in a term agreement as you would any other agreement tendered to you by the factory. If it works for you, there is no detriment to simply having a term agreement. But if the conditions of the term agreement do not work for you, engage your franchisor to negotiate the terms specific to your dealership.
What Are The Problems With The Conditions Imposed?
You must identify the condition or conditions to which you object. Here are examples.
Capitalization
Is your manufacturer saying you are undercapitalized? You must give serious attention. Undercapitalization can be a problem for a dealer in a termination proceeding. The franchisor’s position will be that a dealer’s failure to properly capitalize the business shows continuing weakness and poor representation of the brand. Work to meet the proper capitalization goals in your DSSA.
The real question is whether the capitalization goals are proper.
- Are the capitalization requirements correct? The manufacturer’s calculation of your required capitalization may be wrong. 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, you can challenge this through your state process for challenging performance standards.
- Make sure that the entries on your financial statement are correct. If improper information is being plugged into the franchisor’s capitalization formula, an improper answer will result. 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 will negatively reflect on your dealership. If there is a problem, solve it.
Facilities Improvement
Your tendered term agreement may require that you make facilities changes. Perhaps they are improvements to your showroom. Or an increase in service capacity. Or separation of service or sales from another brand with which you are dualed. Or even an entirely new building. Do not commit to undertake facility improvements lightly. Go through your checklist. Do the improvements work for you? A franchisor can incentivize you to make facility improvements through a program. However, under state franchise law, it may not require you to make facility improvements as a condition to your continuing as a franchisee.
Even if you agree that you will make some or all the improvements, are the terms imposed appropriate? Franchisors are notorious for imposing time restraints that are both unreasonable and unnecessary. Factories seldom have reasons for requiring facility improvements by a date certain, except to meet their internal targets. Often, the real reason for unreasonable and unnecessary targets is leverage on a dealer. When you do not make your targets, the factory can make demands, sometimes greater than the original requirements. Review the terms and milestones imposed on you for improvements. Can you make those? Is there time for delays outside of your control such as zoning and permitting? Is there allowance for delays by the franchisor’s own architect if there is a review process? Is there a commitment to factory leeway for a delay outside your control? Even if you are willing to undertake the improvements the franchisor wants, are the time constraints appropriate?
Sales Performance
Most often a franchisor may seek to impose a condition that a dealer meet a sales performance standard. Usually, the dealer must achieve 100% sales efficiency. However, is that realistic? If your franchisor is attempting to impose a sales effectiveness condition, investigate why you are not sales effective. Often, the reason is that your area of primary responsibility is misstated. If your area is too large, you will be responsible for sales of a number of vehicles based on areas where you have no geographic sales advantages. Most franchisors insist on assignment of all zip codes or census tracts to some dealer, whether the dealer has a geographic advantage on those areas or not. The factory assumption is if there is no closer dealer of that line make, customers in those areas will travel to buy the vehicles. However, that is not so. If your dealership is not convenient to customers, they will travel to a convenient dealer of a competing brand. That will negatively affect your sales effectiveness.
If you believe your area of responsibility is misdefined then challenge it. There are experts on whom you can rely who understand the method by which a franchisor should construct your area of responsibility.
Ask questions on other issues that may affect you.
- Are you getting sufficient numbers of the right vehicles? Previous disruptions in distribution may have affected the turn and earn allocation so that you are not getting what you need. That is especially the case today when the pandemic has so disrupted business. If you believe allocations are an issue, raise that issue before you agree to a performance standard.
- Are there geographic issues that should affect your sales effectiveness calculations? Consider natural geographic barriers like rivers and mountains, and locations of employment centers that may lead commuters away from your business.
- Are there demographic issues? For example, are you a domestic dealer in a college town where there may be a preference for import brands? Demographic issues affecting brand and vehicle type preference will affect your sales effectiveness.
Many issues can affect the calculation of sales effectiveness. Understand those issues before agreeing to a condition requiring that you be sales effective.
CSI Condition
Perhaps the condition proposed is that you reach certain CSI goals. The issues involved in CSI measures may be even more complex than those involved in sales effectiveness. Too often a franchisor’s CSI measures are designed to meet certain franchisor goals rather than to actually measure whether your customers are satisfied, leading to statistically insignificant results.
If you face a condition that you meet CSI goals, consult an expert in statistics to review the factory’s program and determine whether it is fair and whether you can meet the goals. If the factory’s CSI goals are unfair and cannot be met, then discuss this issue.
Be Prepared to Negotiate the Non-Negotiable Document
While the form of a manufacturer’s agreement is not negotiable, the specific terms applicable to your dealership are. If unfavorable, be prepared to raise the issues with the factory and negotiate them as part of your renewal. If your factory representative labels you as a difficult dealer, point out the factory is changing your relationship, not you.