Reminder: Franchise Items That You Can Control

While you cannot control some matters, like the standard terms of your dealer sales and service agreement, you can pay attention to some issues and protect your rights with your franchisor.

June 19, 2024

By Barrie Charapp Beaty
Charapp & Weiss, LLP

This article is a corporate check-in. We have a checklist in this newsletter that accompanies this article.

As many dealers have on their radar, the lifetime gift tax exemption significantly changes at the end of 2025. That change has many dealers restructuring their franchise and corporate documents.

All dealers want to maintain cordial working relationships with their franchisors. They do not want to antagonize their “partner”. Unfortunately, for franchisors, the “partnership” often lasts only as long as the willingness of a dealer to do what the factory says. A franchisor should respect its franchisee as an independent business dedicated to the brand, but it must also recognize that the business must do the right thing for its employees, customers, the dealer, and his or her family. Sticking up for your rights as an independent businessperson is not looking for a fight. Instead it is claiming the respect to which you as an independent business person are due.

While you cannot control some matters, like the standard terms of you dealer sales and service agreement, there are some issues to which you can give attention protect your rights with your franchisor.

  1. Keep your franchise documents. Too often, we are consulted by clients who wish to challenge a franchisor decision, only to be told that they must get paperwork from the factory. The factory is not a dealer’s file clerk. When a dealer requests information, manufacturer’s reps will wonder why the sudden interest and drag their feet.

The franchise is the most valuable asset of your business. Keep all materials you receive from the factory. Keep a hard copy set at the dealership. Keep an electronic set stored in the cloud. You should keep:

  • your dealer sales and service agreement
  • addenda to the DSSA
  • amendments to the DSSA
  • bulletins affecting compensation, particularly sales, warranty, and recall compensation, and performance criteria and results
  • manuals
  • advisories and technical bulletins
  1. Be sure you are compensated properly for warranty and recall work. Many states have enacted legislation requiring that dealers be compensated at an amount equal to retail for labor and/or parts. When was the last time you reviewed the rate at which you are compensated for warranty and recall work? Is your reimbursement consistent with state law? Reimbursement uplifts allow you to be competitive in paying your service and parts employees, protecting your ability to serve your customers.
  2. Are you prepared for an audit? Factory audits are a fact of life for franchised dealers. It is not a question of whether a manufacturer will audit you for warranty and incentive claims, but when.
  • Know the rules. Whether it is a claim for warranty or recall work, or for incentive payments, understand the manufacturer’s rules and follow them. That means training employees to make sure they understand the rules.
  • Understand your rights under your franchise agreements and state law.
  • Have in place paperwork processes designed to show compliance with program qualifiers. Has the service department followed manufacturer requirements to justify the warranty or recall work? Do the repair records adequately reflect technician time and the parts installed? For incentive matters, have you maintained the documents necessary to prove that each deal qualifies for the incentives claimed?
  • Have you followed the technical processes required by your factory? Many states' laws protect the dealer’s right to payment even if it does not dot every “I” and cross every “T”. However, make the effort to follow the required processes to simplify the lives of employees.
  • Make sure all supporting documentation is adequately filed so it can be reviewed by an auditor.
  1. Know your manufacturer’s performance standards and regularly measure the extent to which you are meeting those. If you are not meeting those, find out While factories emphasize the importance of CSI, their primary concern is whether you are selling enough vehicles. At what levels should you be selling them, and are you meeting those criteria? Generally, there are three reasons why a dealer does not meet sales performance requirements.
  • Lack of allocations. You cannot sell vehicles you do not have. If you are missing your sales performance criteria, are you getting sufficient supplies of vehicles to achieve them?
  • Are your sales targets appropriate? The biggest issue for dealers is the size of their primary market area or area of responsibility. If it is too large you will not have a geographic sales advantage in some parts of the area. That will negatively affect your ability to meet your goals. If you believe your PMA is misdefined, request a review. The tendency for any manufacturer is to assign all census tracts or zip codes to dealers, even if it results in dealers having PMAs with areas difficult for them to penetrate.
  • Are geographic, demographic, brand preference, or other issues affecting the buyers in your PMA? For example, are you selling domestic vehicles in a college town? Are you selling import vehicles in a market with a domestic brand factory? Those are two examples of many issues that can affect performance. If your PMA includes areas where buyers will be resistant to your product or another dealership is more convenient, request a review from your franchisor.
  1. What is your succession plan? Succession is not just an issue for your family, your lawyers, and your accountants, but also for franchisors, who are increasingly demanding succession plans.

Franchisors want to prevent control fights leading to paralysis in the dealership. More important for them, they want to control as much as possible who will be operating their franchisees – both in terms of competency and willingness to work with them.

If you have not developed a succession plan it is time. You probably have an estate plan that involves a will and trusts, but that is not enough. Who will be your dealer successor? What are the qualifications of your successor? Have you named the successor to the factory, and has your franchisor approved that person to be your successor? Most important, have you advised your family about your plans? Too often, dealers seek to avoid potential controversies while they are alive. To protect your family, issues should be surfaced during the dealer’s life so the family can work through any potential controversies.

Your corporate documents need to be updated accordingly and submitted to the franchisor.