Maximize Wealth-Building Through F&I Participation Programs

Partnering with established F&I providers that know how to assess risk and offer competitive products can reap rewards.

Today’s modern powersports dealership looks noticeably different from operations of five, 10 or 20 years ago. While the strong focus on customer service and quality products remains front and center, everything behind the scenes continues to evolve at a break-neck pace. This article is the last of a three-part series offering insights into modernizing today’s powersports dealership, centered around operational, financial and customer success.

The first article covered the importance of building the right pay plans for dealership finance and insurance (F&I) staff, with the second spotlighting how pay plans can drive the right performance for F&I managers. With those cornerstones in place, powersports dealers must also secure the right program for wealth-building, also known as participation programs.

By partnering with established F&I providers that know how to assess risk and offer competitive products, powersports dealers both big and small can reap financial rewards and increase customer satisfaction. When selecting an F&I carrier, dealers should consider the market competitiveness of the carrier’s product suite, underwriting ability and history.

Understanding Participation Programs

Participation programs, at their core, are agreements between powersports dealerships and entities, such as F&I providers. These agreements allow dealerships to share in the underwriting profits generated from F&I product sales in addition to their profits from vehicle sales and service department revenues. Historically, participation programs have been primarily structured as either retro or reinsurance programs.

Participation programs allow dealers to select which products they’d like included in their portfolios, allowing the dealer to choose products that will provide the most benefits to their customer base.

Retro participation programs are a great entry-level option for dealers wanting to start exploring participation programs and who may not yet be ready for a full reinsurance program. Retros represent minimal risk and involve the dealership selling a third-party provider’s products (e.g. Vehicle Service Contracts (VSC), Tire and Wheel, Maintenance, Gap, etc.). The provider assumes the product risk and shares with the dealer a portion of the underwriting profits and associated investment income generated from the dealership’s F&I sales. The amount of the underwriting profit tends to be tied to volume production and underwriting performance. Unlike a self-administered program where the dealer owns all the risk, a retro allows the dealer to gain additional revenue and profit from two sources and typically gives the dealer access to the provider’s other areas of expertise and resources, such as training and financial reviews, etc. Retro payouts are taxed at the shareholder’s ordinary income rate.

On the other hand, reinsurance participation programs involve the establishment of a separate reinsurance company to assume the risk associated with F&I products. This approach allows dealerships to retain a more significant portion of the underwriting profits and associated investment income generated from F&I sales. By effectively underwriting their own F&I products, dealerships can capitalize on the premium reserves collected and mitigate external risk factors. In addition, reinsurance allows for more favorable tax treatment when taking a qualified distribution. Reinsurance participation requires filing annual tax returns for the separate company and carries additional costs not required by a retro. Volume production should be analyzed to determine whether reinsurance is preferable to a retro program.

Wealth-Building Potential for Dealerships

Participation programs are often viewed as indispensable sources of wealth-building for today’s leading powersports dealerships. By embracing modern participation programs tailored to the needs of today’s market, dealerships can unlock a host of benefits that contribute to long-term profitability and sustainability. In fact, by not taking part in a participation program, dealers may be leaving anywhere from 20% to 50% of their bottom line on the table.

Revenue Diversification

These programs enable dealerships to diversify their revenue streams beyond vehicle and service department revenues, thereby reducing reliance on volatile market conditions. By tapping into the lucrative F&I market, dealerships can supplement their sales revenue and offset fluctuations in vehicle sales, creating a more stable financial foundation for long-term growth and success.

Risk Mitigation

Through participation programs, dealerships can effectively mitigate financial risks associated with F&I products, thereby safeguarding their bottom line against unforeseen challenges and market uncertainties. Whether through retro or reinsurance structures, participation programs offer dealerships a means of sharing risk with trusted partners while retaining a significant portion of F&I underwriting and investment profits.

Building Success Today and Tomorrow

In today’s competitive market, participation programs also serve as catalysts for differentiation and competitive advantage. Dealerships that leverage modern participation programs to deliver superior F&I experiences and value-added services can distinguish themselves from competitors, attract more customers and command higher profit margins, thereby solidifying their position as industry leaders.

Participation programs represent more than just financial arrangements; they embody strategic initiatives that drive profitability, mitigate risk and enhance competitiveness for dealerships. By embracing the evolution of participation programs and aligning their F&I strategies with the right F&I program provider, dealerships can position themselves for sustained success and prosperity in the powersports industry today and tomorrow.

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