Succession Planning: Every Sale Is Different

Baby Boomers are not only aging out of riding, but some are also “maturing” right out of the industry altogether. While some dealerships have a succession plan in place, many do not.

Garage Composites bulldog in gear

Baby Boomers are not only aging out of riding, but some are also “maturing” right out of the industry altogether. While some dealerships have a succession plan in place, many do not. To this end, we contacted the folks at Garage Composites, a training and 20-club provider that works with more than 350 motorcycle and powersports dealerships across North America, to find out some more insight about how to prepare your dealership to be sold to a new owner or be passed down to the next generation. While each transition is unique, there are some guidelines to help you along the way.
“One of the big questions we get is, ‘What’s my dealership worth?’” says Rex Emery, who leads the Succession Division of Garage Composites. “We were recently contacted by a multiline metric dealer who was looking to transition the ownership of the dealership from the owner to a couple of their general managers (they have multiple locations). It was fascinating to see some of the valuations they had; this individual had worked with a local advisor who cooked up
a valuation.”
According to Emery, when the buyer had a certified valuation done, the multiple was 20 percent lower. “Twenty percent of a big number can be a significant number, a little discrepancy can be a lot of money. It comes down to the funding structure, and being able to say how much of a loan they can get. Most sellers don’t want to carry large notes. They really would prefer the buyers get loans. But that doesn’t always work.”
When you’re dealing with an inside sale, it’s all about making the buyer look as good as possible and making the dealership not look so good (on paper). “There are some key things to help minimize taxes. Taxes are a big deal in these transactions, whether it’s going to be some ordinary income taxes or capital gains taxes.” Emery says that for this particular client, he spent a full day with their other advisors (i.e., attorneys and CPA) so they could all share information and help facilitate the transaction.
What if you don’t have a family member or someone inside the business to take it over? And what if they’re not creditworthy enough? Emery says that every client has a different story.
“I just recently had a client who had never been in the industry before wanting to buy one of the top metric dealers on the West Coast,” Emery notes. “He was getting all of his financing lined up, had the agreement, had the purchase price, and had asset purchase agreements and everything. But when it came time to bring up the financials, I couldn’t even believe it. The only financial that the dealer was able to provide was his 1040 and the unit sales data from the OEM. That was it. The seller carried his flooring.”
What Garage Composites ended up recommending in this situation where there wasn’t enough documentation was to enter into an interim management agreement. “The buyer thought it was brilliant. It was an opportunity for this person to step in and start being the face of the organization and to start running the books. They’re going to probably enter into a six-month to 18-month agreement to make the banks comfortable with the profitability of the company.”
An interim management agreement is just one of the many unique ways Emery says a buyer or seller can position these plans. “We completed a sale for a Harley dealership last fall, and it took 800 emails to complete the transaction! But we got the whole thing done, and the client was happy.”
One of the keys to succession planning is to maximize after-tax cash flow from the transaction and minimize the risk to a transition. “Sometimes just poor preparation creates poor results,” explains Emery, which is why he feels Garage Composites offers so many benefits to their clients. “When you look at our 12 consultants and their relationships, if I end up finding out that somebody in west Texas wants to sell their metric store, I can ask my consultant base if they know anyone in this region. That’s how we helped sell a Harley store. This particular dealership was not in a great financial position. But when you looked at the location and all those things, it was a strategic purchase. We were able to reach out and put non-disclosures in place for some of the members and get the deal done.”
Emery says that when they are consulting for a succession situation that they can represent either the seller or the buyer. It depends. “A lot of the people we have worked with have been the sellers, or we’re representing the dealership helping with an internal sale. In these cases, we’re typically brought in by
a GM that’s wanting to purchase, and we’ve also been retained by the owner who’s looking to transition ownership to the
next generation.”
Emery says that an internal sale is not usually going to be the highest multiple, but it’s more about the legacy transitioning to a relative or employee. He says that the cash flow from the business is often used to buy the owner out in these cases.
It’s all about the deal structure to minimize taxation to get that deal done. One of the big things that the owner has to know is what he needs out of the transaction. “Every time we have a conversation with someone trying to transition, they’ll say, ‘Of course we want maximum value,’ but I always have to pause and ask what they are trying to do. ‘What are your core values?’ And then we have to talk to them about the concept of stewardship. When you’re a business owner in the community, you’re a steward not only to your employees, but you’re also a steward to your family and other businesses in the area.”
Emery says that they see every engagement as a puzzle. He says their job is to come in, listen to the facts, and dive in a little further into their goals and values and try to find out what they’re passionate about and what kind of legacy they’re trying to create.
Emery explains that once they’ve had some of those more in-depth conversations, there are several exercises they do to help the client understand their needs. Dealers need to look at their lifestyle goals and financial goals. All those things based on other assets help them realize if they need to work for another five years and make things a little bit better. Or maybe approach the way they’re running the dealership a bit differently to make it a more attractive sale.
“It’s pretty amazing how many dealerships try to sell based on their past performance,” Emery explains. “Some of the statistics I’ve seen (indicate that) around 80 percent of dealerships, or businesses in general, sell for less than fair market value. That’s because they’re not letting the buyer create the expectation of future earnings. Dealers need to paint a little bit of a picture. Some of the higher multiple sales are because the buyers realize you’ve got a great location. They know that they already have other product lines they want to put in there. It might have a unique pricing strategy or marketing strategy. They know they can step in there and implement that. A lot of times they’re not necessarily buying the business that already exists, they’re looking to modify it.”
Emery says that what they do as consultants is a lot of “recasting” of the financial side to fit with whether they’re trying to focus on an internal sale or an external sale. They go through life insurance, country club dues and planes and all these kinds of things because sometimes there is something in there that needs to be adjusted or removed.
Emery says that they created this division of Garage Composites in the fall of 2016 and it has been getting a lot of traction in the industry ever since. “There’s for sure a need for it and a lot of misunderstanding about what people can do and how to do it. I think boomers are looking to slow down a bit, and a lot of them and want to do something else and pass it on. We’ve had owners say they need to sell because their grandkids are in another state and they need to go there.”
As consultants, Garage Composites charges a flat fee to help dealers facilitate the sale. “We break our engagement into multiple phases once everything is scoped out and we understand what the person’s trying to do,” says Emery. They map out the phases of the transition and put together a sales memo. From there they can go piece by piece until the transaction closes.
“We’re not new to doing the process,” says Emery, “but we are relatively new to doing it in powersports. We’re going into our second year of doing this. When you look at the bench strength that we have with 12 consultants in Garage Composites, and the amount of knowledge there, we have a deep understanding of the industry and know what it takes for these kinds of transactions. And each one is different.”

You May Also Like

Destination Dealership: Motorcycles of Dulles

Find out how this dealership maintains excellent ratings.

John Tisch, the owner of Motorcycles of Dulles, is a modest person. Despite the fact that he moves more motorcycles than most dealers on the Eastern Seaboard and his operation has a 4.9-star rating on Facebook and a 4.8-star rating on Google, he hastens to state that the success of the dealership is due to the vision of his now-retired partner, Ken Davis, and his great staff. “I can't take credit for this,” Tisch says. “We have a superb reputation in the industry and I am only one part of that. It's all the folks who work here who make this place.”

Destination Dealership: Northern Colorado (NOCO) Powersports

This dealership is riding the Rocky Mountain high.

NOCO Powersports
Destination Dealership: Spyke’s KTM

Spyke’s KTM serves as racer headquarters for the Lafayette, Indiana, area and beyond. The dealer offer tons of vehicles, apparel and parts for on and off-road adventures.

Destination Dealership: iMotorsports

A lesson in constantly reevaluating your target markets.

Destination Dealership: Inside Moon Motorsports

Moon Motorsports in Minnesota is a family-owned dealership that has been in operation since 1955.

Moon Motorsports

Other Posts

2 Wheels 2 Ways Ep. 3: Born Free, Technicians, a Texas Dealership and Suspension Changes

Patrick and Jacqui visit Born Free, talk technicians, see inside a Dallas-area dealership, and get a lesson on suspension.

Do Yourself a Favor: Attend AIMExpo

What possible reason do you have to not attend?

2 Wheels 2 Ways Ep. 2: A Massive Powersports Dealer, Memphis Motorcycling, and Graceland

Now that Patrick and Jacqui have their bikes road-ready, they are on their way across the country.

Put Your Butt on a Seat at Central Kentucky Motorsports

Drew Baldinger and his business partner, Brad Stinnett, were riders and enthusiasts when they decided to open their shop in 2012. Find out how the last 12 years have gone.