Is your Succession Plan in Place?

Succession planning isn’t something anyone wants to talk about. It’s hard to face mortality and have uncomfortable conversations with family, but it’s important to have them in order to carry on the business and the family legacy. A dealership is likely a principal’s biggest asset, and there should be a plan in place for how it can benefit his or her family when they retire or after they’re gone.

Small businesses are responsible for 46.8 percent of jobs in the US, but many don’t have a succession plan in place, an estimated 43 percent in fact. Family businesses are even less likely to have a strategy in place. Unsurprisingly, 72 percent of small business owners plan to pass on their businesses to their children, but only about 15 percent work out that way, typically due to lack of planning. 

Many dealer clients resist succession planning for a litany of reasons - fear of death, lack of successors, fear of the "factory approval process," or the cost. So despite an aging auto dealer body, only about a quarter of all U.S. dealers have factory-approved succession plans.

The time to create a succession plan is now, especially since the Biden administration plans to make BIG changes to estate tax. Currently individuals are given an $11.7 million lifetime exemption on estate taxes. This will expire in 2026 when it is set to be reduced to $5 million, plus inflation. Biden’s proposal will reduce that to $3.5 million. Anything over that amount will be taxed at 45 percent! Now is the time to set up an ESOP, trust or other succession plan! 

GW Marketing Services is here to assist you with planning for your future. Throughout the past 40 years, we’ve seen every succession scenario possible play out among our dealer clients. Turning the business over to a new owner is the easy part. Doing it in a way that preserves the integrity of the business while providing service continuity and family harmony is the challenge. Since many dealerships are family owned, several non-business issues and family relationships add complexity.

There are several key factors to consider when planning succession when family is involved:

Wealth

Many family members may have different perspectives on money matters that should be addressed head on. Having the conversations and setting clear guidelines in the succession plan can prevent disputes later.

Values

Personal values drive priorities and goals. Although families have many shared values, individuals may have divergent perspectives. Clarifying long-term values and goals can remove turmoil regarding the “heart” of the business.

Family Ties & Considerations

It’s often difficult for dealer principals to relinquish the dealership to the next generation. As the child takes over, it may seem like big shoes to fill. 

Unprepared Heirs

Not preparing the family for taking over and reluctance to talk about wealth can sabotage a succession. Principals should work closely with successors to alleviate these issues, especially if the succession plan clearly outlines training and responsibilities.

Sibling Rivalries & Family Dynamics

Competition and jealousy can build up for years. The succession plan can bring out the ugliness of it all, especially among blended families that may not have the same shared values and strong bonds. The death of the dealer principal very often precipitates increased family member rivalry, making running the dealership(s) nearly impossible once the owner is gone.

Succession planning is not cheap, but the financial expense is a bargain compared to the emotional cost to family. Without it dealers risk even higher financial costs if litigation arises or "factory approval" is withheld because of inadequate succession planning. 

So where do you start?

Financial planners suggest that early on in the process, families should retain an independent third-party. This firm should assess the value of the business, so its assets can be properly distributed as the succession plan states.

Using that information, a dealer should then choose what type of succession plan fits his or her business. Some principals leave the dealership to family, but others may not have any family members who want to assume responsibility.

An interesting option that is often misunderstood or overlooked is an Employee Stock Ownership Plan (ESOP). The biggest challenge to management or family buyouts is that they rarely have enough money to buy the company outright. Even if financing is available, personal guarantees will be necessary, which can put a lot of stress on managers who are not accustomed to that level of risk. Also, a management or family buyout does not offer the significant tax advantages that an ESOP has to offer.

A sale to an ESOP would keep the management team in place, and typically the borrowing incurred by the company to finance the transaction is effectively a deductible (both principal and interest), which makes it much easier for the company to repay the transaction debt. Also, a sale to an ESOP allows the seller to defer capital gains tax on the sale of the shares under a special tax code provision.

Sometimes a buyout is done in conjunction with an ESOP. The ESOP will buy a portion of the shares and purchasing parties will buy the shares they can afford.

Are you lacking a succession plan?

As one of the most experienced dealership brokers in the country, GW Marketing Services can start you on your succession planning journey. We can provide a reliable, objective valuation of the dealership, walk you through the financial structure options or help you create an agreement. We will refer you to and coordinate with a trustworthy estate planner and consult on your behalf regarding your exit strategy goals. We can also advise you on how to get your succession plan approved by the OEM. 

Contact us for your free consultation.