Thinking About Passing Along Your New Vehicle Franchise to a Family Member Upon Retirement? … It May Not be Quite so Easy
Most dealers assume that when it comes time to retire from the dealer owner-operator position you will be able to designate a family member as your replacement. Increasingly, the manufacturers are refusing to honor a dealer’s designated replacement. These manufacturers, General Motors being one of the primary culprits, point to deficient dealership sales performance as the basis for refusing to approve a family member as the new dealer owner-operator. In the case of General Motors, the denial is made whether or not the family member had any involvement in the prior operations of the dealership!
Dealer Agreements uniformly provide the manufacturers with sole discretion in approving a new dealer owner-operator. These Agreements are framed as “personal service agreements” whereby the manufacturer provides the new vehicle franchise in recognition of the qualifications of the individual proposed to act as the dealer owner-operator.
Although the Dealer Agreements do not recognize any right a dealer owner-operator has to pass the dealership to a family member, state motor vehicle franchise laws do provide some protection. Virtually all states prevent a manufacturer from denying the designation of a family member to replace a dealer owner-operator upon the dealer’s death or incapacity. Some states also prevent a manufacturer from passing the dealer owner-operator position to a family member upon the dealer’s retirement but many others do not address succession upon retirement.
Manufacturers like General Motors refuse to even entertain a dealership’s request to approve a new dealer owner-operator in the case where the current dealer owner-operator wants to retire and the dealership is not performing at or very close to 100% sales effectiveness. In doing so, the manufacturers will not even look at the proposed replacement family member’s qualifications to act as the dealer owner-operator. In the manufacturers’ view, the dealership’s alternative is to either improve its sales performance or sell to a third party. In most cases, we know that it is difficult or impossible for a dealership to significantly move the needle on sales performance as so much of the manufacturers’ state average-based sales performance formula is dependent upon circumstances out of the dealership’s control. Although they will never admit it, the manufacturers understand the basic math that not every dealer can be at or above average market share. Instead, we suspect that the manufacturers’ goal is indeed to force the current owners to sell the store to a new operator. This goal, of course, runs afoul of the long held idea that dealerships are family businesses which, if the family desires, should be passed down from generation to generation.
Dealers in a state without laws protecting their right to retire and designate a family member as the new dealer owner-operator, are left with less than ideal options. First, the dealership should respond to the false assumption that the dealership is in fact not performing well. As I have written about repeatedly, dealers should always respond to a sales deficiency letter or report with a detailed listing of the circumstances out of the dealership’s control which are resulting in the appearance of less than satisfactory sales performance. These circumstances include an improperly drawn area of responsibility, lack of adequate vehicle inventory, demographic and economic changes, import or domestic brand bias and unusual inter-brand or intra-brand competition in your market, to name a few.
Second, with some manufacturers, it will help if the designated replacement family member was not involved with the operations of the dealership or, at least, the new vehicle sales side of the dealership. This separation provides an opening to argue that the dealership’s allegedly poor sales performance should not be held against the proposed replacement dealer owner-operator. Instead, the proposed replacement dealer owner-operator would come to the position with a record of success in other departments of the dealership or in new vehicle sales at another dealership which will serve to help the new dealer owner-operator improve the family dealership’s new vehicle sales performance.
Third, the dealer owner-operator can proceed to retire despite the denial of the replacement dealer owner-operator. This “game of chicken” will force the manufacturer to either come to some resolution on the dealer owner-operator position or issue a notice of termination of the franchise. Manufacturers are usually reluctant to issue a notice of termination as that triggers strong franchise law protections provided in almost all states. Nevertheless, this is certainly a risky approach which could jeopardize the franchise.
Before proceeding with a plan to retire without the sale of the dealership to a third party, dealers should become very familiar with their state laws governing succession of the dealership. Depending upon the level of protection provided, the dealer can then implement the best strategy for accomplishing their goal of passing the dealership to the next generation.