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Unique Issues in Retail Auto Joint Ventures

In a previous post (see: 2017 in Review: Trends in Retail Auto Mergers and Acquisitions), I highlighted the increasing prevalence of joint ventures (JVs) in the auto industry either as an approach to succession or as a way for individuals, family offices or investment entities who are new to the retail auto industry to get their start. Whatever the purpose of a JV, such partnerships are likely to encounter unique challenges in the retail auto space — challenges that partners do not commonly face in many other industries.

To be successful, all JVs, regardless of industry, require thoughtful planning and open discourse among the players. What is unique with JVs involving auto dealerships is that the interests of a third party — the vehicle manufacturer — must be considered. This is somewhat akin to the liquor industry or other industries where there is a “privileged license”Joint Venture ImageFor a retail auto Joint Venture to work well, the partners need to carefully think about and discuss

Attention Business Owners: Plan for Your Succession Now

Nobody likes to think about estate planning. Not only does the phrase evoke a sense of drudgery, but many people literally associate it with death. Clearly nobody wants to think about their own death, especially when there are deals to be done, customers to please and reputations to build. The visceral aversion to sitting down and thinking about what happens after is certainly understandable.

Photo by Benedikt Matern – sourced on Unsplash

The counterpoint to this clear and convincing emotional logic is inevitability — the day will come when you will not want (or be able) to operate your dealership(s) in the way you have in the past. Hopefully the decision to walk away is voluntary and you do so on your terms with rosy prospects on the horizon. Unfortunately, the decision to bid farewell to your dealership may not be in your hands, but whether it is or isn’t you can have much more control over the outcome by

Resolving Value Disconnect between Buyers and Sellers of Auto Dealerships

In my previous post “2017 in Review: Trends in Retail Auto Mergers and Acquisitions,” I highlighted an all-too-familiar and continuing trend: the battles between buyers and sellers over valuation — battles that arise from what I like to call the “value disconnect.”

Sellers, who naturally want to get top dollar for their dealerships, are often reluctant to admit annual sales increases or operational efficiency haven’t been the same as in years past. Buyers, who naturally want to pay as little as possible, use this fact in an attempt to negotiate a lower price. Bringing the two sides closer to a reasonable valuation of a given dealership can be one of the biggest challenges in the negotiating process.

Unfortunately, finding a phrase to reflect the source of this friction (the phrase “value disconnect”) is far easier than pining down its causes or finding a “go to” tactic to combat it. In this post, I examine the causes of the value disconnect, separating the causes attributable to the seller from those attributable to the buyer, and I offer guidance on how to

2017 in Review: Trends in Retail Auto Mergers and Acquisitions

In any industry, an annual retrospective reveals trends that signal a shift away from the past and toward the future of the industry. A look back at 2017 in the retail auto sector calls attention to some trends that were expected and others that appear to be prognostications finally coming true.

Let’s take a moment to review some of the most important developments in the auto retail sector in 2017.

The Value Disconnect

The ongoing battle between buyers and sellers with respect to the value disconnect continued in 2017. We have seen some movement perhaps, to sellers looking at 2017 performance and realizing that while an auto dealership is still a good business, the sales increases were not the same as in recent years past. This may have had the effect of driving more sellers to market thereby creating volume in 2017.

Photo © Justin Luebke on Unsplash. | Used with permission.

Succession Planning or Lack Thereof

For years pundits and anyone watching the industry have been forecasting mergers and acquisitions (M&A) activity would rise to some degree because of family succession. It took some time, but in 2017 this appears to have started. This type of transaction has taken many forms. Some family sellers have determined the next generation will not (or cannot) operate the business, so they put the family business up for sale. In other instances, no “next” generation is available to take over, so the owner looks to transfer the business to trusted management or a third party. Unfortunately, I have also started to see forced sales because the owner either

The Art of Balancing Fear and Trust in Dealmaking

As a corporate lawyer, I spend a large part of my time writing and reviewing contracts and advising clients on opportunities, risks and on their legal rights, responsibilities, and obligations related to their business dealings. However, what I often find most fascinating are the emotions that impact business deals and the resulting group dynamics that often go unnoticed by the participants. While most participants consciously focus on price, timing, problems and other terms, their actions and decisions are often driven by emotion — fear, anger, expectation, hope, disappointment, and so on.

Two emotions that commonly impact business deals are fear and trust. Frankly, I don’t know which is scarier, because either emotion can make people act irrationally.

Acting out of fear, a participant is likely to overreact to a perceived threat in the negotiation or overanalyze an agreement to the point of losing out on a potentially good deal. On the other hand, participants who are overly trusting may enter into an agreement without carefully thinking it through and later regret their decision.

A healthy balance of fear and trust leads to better outcomes.

The 4 Steps to Diagnosing Fear in Business

I often write about fear dynamicsthe behavior and communication patterns that emerge during interpersonal interactions involving fear or anxiety that any or all involved parties are feeling. For example, I was working with a client who repeatedly took hard line stances on negotiation points as his initial opening position. However, when there was silence in the negotiation or it appeared the other party might walk, then my client would cave and give in to the demand. I had observed this type of negotiating tactic before (as I am sure many have), but the consistency of this behavior and almost complete capitulation on virtually every issue was unusual.

As I engaged with my client, I stated that the dynamic he was creating was making each negotiation point more and more difficult because he was teaching the other side that he would give in whenever there was a pause or a fear that the deal might die. My client was self-aware enough to understand this and, to his credit, he admitted to engaging in this behavior. He also stated very clearly that he did not want to lose the deal regardless of the terms. This insight was very helpful to me in understanding the situation; knowing that my client and I understood each other alleviated my anxiety. It allowed me to be more aggressive in stopping my client from speaking and in avoiding breaks and other moments of silence that would eat away at my client.

Ultimately, we worked through the deal and were able to close the transaction. I believe that my client got a better deal after he and I were able to understand the tension between the two of us, and I was then able to act to mitigate my client’s fear response.

Fear dynamics play a role in what is often referred to as

Managing Emotions in Buy/Sell Negotiations

Business transactions, especially mergers and acquisitions (my specialty), involve both head and heart — cognition and emotion. However, we focus far more on the price and terms in an agreement than on the emotions that almost always play a major role in the outcome, even to the point of determining whether negotiations end in a deal or a deadlock. Instead of understanding emotion and using it to our benefit either through insight or action, we often let emotion drive an outcome, usually to the detriment of everyone involved.

Photo by Tommaso Urli (sourced from Unsplash)

I am not suggesting that we leave our emotions outside the door of the conference room, if that were even possible. Emotions play a valuable role in negotiating. For example:

  • Desire pulls parties together to initiate a transaction.
  • Eagerness gives us the energy to persevere when the negotiation drags on.
  • Fear can encourage us to examine a contract more closely.
  • Disappointment can signal the need for further discussion.
  • Anger is sometimes used to make an overly aggressive party realize they need to back off.

What is important is that we maintain our poise and manage the emotions (both our own and our counterpart’s), so these emotions do not control us or the deal.

Alleviating Anxiety

In a study entitled “Can Nervous Nelly Negotiate? How Anxiety Causes Negotiators to Make Low First Offers, Exit Early, and Earn Less Profit,” Alison Brooks and Maurice Schweitzer of The Wharton School of Business at the University of Pennsylvania, conclude

Speaking at the 2017 AICPA Auto Dealership Conference in Las Vegas

The Association of International Certified Professional Accountants (AICPA) will be holding its 2017 Auto Dealership Conference October 26-27 at Caesars Palace in Las Vegas. The conference is the main event for accounting professionals in the auto dealer space, drawing both private and in-house (auto-dealership) accountants from across the country.

On Wednesday, October 25, from 1:00 p.m. to 5:00 p.m., Jonathan Wilke, CPA, Partner, Dixon Hughes Goodman; Alan Haig, President, Haig Partners, LLC; Rick Kotzen, Partner & CEO,  Capital Automotive Financial; and I will be presenting a half-day pre-conference workshop titled “Buy/Sell Workshop” — your guide to understanding:

  • Current dynamics in transaction structures and market conditions
  • Market terms related to buyer or seller legal issues in transaction structure and issues with deal diligence and manufacturer matters

In our half-day (four-hour) session, we will cover buy/sells in the retail automotive industry with a focus on the following key areas:

Finding Business Solutions in the Humanities

At most colleges and universities in the U.S., the schools of humanities and business traditionally have not crossed paths. While you might find business majors in humanities classes, mostly because they are required to take a certain number of electives, it is the rare humanities major who will enroll in a business course. The reason could have more to do with culture than interests. Business seems to draw people with a more fiscally conservative mindset, whereas the humanities tend to draw more liberal minded students. The BA’s and MA’s do not often mingle with the MBA’s.

However, the line dividing business and humanities is blurring. More and more businesses are looking to the humanities for employees or new perspectives on solutions, not only “hard skills,” such as marketing, communications, and graphic arts. Companies are increasingly seeking expertise in the social sciences — anthropology, sociology, and psychology. In 2011, at the iPad 2 launch, Steve Jobs said,

Zero Sum Thinking

How to Avoid Zero Sum Thinking

In the business world, a major force in deal dynamics generated from fear is zero sum thinking — the notion that in any transaction, one party’s gain is, by definition, the other party’s loss. This basic premise forms a simplistic foundation for socialism and communism— the premise being that there is a fixed amount of wealth, so if one person has too little others must have too much. The only solution offered by these economic models is to redistribute the wealth from the haves to the have-nots. Capitalism, on the other hand, is based on the premise that people can create wealth through innovation and investment, a non-finite model of wealth and value. The best solution this system can provide is to create opportunities for everyone to become wealthier, or at least less poor.

I do not want to spark a debate over the pros and cons of either system, and I readily acknowledge that the above is very basic differentiation of the models. Perhaps we need a little of both — compassionate capitalism. However, I would like to generate a discussion over zero sum thinking, because I have witnessed its potential for creating discord in business as well as in personal relationships. Whenever we begin to think that someone else is gaining something at our expense, we feel as though we are being cheated. We can even begin to feel this way when we fear that what we stand to gain from a transaction is less than what the other party stands to gain, even when what we stand to gain is what we wanted all along. Oh, the injustice!Zero Sum ThinkingThe question becomes how do we respond in these situations? The typical response is to feel disappointed and perhaps even angry, but that brings us no closer to our objective of getting a fair deal, or the deal we had hoped for when the process started. There are better options to zero sum thinking.

Find the Value

If you begin to fear that someone else is gaining or is about to gain something at your expense, ask yourself: