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”For a retail auto Joint Venture to work well, the partners need to carefully think about and discuss how the vehicle manufacturer’s involvement will impact their dynamic.
With auto dealership JVs, it is not a simple matter of the partners making decisions together.
In an auto dealership JV, one partner typically has monetary resources, while the other has one or more dealerships or the talent and skills to operate dealerships, or both. If the partners are thoughtful, they discuss their roles and responsibilities prior to forming their partnership. Through their discussions and interactions, they establish a relationship dynamic that may work very well for the two of them. The problem is that their dynamic can change dramatically when a third party joins the mix — the vehicle manufacturer (often referred to as the original equipment manufacturer, OEM).
The OEM provides the agreement that allows a dealership to sell and service new vehicles of a particular brand. The dealer agreement and related policies significantly influence the relationship between partners, particularly when one is a financial partner with little or no expertise in the industry.
For example, the OEM will require that the “car person” has the ability and authority to operate the dealership on a day-to-day basis. On its face, this sounds reasonable, straightforward and easy, but issues arise when the money partner realizes that he or she cannot influence most of the daily operations of the dealership as well as determining what is day-to-day vs. investment issues. In many other industries, the capital partner is able to influence the daily operations through board voting or other equity rights. This is not necessarily the case in retail auto, and that can be disconcerting for some investors.
Issues that arise from this triangular dynamic can certainly be addressed, and I have worked through many of these issues to enable potential partners to become actual working partners in a venture that is understandable, transparent and highly functional. The key to success is to work to understand the different viewpoints of the players involved. This includes the potential partners as well as the OEM.
As in any negotiation, understanding the motives and goals of the participants may not lead to resolution of all issues and an actual deal, but at least everyone is working from correct knowledge and making decisions based on a clearer understanding of the facts and issues.
Disclaimer: The information in this blog post is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Stephen Dietrich, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
About the Author: Stephen Dietrich is an attorney and author who has a passionate interest in the human side of business. His distinctive combination of legal and business knowledge, human insight, and dedication to clients makes him uniquely qualified to help corporate leaders and other C-level executives navigate high-value mergers and acquisitions, restructure transactions, and manage day-to-day operations. Through this blog, Stephen shares his extensive experience and unique personal and professional insights in the hope of stirring thought and dialogue that leads to ever deepening insights and understanding. For more information, please visit www.StephenDietrich.com.
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