Dealer Insights - September October 2014 - It’s a Family Affair - How to Dodge the Pitfalls of Family-owned Dealerships

Published: Sep 18, 2014
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Family-owned businesses, including auto dealerships, have always been an integral part of the American dream. Ambitious young men and women — perhaps immigrants or first-generation entrepreneurs — build their own businesses and eventually pass them on to their children. Within a generation or two, some of these once fledgling operations have grown into multimillion-dollar businesses, sometimes with multiple locations.

The ways these dealerships have survived and thrived through the years are stories in themselves. But one thing is certain: Successful dealer-owners use the pluses of a family-owned business to their advantage while overcoming the hurdles that come with running one.

Leveraging the benefits

Family dealerships work with people they know, love and trust. This is often a blessing: The business provides job flexibility and security for loved ones while building a legacy for future generations.

The concept of “family” also creates goodwill inside and outside the store. Employees like to feel as if they’re part of a family — whether they’re actual relatives or not — rather than an impersonal company. Customers also like the personal touch a family business provides.

Traversing the dark side

But owning a family business also can have a dark side. Quarrels between parents and siblings (or other relatives), nepotism and complacency are just some of the perils family dealerships face.

A family-owned dealership prides itself on being flexible and informal. But it’s still a business. Like other dealerships, family-owned stores must have in place strong organizational processes to be successful. Written job descriptions, fraud training, internal controls and strategic planning are just a few of the conventional, but important, organizational practices that every dealership needs to promote and maintain.

Avoiding resentment

Working for a family business can be highly unsatisfying for unrelated staff if they’re treated like outsiders. When nonfamily employees are routinely overlooked for promotions or grossly underpaid, they may harbor resentment and possibly jump ship — driving up your hiring costs.

Ask yourself whether each worker is truly qualified for the job that he or she holds. Too often, relatives are given the titles — but not the genuine responsibilities — of their positions.

Paying fairly

Fairness and objectivity are challenging when paying relatives. Compare the compensation packages of family and nonfamily employees. When relatives dominate the roster, you may be unfamiliar with current hourly pay rates and commission structures. Don’t be afraid to ask other dealers what they’re paying unrelated workers for similar positions.

Beware, too, that the IRS may be watching how much you’re paying related parties, including perks and excessive dividends. It wants to ensure that compensation is commensurate with the individual’s contribution to the dealership — not merely a way to shelter income from corporate-level or payroll taxes. The IRS also watches loans and rental payments to and from related parties. Your accountant is a good source for reasonable compensation data.

Introducing succession cautiously

Many dealerships fall apart when the second or third generation assumes control — often because the owner unexpectedly dies and his or her successor hasn’t been properly groomed.

Effective succession planning means establishing a plan for gradually delegating and relinquishing control in function, not just form. When prospective successors are given the opportunity to fail, they’re more likely to demonstrate whether they’ve got what it takes to carry the torch. If things aren’t looking good, your succession plan can divert to an alternative strategy, such as selling to an unrelated employee or an outside party.

Reaching out

As mentioned, family-owned dealerships face special management perils. Getting an impartial, outside view is an excellent way to approach these challenges. A family- owned dealership, for example, can set up an advisory board to serve in a consulting capacity and offer an independent perspective. Consulting your financial advisor is another strategy for getting an objective opinion about issues that arise.

Dealer Insights - September/October 2014