Dealer Insights - January-February 2016 - Franchise Fever: Take These Steps Before Changing Your Brand Lineup

Published: Jan 28, 2016
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You might dream about adding an automobile brand to your dealership’s offerings or swapping a lackluster brand for a franchise with greater promise. After all, sales are strong, so this might be an optimal time to fire up the store’s sales base. But if this is a strategy you’re considering, take a step back: Look hard at your options, and what they entail, before forging ahead.

Do your homework

You could apply for a new franchise or take over an existing franchise from another dealership. Both options require diligent market research. When picking the best brand to add, never rely on instinct. Base your decision on historic and projected sales volume, recent demographic trends and objective third-party data.

Create the right mix

Some brands are like oil and water. Others complement each other. Ideally, you want the right mix of products to appeal to a broad market without cannibalizing existing sales or sending an inconsistent marketing message. Also, some manufacturers have similar rules and service agreements, making certain combinations more compatible than others.

If your current product mix isn’t working, consider swapping franchises with another dealership. But swapping franchises requires more than trading keys and moving vehicles. Other assets, such as signs, parts, accessories, prepaid advertising and manufacturer-specific service equipment, may need to be transferred.

You also may swap certain employees, such as sales, finance or service professionals trained to work specifically on one brand. Similar to adding a new franchise, swaps also require approval from manufacturers, lenders and licensing boards.

Factor in the factory

Most manufacturers are highly selective when it comes to granting new franchises or approving franchise sales or swaps. Manufacturers spend millions of dollars on promoting a distinct brand, and they’ll prevent franchisees from doing anything that might cheapen or compromise their image. They also won’t allow you to open a store that might cannibalize sales from other franchisors that offer their brand.

Review your franchise agreements carefully before adding another product line to the mix. Your existing agreement(s) may require you to designate dedicated sales and service professionals for each brand — or even operate stand-alone facilities. Manufacturers also may ask for leasehold improvements as a condition to approving a new franchise. These requirements might make your plan cost-prohibitive.

Lay the groundwork

Dealerships typically must be licensed by the state for each brand they sell — and immediately notify the state board in writing if they plan to add, swap or drop a franchise. You’ll also have to pay fees and complete an application packet that includes such documentation as financial statements, affidavits of extended service contracts and dealer agreements.

In addition, you’ll need to work with lenders to transition the franchise’s debt obligations. If you’re buying or swapping a franchise, the original owner may retain some of its debt, but floor plans transfer with their respective collateral. Also beware that banks may change loan terms, depending on market conditions and the financial health of the new borrower.

A smart move?

Taking on another franchise or switching one of your existing franchises for another may, or may not, be a smart move for your dealership. Your CPA can help you with an objective analysis of the proposition and expected outcomes.

Dealer Insights - January/February 2016