History tells us that we can lose what we make, in an instant. Looking back just a few short years ago to 2009-2011, it is easy to remember the pain, as countless dealers lost franchises and many lost it all. Those who were disciplined money managers in the past came through the recession, not only unscathed, but were able to capture market share and acquire those who were less fortunate and actually experienced growth.
Here we are almost five years later and the industry has been riding the wave of record highs. It has been said that the average age of vehicles on the road is 11 years, so this year is projected to be another record-setting sales year for dealers. Let’s hope so and work hard to make it happen!
According to records from the National Bureau of Economic Research and the Federal Reserve it is projected that the average business cycle lasts just about five and a half years. In doing the math, the dealership industry started to turn upward in 2012. Therefore, 2016 puts us at about the five-year mark. Therefore, a downturn in the market is foreseeable. Proverbs 27:12 says “the prudent see danger and take refuge, but the simple keep going and pay the penalty.” So what are you doing to protect your profitability from the next unknown?
Learning from the past is the best tool we have to protect ourselves from the similar fate of the last recession. Planning the future of your business can help protect today’s profits, while also minimizing potential negative effects from any possible economic downturn.
“Too often when mentioning succession planning, owners think retirement, illness or death. Perhaps the term should be ‘Future Planning’ or ‘Building Business Value’ planning.”
A key area of focus to ensure you are protected is having proper business and succession planning. It is not about retirement or walking away from the business. Succession planning is about protecting what you’ve built, protecting continued growth, and ensuring a future for the business.
The future will require money and discipline. One dealer I’ve worked with for several years has had a practice for nearly 30 years of cutting a check for any profitability in excess of a specific dollar amount on a monthly basis. When the books are completed, if that money is not needed, he has historically invested it in a portfolio of stocks and bonds. Even with the volatility of the market, he and his family are now sitting on a private bank. Financially, they are pretty bullet proof.
Focus on Future Goals of Business and Family
Leveraging the current success of the industry, take stock of where you want your business to go in the next few years. Analyze your trajectory along with where you would like to see business profitability, yours and your family’s finances for the future. Ask yourself these questions:
- Is your wealth sufficient enough, separate from the business? We generally counsel our clients toward building 25% of their total net worth in liquid resources (or cash) apart from the business. To be clear, equity in your used cars is not cash. The only thing that’s cash is cash.
- Have you considered what your exit strategy might be? Are there sufficient funds to bring that exit strategy to fruition? If you don’t plan to exit, that’s another discussion entirely.
- What is the status of your business credit – is there continuity? What are you doing to position the next generation to carry on the debt and relieve yourself from personal guarantees?
- Have you developed and started actively working a strategic plan for your business? Are you hitting or exceeding performance metrics? How is your expense control related to profitability and business goals?
- Do you have a strong team of managers, strategic partners and employees in place? Recruiting the best possible talent is costly. Do you have a budget and allocated resources for building the team that will carry your business’ legacy through the next generation?
Understand that Succession Planning IS Building Your Future
Too often when mentioning succession planning, owners think retirement, illness or death. Perhaps the term should be “Future Planning” or “Building Business Value” planning. One of my favorite clients is fond of saying “it’s about preserving the brand and what we mean to our community.” What if something unexpected happens that changes your business perspective?
Looking at building now, what you would like to have in the future, ensures that your wishes are met along with driving more growth. When you look at where you would like your business to be, or where your family members should be involved, planning is critical. Maybe you’ve spent a lifetime building the business or maybe you view yourself as a steward of what your grandfather or father built. Allow me to encourage you to run your race strong! Don’t give up on it now. It’s not over yet and your business and family need you to stay focused and cast a vision for the future in spite of the powerful distractions of current business profitability. Here are some key areas that can help protect your profits today and build a vision for tomorrow:
- Analyze current status of Business Performance – examine key performance indicators of the business to ensure they are working towards peak performance.
- Develop a Strategic Plan that outlines your vision for the future – confirm your culture and generate detailed, short-term, intermediate-term, and long-term action agendas for the implementation of structures and processes critical to the fulfillment of succession goals. Actively review your plan to ensure you are on track.
- Focus on Leadership and Management Continuity – develop a recruiting, leadership and retention strategy to ensure growth of bench strength in your business.
- Identify Successor – create a process for evaluating, identifying, and developing a family member, partner, key manager, or a group of key managers to protect the franchise on behalf of your family in the event the unexpected occurs.
- Build Management Synergy and Teamwork – establish opportunities to build trust and teamwork among ownership, family and management.
- Evaluate Family Dynamics – examine and build healthy interaction among family members, as family issues can quickly become business issues.
- Establish Family Governance – develop organizational structures, operating policies and accountability processes within the family.
- Engage in Personal Financial Planning – get your estate planning ducks in a row and determine your own personal financial security needs apart from the business.
- Review of Business Structure – position the business to support and fulfill the various aspects of your vision for the future.
While the forecasts project another strong year in retail dealership sales, stay vigilant in protecting and driving your business towards your visions. It is natural to take a breath and relax when things are good, but make sure you are periodically checking in to make sure your enjoyment of the good times doesn’t turn into a lackadaisical approach to key areas of your business that drive productivity. Consider where you have been and the challenges that your business has faced. Have you done everything you can to protect the profitability of your business?
Author: Jeff Faulkner, M.S.
Jeff Faulkner, M.S., is a partner of The Rawls Group, which has helped business owners with their succession planning since 1972. Well-respected in his field, Jeff is a highly requested speaker and has published numerous articles on this subject.