Many retail dealers fail to prioritize succession planning. They may assume – incorrectly – that succession planning can be shelved until retirement is in view. Alternatively, they may simply put it off, anticipating that it will be complicated and time-consuming.
In reality, dealers should be planning for their succession as early as possible. A thoughtful succession plan can ease anxieties and protect owners and their families from the risk of disruption to the business, damage to the owner’s legacy, or loss of wealth for heirs.
Moreover, from a strategic standpoint, the choices owners make years before the transition – about issues like tax planning and successor training – can have a major impact on how smoothly the transition proceeds.
Choosing a Successor
An obvious first step is to identify one or more successors. In the case of family dealerships, the challenge of choosing the right successor can be compounded by the owner’s relationship to the candidates in the next generation. Dealers who have multiple beloved children – and perhaps step-children, nieces and nephews, and more – may struggle to make an honest and objective assessment of who is truly qualified to run the dealership.
To be successful, dealers need a wide range of skills. They must be good managers and evaluators of talent. They need to understand public relations, advertising, and retailing. They have to be able to run a business, especially one with a number of businesses within a business. And, they have to be able to understand and manage the factory relationship.
In addition to thinking about which candidates may succeed them, dealers must consider how ownership will be structured. If there are multiple dealerships and multiple children as part of a group of successors, will dealerships be allocated individually to individual successors? Or will each successor be allotted a proportional ownership of all dealerships?
Owners who plan for succession early can lay the groundwork for a smoother eventual transition by training the next generation from a young age. One developmental step could be arranging for any successors, early in their careers, to work in an unrelated dealership in order to gain exposure to different ways of doing things. Owners also should consider training the next generation across all departments, including new vehicle sales, used vehicle sales, finance and insurance, parts, and service. For larger dealer groups, successors should be exposed to bigger-picture strategic decisions, such as how multiple branches’ operations are intertwined and how processes and functions are standardized across the chain.
Preparing for a Successful Transition, Step by Step
With a successor identified, the next steps include:
- Writing an emergency transition letter and 90-day plan
- Seeking approval of the successor from the franchisor
- Creating a family charter
- Developing a buy-sell agreement
- Considering changes to the business structure for tax planning purposes
The first order of business is to draft an emergency transition letter. This document clearly details the individual or individuals who will be appointed to make certain business decisions in the short term, in the event the owner is unexpectedly incapacitated. This letter should lay out the relevant contacts for the business such as banking, legal, accounting, and factory relationships. This is helpful for family members who are not involved in the business and who may need to know who to turn to for help if the owner is unable to assist.
Another top priority is to formally name a successor in the dealer’s franchise agreements. Franchisors have approval rights over the selection of a successor, so dealers need to go through the required steps in order to avoid disruptions or unwanted intervention from the franchisor at the time of the transition. This can be especially important if the transition is unexpected.
When family relationships are intertwined with business, poor communication or a lack of clear expectations can threaten both the relationships and the business. These pitfalls can be managed to some degree through the formation of a family charter. Like a shareholder agreement, a family charter clearly articulates expectations on all sides about roles and responsibilities and can help to minimize family drama.
For businesses run by multiple owners, a buy-sell agreement can be valuable. This agreement articulates how any future transactions will be handled and priced in the face of a number of events such as death, disability, or divorce. Buy-sell agreements are important to keep ownership of the business among stakeholders best suited for the role.
Finally, dealers should consider, as early as possible, how the business structure will affect the transition of the business to the successor. Whether selling to a third party or giving the business to the next generation, a number of tax considerations come into play. For example, if the owner plans to turn the business over to the next generation, there could be a significant tax expense associated with gifting a large company all at once. If, with foresight, the owner instead gifts small shares of ownership to the successor over several years, he or she may be able to avoid much of this tax burden. Proper planning can minimize the gift and estate taxes.
Alternatively, if the business will be sold, rather than gifted, a separate set of issues emerges. For example, how is the entity organized? Is the business organized as a C corporation, a partnership, or an S corporation? If the entity is a C corporation, should it elect to be an S corporation? Over what time period will the sale take place? Will the business all be sold at once, or will the sale take place over a period of years? How will the entity be valued? Will the shares being sold be voting or nonvoting shares? These types of questions illustrate the importance of planning ahead in order to take steps to minimize potential tax expense associated with a transaction.
With the Benefit of Time, Succession Planning Proceeds Smoothly
Most retail dealers know they need to plan for what will happen to their business when they are gone. But the effort required to develop a succession plan – choosing a successor, equipping that successor with the tools to manage the business according to the owner’s vision, and letting go of an enterprise that has defined the owner’s life and purpose for decades – can seem insurmountable. For family-owned dealerships, relationships can intensify an already daunting process.
However, the risks of neglecting to plan for succession are considerable and include the potential loss of the business and the owner’s legacy, or the loss of wealth for heirs due to poor tax planning. Creating a succession plan should be prioritized, but it need not be overwhelming. With the benefit of time, it can be a seamless process that relieves anxiety for both the owner and the heirs to the business.