Most dealers have, or will be, forced to perform some type of facility upgrade program. Rightly so, dealers object strongly to these demanding requirements. Most of the programs have little flexibility and some of the requirements are outright ridiculous.
This article will attempt to put a positive spin on these upgrade programs. Let’s examine a fact pattern that I recently reviewed with one of my clients. The dealer is a successful GM dealer with a facility that was built approximately twenty years ago and has been subject to only minimal improvements. The dealer is part of the GM Essential Brand Elements program. The estimated cost of the improvement project is one million dollars as designed by GM. The dealer acknowledges that certain aspects of his facility are outdated and without being coerced, he would have renovated in the near future, and he estimates that he would have spent approximately $500,000 to do that. Areas such as customer waiting areas, lavatories, and showroom design are outdated and do not meet the demands of today’s consumer.
The bottom line is GM will require the dealer to spend $500,000 more than he would have spent had he not opted into the “EBE” program. The additional costs will be offset by the incentives that the dealer receives from GM under the “EBE” program. This dealer estimates that he will receive in excess of $500,000 in incentives over the life of the program. A negative point to consider here is the fact that most tax professionals are of the opinion that almost all of these incentive payments are taxable upon receipt.
Let’s get to the financing of this project. The dealer has significant equity in the facility and could finance 100% of these improvements, if necessary. Assuming a one million dollar loan, for 15 years, at 4% interest, the monthly payment is approximately $7,000 per month. I would argue that this dealer will easily produce $7,000 dollars of additional monthly gross as a direct result of having a state of the art facility. I would also argue that he will lose business to other dealers that have modern facilities if he doesn’t upgrade.
What are the most disturbing parts of this program? The dealer is required to spend double or triple the price of comparable furniture, lighting, signage, etc. to comply with the demands of the program. There are other requirements of the “EBE” program that will cost the dealer money. Certain monthly costs of marketing, software, and internet programs must be purchased from GM or approved vendors. The dealer acknowledges that he needs to purchase most of these services and products, but he now has no flexibility with regard to the programs, costs, or vendors. Dealing with GM’s architects is aggravating, costly, and time consuming.
To sum this up, dealers are frustrated with the demands of these facility upgrade programs. The programs have little flexibility in terms of timing and cost. I am in no way supporting these onerous demands of the manufacturers, but try to reflect on the positive aspects of upgrading to a state of the art facility to overcome your frustrations. In most cases, the costs will pay for themselves as you sell more vehicles and service them in a modern, customer friendly environment.
If you have any dealership management questions, please contact Paul McGovern at 800-849-6022 or pmcgovern@downeycocpa.com.
