The answer to the above question is — maybe? The following discusses the factors that a dealer should consider when contemplating his/her future as a non-franchised dealer.
Does your dealership have a successful used vehicle department? Let’s face it, the main factor in Chrysler’s and GM’s decisions to terminate dealers was low new vehicle sales volume. If you were terminated due to low new vehicle sales volume, you may have survived all these years because of your skill as a used vehicle dealer.
You will need to answer one important question. Where will you get your used vehicles after termination? Many new vehicle dealers purchase a significant amount of their used inventory from factory sponsored auctions, including those operated on-line. Will you be able to find the required inventory through other channels and what will be the cost? A substantial source of used inventory is vehicles traded on new sales. You will need to study the purchase and sale activity in the used vehicle department over the past few years to determine the impact.
Another key factor in your survival as an independent dealer is the impact of lost warranty sales to your parts and service operation. Determine the average monthly gross profit for service and parts warranty sales. This will have to be factored into your forecast.
Do you operate a successful body shop? As you know, many body shops have closed in recent years. It will be much easier to survive as an independent if you are generating gross profits from an existing body shop.
Once you contemplate these factors, you must develop a monthly forecast for your operations as an independent. The starting point is the amount of gross profit that you project in each department. You will then need to determine your monthly expenses. Keep in mind that the new vehicle department is expensive to run and the majority of dealers are losing money in the department. Personnel, advertising, floor plan interest, and computer/software costs are high in the new vehicle department.
I suspect that less than half of the former franchised dealers will be successful in operating profitable independent stores. Those that succeed will be dealers that have always been committed to their used operations and have a strong aptitude in that area.
Dealers that own their operating facilities may attempt to cover their facility costs as an independent with the hope that the commercial real estate market will improve in the future. This might be a viable option for a dealership that can at least break even from operations while covering the mortgage, taxes, and operating costs of the facility. When the economy and the commercial real estate market improve, the property can be sold.
Downey & Company, LLP specializes in management, finance and taxation of automobile dealerships. For more information, please call Paul McGovern at 781-849-3100 or send an email to pmcgovern@downeycocpa.com.
