Death of an Automobile Dealership

Closing a store requires considerable effort and attention and the items listed below, in no particular order, are minimal considerations when terminating a franchise and closing a dealership operation.

Basic Preparation

1. Officers, Directors, and Shareholders

Be certain to hold both directors and shareholders meetings and to obtain resolutions from each entity, authorizing the dealer to liquidate the dealership, or a substantial portion of the dealership’s assets.

Determine whether or not the board and shareholders may authorize you a termination bonus and prepay your for your services in “winding down the business”. Consult with your accountant and attorney to determine what would be a reasonable amount of compensation in the event a company creditor challenges the transaction.

Determine if it is reasonable for officers to buy themselves and their spouse vehicles. Pay “Net” “Net”, as that would be the sales price if the vehicle were returned to the factory or sold to a purchaser of the business.

The officers should open a new bank account, at a different bank, and: (a) use a PO Box, or Private Mail Service as a mailing address; and (b) use a different check color in order to easily determine pre and post closing checks written.

Authorize payment to and pre-pay the company’s attorney and accountant with a retainer. Their services will be needed to properly close the business and the company might not be able to pay them later.

Authorize pre-payment of whatever services or supplies the company will need to be serviced during the wind-down period. For example, property and personal insurance, real property taxes (if the property is not owned by a third party), rent, utilities and such.

2. The Facility and Insurance

A one-sheet summary of the lease should be attached to the original, in order to facilitate matters. The summary should include such items as: the dates of the base term; the base rent; the current rent; the dates of any option periods, together with notations regarding rent increases; the facility ownership; the lessee and lessor; a notation as to whether or not the factory has point, or site protection; the rent as an equivalent to the dollar value per new unit sold; and, a notation as to WHETHER OR NOT THE LEASE IS ASSIGNABLE and under what conditions.

Other considerations regarding the facility lease include violations of the ADA, hazardous materials (underground gas tanks, or underground oil disposal tanks) being located on the property.

Owned Facilities

With respect to receiving “factory termination assistance”, some Sales and Service Agreements, General Motors for example, make a distinction between “owner occupied” and “leased” dealership facilities. Be sure to read your Sales and Service Agreement in order to understand and be able to capitalize on the distinctions.

Leased Facilities

If the selling dealer’s rent factor prior to the sale of the dealership is within factory guidelines the factory should make the dealer’s lease payments for the period specified in the Service and Sales Agreement. (See, however, the EPA section.)

Check with your insurance agent to determine the requirements for insuring an empty building.

Other Insurance

In addition to facility insurance the dealer will need a “tail” or rider on his or her garage keepers insurance. Most insurance today is “claims made” versus “occurrence”.

In actual practice, most cases that are settled are settled within the insurance policy limits and the insurance company will have paid for both the defense and the settlement.

With respect to Medical Insurance, arrange for COBRA all employees of the company. Again, officers and directors may be able to include medical insurance payments as part of their wind-down compensation.

3. UCC, Mechanic’s Lien and Title Searches

Most dealers are not cognizant of all existing liens on dealership’s assets.

In order to accurately estimate the selling dealer’s anticipated net proceeds, all of these liens will have to be discovered, preferably, prior to negotiations.

Possession of title reports and UCC-1 reports will give the dealer adequate time to address the issues and to have readily available answers, if and when a prospective purchaser raises the issue.

4. Taxes Due and Anticipated

The dealership’s comptroller or accountant, should prepare a sheet of all taxes currently owed by the dealership and all anticipated taxes. The list should identify the amount, to who owed and the reason. In certain states unpaid taxes have a “superlien” status and if unpaid the selling dealer’s assets can and will be attached to recover unpaid taxes due by the selling dealership. This attachment can occur months after the dealership has closed.

As a general rule, anyone authorized to sign on the checking account can be held personally liable for at least ½ of the payroll withholding tax, as well as 100% of all of the sales taxes due. In addition, in some instances dealers have been held personally liable for monies collected from customers that should have been treated as “trust” monies, such as: customer trade payoffs, customer credit and life insurance premiums, and customer warranty and service contract premiums.

5. Notes and Accounts Receivable From Others

The “Notes and Accounts Receivable – Other” account is usually a “catch-all” account on the dealership statement. For purposes of a dealership sale, this account should be purified (1) in order to apprise the dealer of any extra funds, which may be available for final sales and property taxes and (2) to make both the dealer and accountant aware of any “in-house” loans to officers, directors and employees, which may have to be repaid.

6. Prepaid Expenses

The prepaid expense account is another “catch-all” account that must be purified. When scheduling the prepaid expense account the comptroller should make a thorough search for all lease and contract deposits. In many instances, service equipment on lease, vehicles on lease, computers on lease, and other leases made to the dealership carry security deposits, or the last month’s payment, or both.

7. Dealership Employees

Along with the normal employer-employee relations, there are two very important legal areas that may affect automobile dealers: (a) pension fund liability; and (b) state and federal laws regarding closings.

In some states the selling dealer could be personally liable for funding employee pension funds; while in others the dealer must give employees advance notice of any closing. Also, the United States Congress passed legislation regarding “closings”. In the instances of “closings”, both state and federal laws put a minimum on the number of persons employed, usually 50 or 100, before the law applies to the dealer’s company. Check the Hart Scott Rodino Act (HSR) and the WARN Act.

With respect to wages, some jurisdictions have enacted statutes making certain shareholders personally liable for corporate debts owing to laborers and other employees. Welfare and pension funds also qualify as wages under New York’s statute.

The comptroller, or accountant should prepare a
list of these liabilities, to include any amounts due the employees, with respect to accrued vacations, withholding taxes, pension and profit sharing plans and wages, as of the date of close.

Insofar as the actual terminations are concerned, if the dealership is “union”, the dealer should talk to the union’s representative in order to be sure that all of the conditions of the union contract are met.

8. Long Term Debt

All long-term debt should be itemized and a method of repayment determined. Interest should be computed. When past due interest and past due payments are added to the loan balance, the loan pay-offs are generally higher than anticipated.

The comptroller should prepare a list of these debts, to include the amount owed including interest, to who owed, purpose of debt, maturity, terms and security given. In addition, after the list is completed, the comptroller should keep a running total, daily, through close of escrow.

9. Other Notes Payable

As with long-term debt, other notes payable should be listed by amount including interest to date of close, to whom owed, purpose of note, maturity, terms and security given; and arrangements should be made to retire the debt.

10. The Financial Statements

The retail automobile business is one of the few businesses requiring a complete closing of all books and records, promptly, at the end of each and every month. Factories and finance companies require reporting on factory originated, or approved forms.

In preparing the store for closing, a reconciliation statement may be used, explaining categories such as “other income & expense”, warranty, finance and insurance income not shown on the statement, along with extraordinary items.

You will need a final financial statement for tax purposes.

11. Storage of Records

Dealerships amass a great deal of paperwork, the safe, accessible, storage of which will present a necessary problem to the selling dealer. No dealership record will be as important as it is on the day it cannot be found. Former dealers have related stories of attempting to retrieve documents from mini-storage facilities, in both rain and snow.

The appropriate time period should be determined, only after the dealer’s accountant and attorney have considered and advised the dealer with respect to statute of limitations problems and other document retention regulations, peculiar to the political area in which dealership is located.

12. In-House Service Contracts

If the dealer has sold any “in-house service contracts”, the selling dealer will not want former customers calling at his or her home for repairs, or complaints; therefore, a system of service, along the following lines, should be negotiated with a dealer located in close proximity to the closing store.

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