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 director’s and shareholders’ meetings and 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 charge you a termination bonus and prepay for your services in “winding down the business.” Consult with your accountant and attorney to determine a reasonable amount of compensation if a company creditor challenges the transaction.


Determine if it is reasonable for officers to buy themselves and their spouse’s vehicles. Pay “Net” “Net,” as that would be the sales price if the car were returned to the factory or sold to a business purchaser. The officers should open a new bank account at a different bank, (a) use a PO Box or Private Mail Service as a mailing address, and (b) use a different check color to determine pre- and post-closing checks written.

Authorize payment to and prepay the company’s attorney and accountant with a retainer. Their services will be needed to close the business properly, and the company might not pay them later. Authorize pre-payment of whatever services or supplies the company will need to be serviced during the wind-down period, such as property and personal insurance, real property taxes (if a third party does not own the property), rent, utilities, and such.


2. The Facility and Insurance

A one-sheet lease summary should be attached to the original to facilitate matters. The summary should include such items as the dates of the base term, the base rent, the current rent, and 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 a 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 and hazardous materials (underground gas tanks or underground oil disposal tanks) on the property.

Owned Facilities

Concerning receiving “factory termination assistance,” some Sales and Service Agreements, General Motors, for example, make a distinction between “owner-occupied” and “leased” dealership facilities. Read your Sales and Service Agreement to understand and capitalize on the merits.

Leased Facilities

Suppose the selling dealer’s rent factor before the sale of the dealership is within factory guidelines. In that case, 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 ensuring an empty building.

Other Insurance

In addition to facility insurance, the dealer will need a “tail” or rider on their garage keepers insurance. Most insurance today is “claims made” versus “occurrence”. In actual practice, most settled cases are settled within the insurance policy’s limits, and the insurance company will have paid for both the defense and the settlement. Concerning Medical Insurance, arrange for COBRA for all employees of the company. Again, officers and directors may include medical insurance payments as part of their wind-down compensation.

3. UCC, Mechanic’s Lien, and Title Searches

Most dealers are unaware of all existing liens on the dealership’s assets. To accurately estimate the selling dealer’s anticipated net proceeds, all of these liens will have to be discovered, preferably before 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 the dealership’s current and anticipated taxes. The list should identify the amount, who is owed, and why. In certain states, unpaid taxes have a “super lien” 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 and 100% of all 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) to appraise the dealer of any extra funds that 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. In many instances, service equipment on lease, vehicles on lease, computers on the lease, and other leases made to the dealership carry security deposits, the last month’s payment, or both. When scheduling the prepaid expense account, the comptroller should thoroughly search for all lease and contract deposits.

7. Dealership Employees

Along with the normal employer-employee relations, two critical legal areas 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 “closings,” state and federal laws put a minimum on the number of persons employed, usually 50 or 100, before the rule applies to the dealer’s company. Check the Hart Scott Rodino Act (HSR) and the WARN Act.

Some jurisdictions have enacted statutes concerning wages, 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, including any amounts due to the employees, concerning accrued vacations, withholding taxes, pension, profit-sharing plans, and wages, as of the close date.

Insofar as the actual terminations are concerned, if the dealership is “union,” the dealer should talk to the union’s representative to be sure that all of the union contract conditions 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 payoffs are generally higher than anticipated.

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

9. Other Notes Payable

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

10. The Financial Statements

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

A reconciliation statement may be used to prepare the store for closing, explaining categories such as “other income & expense,” warranty, finance, insurance income not shown on the statement, and extraordinary items.

You will need a final financial statement for tax purposes.

11. Storage of Records

Dealerships amass a lot of paperwork; the safe, accessible storage 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 period should be determined only after the dealer’s accountant and the attorney have considered and advised the dealer concerning the statute of limitations problems and other document retention regulations peculiar to the political area in which the 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 their home for repairs or complaints; therefore, a service system along the following lines should be negotiated with a dealer near the closing store.


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