BHPH 0217 by Christy Haynes

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TAKING CHARGE OF YOUR

SALES EFFORT Shift for Success

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M N E MA AG NE E GA AZ Z II N N E

CONTENTS FEBRUARY FEBRUARY 2017 2017

F E AT U R E S C O L U M N S

BHPH Dealer •

THE

OFFICIAL

NIADA

PREMIER

8 Cover Story

Before Before you you start start throwing throwing money money into into more more advertising, advertising, NIADA NIADA Dealer Dealer 20 20 Groups Groups moderator/consultant moderator/consultant David David Brotherton Brotherton advises, advises, make make your your sales sales efforts efforts consistent consistent and and dependable dependable with with aa structured structured process. process.

SUBPRIME

AUTO

RESOURCE

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4 Editor’s Message

As As advertising advertising methods methods evolve, evolve, BHPH BHPH DEALER DEALER editor editor in in chief chief Chuck Chuck Bonanno Bonanno reminds reminds dealers dealers to to focus focus on on what vision,your yourmission, mission, what matters matters most most of of all: all: your you vision, your your message. message. MAGAZINE

6 BHPH Advocate

Shaun Shaun Petersen, Petersen, NIADA’s NIADA’s senior senior vice vice president president of of legal legal and and government government affairs, affairs, reviews reviews the the Freeman Freeman v. v. J.L.H J.L.H Investments, Investments, LP LP case case and and lessons lessons dealers dealers can can learn learn regarding the doc fee. regarding the doc fee.

TAKING CHARGE OF YOUR

SALES EFFORT Shift for Success

10 Best Practices

Do D o you you learn learn more more from from your your successes successes or or mistakes? mistakes? NCM NCM Institute Institute executive executive conference conference moderator moderator Brent Brent Carmichael Carmichael presents presents five five top top industry industry mistakes mistakes and and what what to to learn learn from from them. them.

14 Management

NABD N ABD President President Kenneth Kenneth Shilson Shilson discusses discusses the the importance of evaluating your BHPH importance of evaluating your BHPH portfolio portfolio to to maximize maximize its its return, return, and and how how to to do do so. so.

ADVERTISERS

16 Legislative

AUTOZONE...................................................................................11 11 AUTOZONE................................................................................... RISK......................................................................... 17 BERKSHIRE RISK. BERKSHIRE ....................................................................... 17 CLIFTONLARSONALLEN ............................................................... ..............................................................17 17 CLIFTONLARSONALLEN IFC DEALERSOCKET ........................................................................ IFC DEALERSOCKET......................................................................... INTERACTIVE FINANCIAL MARKETING MARKETING ................................... ..................................12, 12, 14 14 INTERACTIVE PASSTIME.......................................................................................9 PASSTIME. .....................................................................................9 PERITUS ...................................................................................... .....................................................................................10 10 PERITUS QUOTEPRO ....................................................................................7 QUOTEPRO.....................................................................................7 SPIREON .......................................................................................19 SPIREON ....................................................................................19 STARS GPS GPS ..................................................................................15 .................................................................................15 STARS 5 TSYS.............................................................................................. TSYS. ............................................................................................ 5

Regulation. R egulation. The The CFPB. CFPB. Arbitration Arbitration agreements. agreements. BHPH BHPH Commission Commission member member Lee Lee Cavender Cavender gives gives some some perspective on the CFPB’s potential to prohibit perspective on the CFPB’s potential to prohibit the the use use of of arbitration arbitration agreements agreements with with class class action action waivers. waivers.

17 Industry Perspective

David Algood of AMAC says the current subprime lending climate offers an opportunity for properly capitalized BHPH operators. Are you in the zone? LearnToLead president Dave Anderson coaches on getting and staying in the zone to optimize performance and results. Are you in the zone? LearnToLead president Dave Anderson coaches on getting and staying in the zone to optimize performance and results.

18 Best Practices

ONLINE ONLINE

18 Best Practices

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www.niada.com/bhph_dealer_magazine.php www.niada.com/bhph_dealer_magazine.php

Click Click on on ads ads that that link link directly directly to to advertisers’ advertisers’ websites. websites. For For advertising advertising information, information, please please contact contact Troy Troy Graff Graff at at troy@niada.com. troy@niada.com.

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EDITOR’S MESSAGE

AS ADVERTISING EVOLVES, FOCUS ON THE MESSAGE Your Vision, Your Mission, Your Message Still Matter Most of All

I hope you are enjoying a great tax season. Traditionally, this is the easiest time to sell cars, since your customers have down payment money. I know the season has grown shorter and shorter. I know many of you are advertising tax business earlier and earlier each year, and I know some of you no longer enjoy a big tax business during February and March. It’s different for dealers in different markets and it’s different for dealers who advertise little or no money down during the year. Any way you look at it, though, this is the easiest time to attract customers and get them financed. So I want to talk about the rest of the year. Let’s start with a short history of advertising BHPH and used car sales in general. In the beginning, there was print. You could advertise in daily or weekly newspapers or used car magazines. They were expensive, as they charge based on readership. The problem for BHPH dealers is we only market to a small percentage of the local population – those who have poor credit, low income, small down payments and live in the market area. Print also was not timely, meaning you could advertise a vehicle in next week’s edition that was sold long before the publication hit the shelves. The use of electronic media essentially replaced print for larger dealers and for smaller dealers in small markets. Television and radio advertising reached a large segment of the local population. Consumers were engaged in radio listening at work and in the car and were glued to TV sets at home. The small number of choices in radio and TV ensured your message would be heard. Unfortunately, the same issues occurred as print. Pricing was based on viewership and listenership and you were paying for lot of eyes and ears who were never BHPH prospects. You also had to compete with most mainstream advertisers, which drove up prices, so those media are not very affordable today – with the exception

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of large dealer groups or small markets. Electronic advertising methods require repetition and saturation. That costs a significant amount of advertising dollars. Electronic advertising has also become increasingly challenging since the advent of DVRs, satellite radio, on-demand programming and products such as Netflix. There are just too many places to try to market, and many are now close to or completely ad-free. In 2017, we are becoming digital marketers. The use of digital marketing has been growing for several years, but we are at a tipping point. Dealers are spending the majority, if not all, of their advertising budget in the digital space. The exciting aspect of digital marketing is the ability to reach a large audience extremely inexpensively and to do so immediately. You can now measure the effectiveness of your advertising dollars, change messages and create a “relationship” with customers and prospects. Social media allows you to interact on a regular basis. Online reviews are powerful tools to separate you from the competition. Dealership websites have become an integral part of our process. When they were first developed, they were not much more than digital billboards – a place to find contact information. We expanded the sites to become more interactive and to begin the sales process. We included our inventory and talked about our finance programs and gave our prospects ways to contact us. Today, websites are your “digital showroom,” and should be not just a portal to your business but a part of your business, including vehicle selection, credit application and approval, and even vehicle delivery. You must view your website as an extension of your physical dealership. You must provide transparency in pricing, process and product. You must communicate quickly and effectively in the digital space. You must remember consumers can shop hundreds of dealerships and thousands of cars from mobile devices

BY CHUCK BONANNO

and do so in a matter of minutes. Digital advertising is your future, and you must adapt. The evolution from print to electronic to digital is welcomed and can reap great rewards at a fraction of the cost of advertising in years past. But that evolution encompasses only the method of delivery of your message. Your vision, your mission, your message still matter most of all. So many dealers create slick ads, beautiful websites, clever tag lines and jingles but miss the mark with customers. What do your customers want to know about the dealership? What do they want to know about you? How does the process work? Will they get financing? Those are questions you must answer, as well as giving them assurance you are a dealer with values, integrity, transparency and ethics. You must create a “value proposition” and allow them to choose their vehicle, their payment and their term. You must be able to do this in their timeframe, and you must be flexible. Please keep in mind a couple of items that hold true regardless of the advertising delivery method. If you don’t design a call to action and create a sense of urgency, do not sit by the front gate waiting for the throngs. Car shopping is not the same as shopping for a lunch spot. You must give customers a reason to come in or go online, and you must give them a timeframe in which to act. All other advertising is branding. Branding is great, but it is expensive and it is a long-term investment. The best future customers are your current customers. They can be the best salespeople you have. Your ability to create repeat and referral business will ensure your future success. The best dealers live by the adage, “We don’t want to sell you one car, we want to sell you your next ten cars.” I like the sound of that. CHUCK BONANNO IS EDITOR IN CHIEF OF BHPH DEALER.

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BHPH ADVOCATE

TIME TO RETHINK YOUR DOC FEE

Lessons from the Freeman Case

BY SHAUN PETERSEN

Is there a catchphrase more recognizable than “What’s in your wallet?” Whether it is Charles Barkley, Alec Baldwin, Samuel L. Jackson or Jennifer Garner delivering the tagline, the minute you hear it you know it’s a Capital One promo. It is not uncommon to hear consumer attorneys and even some regulators argue that doc fees are charged for no other reason than for dealers to “line their wallets.” That contention was the crux of a recent decision from the South Carolina Supreme Court in Freeman v. J.L.H. Investments, LP. South Carolina law permits a dealer to charge closing fees on each motor vehicle sales contract so long as the dealer pays an annual registration fee to the state. The dealer must then include the closing fee amount in the advertised price of the vehicle, disclose the cost on the sales contract and display the amount in a conspicuous place in the dealership. A South Carolina Honda dealer charged its customers a $299 closing fee, which was properly disclosed on its sales contract and in a conspicuous statement in the dealership. Moreover, the dealer filed the necessary paperwork with the state to charge the fee. When advertising the purchase of a vehicle, the $299 was included in the price of the vehicle. After purchasing a vehicle from that dealer (and after consulting with an attorney friend), a consumer filed a class-action lawsuit against the dealership, alleging the dealer had violated the South Carolina Dealers Act by charging closing fees that were not calculated to reimburse the

dealership for the dealer’s actual expenses incurred in closing the transaction. The case proceeded to trial, where a jury found in favor of the consumer and returned a verdict of nearly $1.5 million in actual damages, which equates to the total of closing fees charged by the dealership during the four years prior to the lawsuit. Both parties filed post-trial motions with the trial court. The judge denied the dealer’s attempt to overturn or reduce the jury’s verdict. The judge also granted the consumer’s motion to double the actual damages award – permissible under South Carolina law – and to award attorneys’ fees and costs. In arguments to the South Carolina Supreme Court, the dealership argued it had fully complied with the aforementioned requirements of the statute pertaining to closing fees. The dealership contended its compliance with those provisions absolved it of any liability to the consumer. The Supreme Court disagreed and ruled that compliance with the statute enabled the dealership to charge a closing fee but did not allow it to charge any amount it wanted for that fee. The court said if a dealership is going to charge a closing fee, it is required to account for the costs that comprise the fee, and those costs must be directly related to the expenses incurred in closing the motor vehicle sale. Perhaps recognizing that such a standard might make calculating the closing fee a compliance challenge, if not an all-out compliance nightmare, the Supreme Court said dealers may set a fee that represents the average of costs actually incurred by the

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THE DECISION IN THE

FREEMAN CASE RAISES THREE IMPORTANT POINTS dealer in all closings from the prior year. The decision in the Freeman case raises three important points dealers in South Carolina certainly need to be aware of – and are good ideas for dealers across the nation to consider. First, determine what items should be included in the closing fee (or doc fee) and the cost of each of those items up front – before you set the amount of the fee. Second, the closing fee (or doc fee) should be limited to costs directly related to the services rendered and expenses incurred in closing a transaction. Expenses related to salaries, building costs, utilities, vendors or other general operating expenses should not be included as part of the fee calculation. Third, there is now precedent that a closing fee calculated from an average of the costs the dealer actually incurred in all closings from the prior year is a “safe harbor” of sorts. Legislation passed in South Carolina supersedes the court’s decision. However, I believe this case will be fodder for plaintiff’s attorneys across the country to pursue similar class-action cases against dealers if they haphazardly charge a closing/ doc fee without sufficient rationale to justify the actual expenses behind it. I encourage dealers to undertake that analysis as soon as possible, or the answer to the question of “What’s in your wallet?” could end up being cobwebs. SHAUN PETERSEN IS NIADA’S SENIOR VICE PRESIDENT OF LEGAL AND GOVERNMENT AFFAIRS.

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COVER STORY

TAKING CHARGE OF YOUR SALES EFFORT Shift for Success

BY DAVID BROTHERTON

There are many aggressive salespeople in the industry today. That is, I see a lot of salespeople who aggressively sit and wait for the next customer to walk in or for the phone to ring. We all understand the impact competitive pressures have had on our businesses by pulling away better qualified qualified customers and forcing us to make do with less. Many of us have struggled with higher delinquencies and charge-offs. charge-offs. With losses increasing, many dealers have realized they must implement some basic underwriting principles to make their business models work. In so doing, they can’t just sell every customer who comes in. All things being equal, increasing underwriting standards will result in fewer sales. The key is that all things can’t remain equal – application counts must increase to maintain sales when you tighten underwriting. Before you start throwing money at advertising, you need to take a hard look at the efficiency efficiency of your sales process, and how it is managed. Taking a “ready, fire, fire, aim” approach by spending a small fortune on social and/or traditional broadcast media to try and drive traffic traffic is a big waste when your salespeople probably aren’t properly working the leads they get now. Salespeople are notoriously bad at follow up and much money is wasted letting leads go cold and die due to neglect. Ultimately, we must consider some uncomfortable truths about our sales efforts: efforts: →• 4 444 percent of salespeople give up after one follow up attempt. →• T The he average sales person only makes two attempts to reach a prospect. →• 8 80 0 percent of sales require five five follow up attempts. Looking at those metrics clearly shows most salespeople consistently give up on leads too soon. There are four reasons for that. There is no system in place for follow up: Most salespeople today are technologically adept. They are clearly comfortable spending significant significant portions of their day using smartphones and the Internet. They can handle a CRM system if it is implemented properly and made part of the process and culture. They have new leads to distract them from working the older ones properly: Human nature is to take the path of least

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resistance. New leads are fresh. New leads haven’t told you “no” yet. They are perceived to be easier and far more likely to close. But concentrating solely on the newest leads means the ones that don’t immediately develop tend to fall by the wayside. Follow up takes a skill set they lack: Our business requires a skill set that must be learned. If follow up has never been a priority for your organization, odds are your salespeople don’t know how to do it well. That requires consistent training and reinforcement that is part of your culture. Management can’t just say, “Do this.” They need to tell, show and do it themselves. Management has failed to make it a requirement: A “hands-off” “hands-off” approach to sales efforts efforts is all too common in the industry. Good salespeople who are a fit fit for your culture and understand and use the tools provided in a consistent manner must be made rather than hired. Building the right team necessitates strong, consistent communication between management and the sales team, and it requires daily maintenance to run efficiently. efficiently. If you’ve never required that level of commitment before, it’s going to take strong leadership to change course and develop it now. Many dealers dealers just just don’t don’t see see the importance of having a refined, refined, defined defined sales process. Even though it would never be tolerated from service or collections, I have seen many operations in which the sales team drifts, with little leadership or accountability other than how many cars they sold. That blind spot allows the sales team to wait for business to come to them and contributes to no real process at all. The real question is how to take charge of your sales effort effort and make the cultural shift to a sales process. ACTIVITY-BASED SALES MANAGEMENT There are a lot of articles and blog posts that talk about different different ways to manage sales teams. The big big debate debate in the blogosphere seems to be between activity-based management and results-based management, and the debate is fierce. fierce. It’s easy to see the bias in the process-minded people who advocate activity-based systems and the current or former sales people who advocate a results-based approach.

Results-based aficionados aficionados tend to talk about the need for “creative freedom” and “lack of micromanagement,” and generally don’t approve of a rigid activitybased structure for salespeople because it stifles stifles creativity and confuses activity with productivity. They contend there are many paths to success and top performers shouldn’t be pigeonholed into only one acceptable path to success. It’s the school of: “As long as I sell enough cars, why do you care how I got there?” That school does not like using CRM or activity-tracking systems. It contends sales managers should be spending their time closing deals and helping close deals rather than measuring call counts and conversion ratios. Activity-based system proponents believe the process is everything. There is one way to get the job done because the job is to follow the sales process, not just sell cars. Management decisions are based on data, not on gut, and require good data at every stage. The belief is that the system sells cars, not the salesperson, because sales is primarily a numbers game and the operation performs better when everyone everyone is doing things the same way. Sales managers should be reviewing activity, training and helping close deals while closely monitoring the procedural steps to the sale outlined in the dealer’s sales process. The quality of the data collected is critical, and it is very important management knows the difference difference between activity and productivity. Calling it “activity-based” does it a disservice because the activities are defined defined and measured to drive productivity, not just the activities themselves. Ideally, we’d all like to have toptier sales professionals who require no managing and can be relied on to consistently deliver superior performance. Those are called “unicorns.” While some might believe unicorns exist, not many of us have actually seen one. You cannot build a consistent process around unicorns. You need to deal with what’s available – not with your dream employee. Consequently, an activity-based system that is closely monitored and directed by management tends to have the most consistent results for the average low-

COVER STORY

and mid-tier salespeople that populate our sales floors. I’ll freely acknowledge the top-tier salespeople have probably earned more freedom of action than this system allows. I’m all for more freedom, within the established framework, for proven, consistent performers. However, it is not OK for them to create their own sales process just because they’ve done well. Most of us have mostly average salespeople, which means a lot of business is getting missed. There is more fruit on the tree than just what is hanging at the bottom, but your average salesperson only reaches for the low-hanging fruit… and then blames you when there isn’t enough of it. No one is perfect. Every team has missed opportunities. A structured process will minimize them. IMPLEMENT A CRM SOLUTION Holding salespeople accountable for their efforts is the first step toward improving their results. That starts with properly implementing a CRM into your organization. Here are two truths about CRM: → T here is no easier way to document activity and predict future sales performance than properly implementing a CRM solution. → T here is no purchase that is potentially

a bigger waste of money than an improperly implemented CRM solution. A CRM represents the ultimate expression of “garbage-in, garbage-out.” If you aren’t going to go all the way in and stick with it, save your money. Doing it properly requires an ongoing commitment to an accountability-focused culture. It will not be an easy transition for some. Proper CRM implementation requires: → E veryone is trained to use it and acknowledges receiving the training. → E veryone is expected to use it 100 percent of the time with no exceptions or excuses. → T he CRM becomes the law: if something isn’t in there, it doesn’t count. →M anagement gets on board by consistently providing accountability. →A ctivity goals are implemented for every step in the sales process, from calls made all the way to deals delivered. →M etrics are tracked constantly and consistently measured against those goals. →G oals are adjusted as skills and performance improve. → Y ou make a big deal out of the software, its features and your new policies. Because it is a big deal. EMPOWER MANAGEMENT The final and ongoing piece to a more

effective sales process is empowering management to lead. That sounds easy, but it is probably the most challenging part of the transition for most. If your sales management is not used to leading, training and coaching, and is unable to embrace technology, you have the wrong management in place. Ultimately, this is about taking charge of your sales process, and you must have leadership capable of handling it. Something that began with “salespeople don’t follow up” presents a larger, more complicated issue – and an opportunity. Dealers who rise to the challenge to refine and enhance their processes and find ways to do more with less more successfully will define the industry standard. By introducing accountability and implementing a quality CRM solution, you can take charge of your sales effort. Make your sales efforts consistent and dependable before you start throwing more money at advertising. Refine your efforts and bring your team to a higher level of performance. Expect more. DAVID BROTHERTON IS A MODERATOR/CONSULTANT FOR NIADA DEALER 20 GROUPS. HE CAN BE REACHED AT DAVID@NIADA.COM OR (941) 371-7999.

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BEST PRACTICES

5 BIGGEST MISTAKES IN BHPH Learn from Mistakes

BY BRENT CARMICHAEL

I have the honor and privilege of traveling this great country of ours and working with all types of BHPH dealers on a consulting, training, and 20 Group basis. I am a firm believer that we learn more from our mistakes than our successes. When I started to put this article together, I made a list of the most prominent mistakes I see BHPH dealers make. The problem was the list was about 1,001 mistakes long, most, if not all, of which I had made myself as a dealer. After looking over the list several times, I realized that these mistakes could all fit into one of five main categories. Mistake #1: Lack of a plan. The days of running a BHPH business by the seat of your pants or intuitively are rapidly coming to an end. Today’s BHPH environment is too competitive. There are more players in the game and more on the way. To ensure future success you have to plan for it. Cash flow, sales and

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collections plans are the minimal requirements. Always remember a goal without a plan is a wish. Mistake #2: Lack of the right people. In the long run, half an employee will cost you more than two employees. What I mean by this is in today’s competitive and regulatory environment, you can no longer afford to have an employee who is only performing up to half of

your standards just so you won’t be shorthanded. Practice the old adage of hiring slow and firing fast. Take your time and hire the right person for what you need. And fire those who aren’t cutting it. Mistake #3: Lack of processes. If you think your employees know what to do and how to do it because you told them, you are sadly mistaken. CONTINUED ON PAGE 12

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NATIONAL AND STATE DEALER ASSOCIATIONS, 20 GROUPS, DMS PROVIDERS, TRADE MAGAZINES AND PERIODICALS KEEP YOU UP TO DATE ON THE LATEST AND GREATEST IN THE INDUSTRY. IGNORANCE IS NO LONGER AN EXCUSE.

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What you think is being done and what is actually happening are very often two completely different things. Document as many of your processes and procedures as possible. They don’t have to cover every contingency, but they need to cover the basics. With compliance more important than ever, documented processes and procedures could be your “get out of jail free” card. Mistake #4: Lack of education. There has never been a better time to be in BHPH. I say this due to the resources available to dealers, both new and experienced, to educate them. When I got into the business, there were little to no resources to educate us on compliance or simply on how we were doing compared to other dealers. DMS had basic functionality at best and reporting capabilities were almost nonexistent. National and state dealer associations, 20 Groups, DMS providers, trade magazines and periodicals keep you up to date on the latest and greatest in the industry. Ignorance is no longer an excuse. Mistake #5: Lack of technology. Technology is the key to current and

future success. I think the Internet is the root of all evil, but if you’re not using it to collect, advertise or purchase vehicles you will get left behind. Our customers, I can assure you, are very proficient with it. And for the lazy of us, what better way to educate ourselves on the industry? DMS and payment devices have also come a long way in recent years. It’s time to join the 21st century. Every dealer I have ever come in contact with has, or still is, making one if not more of these mistakes. The great thing about this industry is there are a bunch of ways to do it right. By the same token, there are quite a few ways to do it wrong. I’ve listed five that can and will cost you. It’s just a question of how much. Remember these simple tips and it won’t cost you as much: → A goal without a plan is a wish. → Hire slow and fire fast. → Document. → Ignorance is not an excuse. → Join the 21st century. BRENT CARMICHAEL IS AN EXECUTIVE CONFERENCE MODERATOR FOR NCM INSTITUTE. PRIOR TO JOINING NCM, BRENT WORKED OVER 17 YEARS IN SUBPRIME FINANCE AND COLLECTIONS, THE LAST 11 OF WHICH WERE IN BUY HERE-PAY HERE.

HIT YOUR YOUR HIT MARK MARK APPLYTODAY TODAY APPLY

Completethe theNIADA NIADADealer Dealer Group Complete 2020 Group membershipapplication application invitation membership forfor an an invitation to attend attendasasa amember member candidate. to candidate. CommittedBoard Board Directors for Your Dealership →→ AA Committed of of Directors for Your Dealership →→ Dealers Profit Increase in Their First First DealersAverage Average25% 25% Profit Increase in Their 33Years Member YearsasasTwenty TwentyGroup Group Member →→ Groups Large Dealers GroupsforforSmall Smalland and Large Dealers →→ Tailored Monthly Composite Tailored Monthly Composite →→ Proprietary Forum ProprietaryOnline OnlineGroup Group Forum → Business Model Best Ideas Session → Business Model Best Ideas Session → Consulting, Training & Expert Advice → Consulting, Training & Expert Advice → Currently Forming Three New Groups → Currently Forming Three New Groups

WE HAVE GROUPS TO SATISFY ALL WE HAVE GROUPS DEALER INTERESTS. TO SATISFY ALL

YOUR PLACE DEALER FIND INTERESTS. Retail BHPH

FIND YOUR PLACE Controller LHPH

Retail BHPH Auto Finance Service

Controller LHPH Auto Service For more details,Finance contact Diann Flanders at 888-906-2705 or diann@niada.com www.twentygroups.com

For more details, contact Diann Flanders at 888-906-2705 or diann@niada.com www.twentygroups.com

The National Independent Automobile The National Independent Automobile Dealers Association’s recent acquisition of Leedom & Associatesrecent Dealer acquisition Twenty Dealers Association’s Groups will provide NIADA members 17 of Leedom & Associates Dealer Twenty different group optionsNIADA to joinmembers to help your Groups will provide 17 dealership improve profitability and identify different group options to join to help your opportunities for growth. Whether you dealership improve profitability and identify are an independent retail dealer, a BHPH opportunities for growth. Whether you dealer, a store manager, or if you operate are an independent retail dealer, a BHPH a franchise new car store, NIADA’s Dealer dealer, a store manager, or if you 20 Groups program has a group to fitoperate your a franchise new car store, NIADA’s Dealer needs and expectations. Whether you are 20 Groups has a togroup to fitlevel, your trying to takeprogram your business the next needs and expectations. Whetherfor you are train your staff or arrange financing your trying to take yourhelp! business to theDealer next level, dealership, we can The NIADA 20 Group dedicated to finding train yourprogram staff or isarrange financing for your the perfect group to fithelp! your The dealership dealership, we can NIADA size, Dealer sales volume and overall operation. 20 Group program is dedicated to finding

the perfect group to fit your dealership size, sales volume and overall operation.

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MANAGEMENT

IS YOUR BHPH PORTFOLIO MAXIMIZING ITS RETURNS?

Evaluating to Improve Performance

BY KENNETH SHILSON

As another year begins, BHPH operators must focus on how to make this year better. The answers can’t be found in their year-end financial statements or even by reviewing unit sales numbers. This article will discuss what every operator should evaluate to improve performance and profitability: → Indicators that your installment contracts portfolio needs a “tune up.” → Proactive ways to improve portfolio performance by using metrics as your guide. → The proper accounting for bad debt losses and why charging off those losses should not be deferred. → Is your business model designed for success or failure? What can you learn from your losses so you do not repeat them? Some indicators that your installment portfolio needs a tune up include:

→ Your receivables are increasing but your collections are decreasing. → You are selling more vehicles but your portfolio is not growing at the same rate. → Your bad debt losses are increasing and you don’t know why. → Your portfolio is more than 50 percent liquidated and you aren’t replacing the “run off” with new originations. → Your portfolio performance is worse than the NABD industry benchmarks, which are available at www.subanalytics. com. Hoping next year will get better is not a prudent strategy. Waiting for the competition to decline or disappear isn’t the answer, either. You must take a proactive approach to improving your internal portfolio performance and not depend on the competition declining.

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The first step is to develop portfolio metrics: static pool, loss/liquidation and default rates are needed so you can compare your performance with your peers and identify performance trends. What can you learn from those metric calculations? Net static pool rates: Measures the frequency and severity of your bad debt losses after recoveries (in dollars) over the life of pools of installment receivables. This is your performance report card. Net loss/liquidation rates: Measures the pace of losses in your portfolio (after recoveries) in dollars before pools of receivables are fully amortized. This measurement is important for projecting cash flow, anticipating future losses and identifying changing trends. Default rates: Measures the frequency of bad debt losses in units (not dollars) over the life of your installment portfolio.

→ pool and loss/liquidation metrics needed to project future cash flow, after bad debts and recoveries. Such projections are used to identify capital needs and predict future financial performance. A new credit loss measurement standard passed by the AICPA in June 2016 will require you to reserve for future bad debt losses. You must determine how the new standard will affect your loan covenants and borrowing relationships as soon as possible. Metrics are needed to estimate future losses and to adjust your reserve for bad debts in your financial statements. Those who do not make portfolio

MANAGEMENT

adjustments periodically cannot expect better results. The BHPH industry must regain market share by learning from its bad debt losses and not repeating them. Do not enter another year without “looking under the hood” of your own portfolio. The more you learn, the more you will earn. Good luck! KENNETH SHILSON IS PRESIDENT AND FOUNDER OF THE NATIONAL ALLIANCE OF BUY HERE-PAY HERE DEALERS (WWW.BHPHINFO.COM), THE NATION’S LARGEST SPECIAL INTEREST GROUP FOR THIS INDUSTRY, AND PRESIDENT OF SUBPRIME ANALYTICS (WWW.SUBANALYTICS. COM), WHICH PROVIDES PORTFOLIO ANALYSIS FOR OPERATORS AND CAPITAL PROVIDERS.

This metric is used to measure volatility and portfolio quality. If you don’t have those metrics, your access to capital to fund portfolio growth will be severely limited. Capital providers use them to evaluate credit risk and project loan repayment. You can’t expect to borrow millions of dollars without those portfolio barometers. The next step is to charge off your bad debts when losses become known. Bad debts in BHPH are not like wine – they don’t get better with age. When customers become delinquent 60-90 days, their chances of “catching up” are unlikely. It is important that delinquent debt be charged off when it is identified so losses can be mitigated and the appropriate collection action can be taken. If a charged-off account is subsequently collected, the recovery should be recorded when received. A timely and consistent charge-off policy provides a realistic picture of your portfolio performance and helps you avoid financial surprises. The bad debt charge-offs are deductible for federal tax purposes, so your corresponding tax liability is reduced. Your business model dictates your BHPH success. You must evaluate your business model periodically for cash efficiency. That means determining the cash return (ROI) on your portfolio investment. You would not make other investments without first considering their ROI, and the same holds true for building a BHPH portfolio. Those calculations require the use of static

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LEGISLATIVE

I HAVE HEARD IT SAID THAT SMALL BUSINESS IS THE BACKBONE OF OUR ECONOMY. THIS IS ESPECIALLY TRUE FOR THE BHPH OPERATOR.

ARBITRATION AGREEMENTS CFPB’s Potential to Prohibit Their Use When I was asked to write this article, I decided on the topic of compliance. Not because I enjoy studying or learning about compliance, but because I fear an unknown rule or law could generate a tremendous financial penalty, or even put us out of business. Like most BHPH dealers I know, I actively seek information on how to better serve our customers, increase efficiencies and stay in compliance. I do so through involvement with the state and national independent automobile dealers associations, 20 groups and trade shows. Our state and national associations have done a good job reaching out to the FTC, CFPB and other entities to help create dialogue and seek guidance on how to stay compliant to help dealers better understand what is expected of them. As dealers strive to be compliant, I read and hear about consent agreements between the CFPB and various finance companies and BHPH dealers. The companies in question might disagree with the assessment of guilt but are being given a choice of agreeing to the consent decree or facing an extended legal battle that could put them out of business. It feels as if guidance is being provided by devastating fines. Along with those concerns, the CFPB is currently reviewing, and is expected to prohibit, the use of arbitration agreements with class action waivers. What that means for BHPH dealers across the country is that a small error, or in some instances no error, on your part can set you up for a class

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BY LEE CAVENDER

action lawsuit. For example, in March 2002, 61 Texas BHPH dealers were named as defendants in an initial class action suit filed by a group of plaintiff’s attorneys who had targeted the dealers in Rather vs. Dallas Automotive. Despite every effort the dealers had made to comply with the complex federal and state laws and regulations, they were accused of misleading and defrauding their customers by charging interest on deferred sales tax and by generally overcharging on their contracts. The majority of those dealers were using software that had been approved by the Office of the Consumer Credit Commissioner and were using approved contract forms that clearly showed deferred sales tax was subtracted from the amount financed before the finance charge was calculated. But when the dealers contacted the law firm bringing the suit they were told wrongdoing could be proved and they needed to make arrangements to pay up. The dealers spent the next two years and approximately $665,000 before the court ultimately denied the certification of the class. In a paper written by Michael W. Duncan concerning the suit, he said, “Class actions are a business model to enrich the firms that can get a certification while giving consumers very little payback.” Between 2008 and 2012, 419 class actions were certified, with the average plaintiff receiving $32 while the law firms received $35 million to $46 million.

During the NIADA National Leadership Conference and Legislative Summit in September, I, along with the rest of our Georgia IADA delegation, spoke to 11 legislators about this and other issues concerning independent auto dealers. We shared with them a possible solution of carving out a small business exemption – maybe around $30 million per year in revenue. That small business exemption was originally suggested by Phil Lathrop of VP Motors Inc., one of the affected Texas dealers, while testifying at the CFPB Small Business Review Panel on Arbitration Agreements in October 2015. I have heard it said that small business is the backbone of our economy. That is especially true of BHPH operators. Not only do we provide good paying jobs, we also help good people who are at the bottom tier of the credit market get to work, school, etc., every day. The BHPH dealers I know work hard to provide safe, dependable transportation. My hope is BHPH dealers across the country will reach out to their legislators to help give us a voice, and the CFPB will either not make the expected arbitration ruling or provide a small business exemption. LEE CAVENDER HAS HELD VARIOUS POSITIONS IN THE AUTO INDUSTRY, INCLUDING SALESMAN, F&I MANAGER, LEASING MANAGER, GENERAL MANAGER AND DEALERSHIP OWNER. HE IS ACTIVELY INVOLVED IN NIADA AND THE GEORGIA IADA, AND SERVES ON NIADA’S BHPH COMMISSION.

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INDUSTRY PERSPECTIVE

THE GROWING NEED FOR BHPH Benefits of Having a Properly Capitalized BHPH Dealership BY DAVID ALGOOD

The Buy Here-Pay Here business can be a great resource to build wealth for multiple generations, while also increasing cash flow to withstand the economic ups and downs of the car business. In the past several years, banks and finance companies have been very aggressive in their purchasing of secondary customer contracts. However, this trend is now changing as the subprime cycle nears its end. In 2016 alone, many subprime banks and finance companies have either substantially reduced the purchase of contracts from independent dealers or completely discontinued originations. CONTINUED ON PAGE 19

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BEST PRACTICES

GIVE IT UP! Stay in the Zone

BY DAVE ANDERSON

In sports you hear much about an athlete being “in the zone,” where his focus is sharper and performance excels. But being in the zone doesn’t apply only to athletics. It’s relevant in any job or endeavor in which performance matters. The “zone” is defined as “a temporary heightened state of focus that enables peak performance.” With that in mind, our objective should be to make the state of heightened focus less temporary, so peak performance can continue, and to help our people do likewise. To get in your zone more often and stay there longer, it’s important to identify the things that can put you there, or take you out of a heightened state of focus. Following are five things we have to give up to get in our zone more often and stay there longer, so we can then go up to the next level of performance and results. Excuses: You can’t focus on what you can control, maintain a playto-win mindset or operate at peak levels while you’re making excuses. Excuses waste time and energy as you rationalize why you’re not responsible, rather than owning your results, staying in your zone and moving forward. If you dropped the ball or fell short, just say, “I screwed up. I own it. I’ll be better because of what I’ve learned from it, and I’m moving on.” There is no retort for that brutal honesty, nor is focus lost on achieving the objectives that matter most. Excuses are zone-busters. Owning your results heightens focus and enables peak performance. Procrastination: Procrastination breaks momentum and wastes time as you continually revisit matters that should have already been decided or executed. Nor can you maintain a state of heightened focus when you’re going in circles. Action keeps you in motion and enhances focus. Even wrong action can benefit you – if you’re paying attention, realize your error, learn something in the process, correct your course and then restart progress toward your goals. Procrastination is a zone-buster. Taking action on what needs to be done heightens focus.

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Obsessing over competitors: In one of my workshops, I describe the differences between caretakers, playmakers and game-changers within an organization. Caretakers hope they can measure up to expectations, or to what a competitor is doing. Playmakers study the competition and devise a plan to counter them. Game-changers act as though they are the competition and set a pace others must study, counter and combat. Of course, you should be aware of your competitors. But you can’t focus on what you do best and operate at peak performance levels when you’re obsessing over them. A focus on external conditions: The weather, economy, manufacturer’s decisions, product recalls, interest rates, a competitor’s advertising and actions, the time of year and factors like them are among external conditions that can impact results but are beyond your control. There will always be external conditions you can blame for a lack of results, but by doing so you lose a sense of heightened focus on what you can control – taking a giant leap out of your zone in the process. As a leader it’s essential that you get this – you are still responsible for results, and when you blame external conditions to justify your failures you are confessing two things: you don’t have control of your destiny and you don’t have a solution. Leaders get paid to be in control and find solutions. By resolving up front you will not allow external conditions to dictate outcomes, you heighten your focus on what you can do and control to get the job done. Navigating through obstacles with a locked-in focus on results keeps you in your zone. Blaming external conditions is a zone-buster. Complacency: By its very definition of being “calmly content and smugly self-satisfied,” complacency is an obvious and brutal zone-buster. Your chances of having a heightened state of focus that enables peak performance while calmly content are nil. A heightened state of focus activates energy, creates urgency and drives alertness – not something you’re likely to feel when smugly self-satisfied.

WE MUST INCREASE AWARENESS OF WHAT OUR ZONE IS, HOW TO GET IN IT, AND THEN RECOGNIZE WHEN WE’VE COME OUT OF IT SO WE LEAVE IT LESS OFTEN. Excuses, procrastination, obsessing over competitors, focusing on external conditions and complacency are common conditions in even ultrasuccessful dealerships, from the top down to the front line. That is why so many businesses, while “successful,” also miss their potential by a mile. People go out of their zone too often and take too long to find their way back in, often requiring a deadline, incentive, threat or endof-the-month push to create the heightened state of focus needed to finish well. And while we’re all human and can expect to take the bait and step out of our zone throughout our lives – engaging in these factors and others like them – if we are going to grow to our maximum potential two things must happen. We must increase awareness of what our zone is and how to get in it, then recognize when we’ve come out of it so we leave it less often. And when we do bust out of our zone we need to recognize it faster and return to it as soon as possible. If we can do those two things consistently well, we will far surpass our past results as an organization, as well as improving over our former self as a leader. DAVE ANDERSON IS PRESIDENT OF LEARNTOLEAD.

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The aggressiveness of the subprime market caused assetbacked securities to increase in both delinquency and losses. According to CNN Money and Subprime Analytics, there has been a rise in both low down payment and extended-term loans, as well as loans to borrowers with no FICO scores. As of February 2016, asset-backed securities saw a 34 percent increase in losses. As the performance of the securities continues to deteriorate, the coming year will see a significant tightening in the subprime sector. According to Equifax, in 2016, 23.5 percent of all new auto loans were to subprime borrowers, many of which were securitized. As several large players exit the independent dealer marketplace and securitization standards tighten, there will be a substantial reduction in the availability of credit in the subprime and deep subprime industry. That means there is a huge base you should be prepared to capture as those secondary customers come back into BHPH stores.

THE DAYS WHEN DEALERS USED TO RECAPTURE NEARLY ALL THE VEHICLE COST WITH THE DOWN PAYMENT AND FINANCE THE PROFIT ARE LONG GONE. While many dealers realize there are numerous advantages to being in the BHPH business, most do not have sufficient capital to grow their portfolio as they wish. There are a couple of financial considerations that must first be understood. The days when dealers used to recapture nearly all the vehicle cost with the down payment and finance the profit are long gone. In recent years, the market has shifted dramatically with vehicle costs rising and down payments declining. According to Subprime Analytics, as of mid-year 2016, BHPH dealers had an average vehicle cost of $7,007 with a down payment of $727, leaving them with $6,280 cash in deal. Dealers have shifted to selling a newer and nicer vehicle with a lower down payment, which in turn creates a larger cash burden. This has created a significant

INDUSTRY PERSPECTIVE

financial barrier to enter or grow a BHPH operation. A dealer looking to enter the BHPH business will likely need between $500,000 and $3 million of working capital to fund a single lot operation doing 15-50 loans per month. For this reason nearly all BHPH dealers use a third party to fund a portion of their operation, often allowing them to lower their selffunding needs to less than $100,000. Whether you have been in the BHPH business for three generations or you are looking to start a portfolio, choosing the right capital partner who both understands the BHPH business and will provide financing to help you grow is vital to your success. The BHPH business can be extremely profitable. Many dealers are able to cover 100 percent of their credit losses with interest income, meaning they are able to make 100 percent of the markup on their car, which in many cases is $4,000-$5,000 per unit. If your store could benefit from additional sales with great margins then entering or expanding in the BHPH business may be for you. The BHPH business is an excellent choice for dealers who do not want their livelihood to be at the mercy of secondary banks. DAVID ALGOOD IS DIRECTOR OF SALES AND MARKETING FOR AMAC, A FINANCE COMPANY DOING BUSINESS IN THE EASTERN HALF OF THE UNITED STATES. FOR MORE INFORMATION, CALL (704) 882-7100 (EXT. 7509) OR VISIT WWW. ACEMOTORACCEPTANCE.COM.

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