Underwriting Basics
Micromanagement
It’s always a good idea to tighten-up on your underwriting procedures and do your due diligence before an approval.
It can cripple an organization. Make sure your leaders know how to steer clear of its danger.
JULY/AUGUST 2015 DealerBusinessJournal.com
It’s time to start planning for the future. Leedom Dealer Advisory Group can help you get there. Page 18.
www.DealerBusinessJournal.com
DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 1
WE CARS Almost as much as you do.
So we took what we know best and built a payment solutions product designed specifically for car dealers.
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Paymaxx Pro is ALL things Automotive Founded by Chris Leedom, BHPH industry expert and Leedom Twenty Group founder, Paymaxx Pro can offer our know how of the auto industry to provide you with a competitive advantage in accepting payments from your customers. We know auto! Why does that matter? Because we know the needs for payment solutions that work with your business Call us at 877.527.5658 for a free quote. If we can’t save you money on www.DealerBusinessJournal.com processing we’ll send you a $50 American Express gift card for your time.
2 | JULY/AUGUST 2015 | DEALER BUSINESS JOURNAL
VOLUME 12, ISSUE 6 JULY/AUGUST 2015
CONTENTS
LEEDOM GROUP FEATURES
LEGAL
OPERATIONS
4 The Most Critical Decision You May Face Is... Succession planning has been a hot topic this summer.
22 Lots of Pages, but a Single Document Some states require
30 Tough Times Call for Tough Decisions When the times get
Thoughts and suggestions on tackling this important topic. By Chris Leedom
10 The Case for Evolving Underwriting The CFPB is proposing regulations that will require
dealers to thoroughly verify a customer’s ability to pay before giving an approval, and it’s not such a bad idea. By David Brotherton
14 Underwriting Fundamentals: The 4 C’s There are four basic components of solid underwriting:
capability, consistency, character and collateral. By Paxton Wright
18 Do You Have an Exit Strategy? You’ve worked hard building your business, but have
you worked at creating a succession plan for the future? By Chris Leedom
IN EVERY ISSUE 5 6 7 8
Calendar Industry News News Briefs Vendor Updates
www.DealerBusinessJournal.com
34 Ad Index 35 Classifieds 39 Twenty Group Application
sales and financing paperwork to be in one document, and sometimes on one page. By Tom Hudson
24 PayPal Ordered to Pay Up PayPal Credit found
itself on the wrong side of CFPB regulations and is paying for it. By Catherine M. Brennan
LEADERSHIP 26 The Danger of Micromanagement Employees need
leadership that is empowering not imprisoning. Stay away from micromanaging. By Dave Anderson
tough, the tough get going, as long as they have certain business disciplines to guide them. By David J. Wiggins
33 Probably the Smartest Thing I Ever Did If you are looking for a
few bright ideas to save money and increase profit, here are a few to consider. By Tim Byrd
SALES & SERVICE 36 Marketing to the Meme Generation Millennial women are
the next growing group of luxury car shoppers. Jody DeVere
DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 3
CHRIS LEEDOM EXECUTIVE PUBLISHER
CORNER OFFICE
The Most Critical Decision You May Face is . . .
I
n the past six months I have had more discussions than ever with many dealer clients that touch on a common theme. That question is “what exit plans are available and how do I handle succession planning?” I have had these discussions at conventions, Twenty Groups and on an individual basis. It is an issue that sooner or later every business owner must face. We decided it was such an important issue we wanted our feature story to begin to address this topic. I certainly know we cannot cover all of the complicated aspects of this question in one issue. You will find an introduction to some of the key considerations and the thought process in this issue. We intend to continue to have regular columns that will provide guidance on this complex decision. We have consulted Certified Public Accountants, Finance Professionals and others not only for this initial article but for future installments as well. I hope you find our offering informative and thought provoking. As you begin to investigate your options you may find this is one of the most opportune times to address the issue of exit and/or succession planning. Timing is very good right now. Over the past year we have provided advisory services in several buy-sell situation. Each situation is always different. I have been contacted by more private equity groups or potential acquirors of dealerships in the past six months than in the previous six years. There is definitely opportunity for dealer-owners that may want to sell their business, which is one of three options you face when thinking about an exit strategy. Our feature story in this issue focuses on the “big three” options. Earlier this year we also formed Leedom Dealer Advisory Group to provide guidance and direction specific to constructing a succession plan, selling your business or otherwise adopting an exit strategy. Our group includes professionals that can value your business, construct a long-term financial plan and help identify a successful exit strategy. As more and more successful dealer-owners reach that point where you must decide what is the next step for your business the Leedom Dealer Advisory Group will provide expert guidance specific to the auto industry. We understand the complex issues and have the experience relative to your situation as a dealer-owner. If we can help, give us a ring or email me at chris@leedomgroup. com As summer comes to a close I hope this issue provides some thought-provoking reading material. I can tell you from personal experience virtually every business owner must face these decisions sooner or later. It is clearly a situation where sooner is always better than later. Enjoy and good luck! 4 | JULY/AUGUST 2015 | DEALER BUSINESS JOURNAL
Dealer Business Journal 2601 Cattlemen Road Ste.200 Sarasota, FL 34232 Ph: 800.966.8733 Fax: 941.371.2874 Executive Publisher Christopher M. Leedom chris@twentygroups.com Contributing Writers Dave Anderson dave@learntolead.com David Brotherton davidb@leedomgroup.com Tom Hudson thudson@hudco.com Christy Taylor info@dealerbusinessjournal.com Paxton Wright paxton@leedomgroup.com FOR QUESTIONS REGARDING SUBSCRIPTIONS CALL 800.966.8733 or subscribe online at DealerBusinessJournal.com ADVERTISING INQUIRIES call 941.371.7999 or email Sales@DealerBusinessJournal.com DISCLAIMER: The information included in this publication is obtained from sources believed reliable and has been produced with reasonable care in production and editing. It is not intended to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult a professional for application in their particular situation. Copyright 2015 Leedom and Associates, LLC. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Dealer Business Journal is a publication of Leedom and Associates, LLC. POSTMASTER: Send change of address form to Dealer Business Journal, 2601 Cattlemen Road, Ste.200, Sarasota, FL 34232
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LEEDOM GROUP UPCOMING EVENTS
CALENDAR SEPTEMBER 2015 September 1 | Buy Here Pay Here Sales Training Boot Camp
Dealer’s competition has really heated up and you are fighting with conventional lenders as well as with each other for that BHPH customer. This is not an advertising course. Instead, this Camp will give your sales managers and reps real-world techniques and strategies for developing your business the way it should be developed. This Camp emphasizes lead management, prospecting, and the day-to-day activities and accountability that have proven to be successful. We will instruct on techniques of BHPH and telephone sales, facts about the BHPH business and the customers, developing consistent repeat and referral business, as well as the sales person’s role in application and underwriting procedures. Who Attends: Buy Here Pay Here Dealers and Sales Staff Location: Dallas, TX Details: Call Meredith McNellis at 800.966.8733 for more information or go to www.twentygroups.com to register.
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September 2 | Buy Here Pay Here Manager’s Boot Camp
Knowing how the different pieces of the business come together is very important when trying to move the needle on one of more of the key drivers. This Camp will identify key drivers with an emphasis on how they impact – and are impacted by – the others. You will also receive information on industry benchmarks and what they mean for your business. We will discuss inventory management, expense allocation, pricing, management and hiring practices. There will be a lot of information here that you don’t want to miss. Who Attends: New and seasoned managers Location: Dallas, TX Details: Call Meredith McNellis at 800.966.8733 for more information or go to www.twentygroups.com to register.
September 3 | Buy Here Pay Here Collections Boot Camp
Ensure you are collecting every dollar possible by attending the Collections Boot Camp. There have been many developments on the regulatory and legal fronts recently that directly impact the acceptable and compliant collection techniques you use every day. This Camp will identify changes and opportunities present in today’s landscape. We will discuss customer retention, alternative communication methods, relationship building, objection handling and providing a road map to your day. We will also discuss collections expectations in your model as well as industry benchmarks. Who Attends: Collection Managers, Collectors, and Buy Here - Pay Here Dealers Location: Dallas, TX Details: Call Meredith McNellis at 800.966.8733 for more information or go to www.twentygroups.com to register
Keep up to Date:
Stay up with all of the Leedom Group’s upcoming seminars, trainings and sepcial events. Visit LeedomGroup.com and click on Training.
DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 5
DBJ INDUSTRY NEWS SEND YOUR HEADLINES TO INFO@DEALERBUSINESSJOURNAL.COM
CONSUMER TRENDS
Consumers Say Buying a Vehicle Takes Too Long A majority of new-vehicle buyers in the United States indicate that it should take no more than two hours to complete a vehicle purchase from the time they walk into the dealer showroom, accordint to a recent DealerRater survey; however, industry data finds the median amount of time actually spent completing a new-vehicle purchase is four hours, according to the June 2015 PowerRater Consumer Pulse report from J.D. Power. A few of the report’s Key Findings: • More than two-thirds (67%) of luxury and 62 percent of mass market buyers indicate it should take no more than two hours to complete a vehicle purchase from the time they enter the showroom. Half of buyers from each segment indicate the ideal duration is somewhere between one and two hours. • Slightly more luxury vehicle buyers than mass market vehicle buyers prefer to spend less than an hour in the dealership (18% vs. 13%, respectively). • According to the J.D. Power 2014 U.S. Sales Satisfaction Index (SSI) StudySM, buyers who use
the Internet to shop for their new vehicle prior to visiting the dealership spend more time overall completing their purchase than those who do not research online. In addition, buyers that used the internet are more than twice as likely to have compared prices from different dealers, and are more likely to know the expected price before they visit the dealer, than those that didn’t. “Many retailers are expending enormous amounts of energy and capital to achieve a one-hour transaction time frame for their sales process. While this quest is noble–and customers do want to spend less time than they are currently–buyers tell us that one to two hours is a very reasonable time window,” said Gary Tucker, chief executive officer of DealerRater. According to the J.D. Power 2014 SSI Study, most of a vehicle buyer’s in-dealership experience is currently spent on selecting a vehicle for purchase and negotiating the deal (60 minutes each, on average). This is followed by an average of 30 minutes to discuss and sign the necessary paperwork and an additional 30 minutes to take delivery
6 | JULY/AUGUST 2015 | DEALER BUSINESS JOURNAL
of the vehicle. This leaves the remainder of the overall time spent waiting both before and after the paperwork process, a key area to focus on in terms of creating a more seamless and efficient process flow. “From a generational standpoint, Gen Y buyers spend more time negotiating than other generational groups , as they are more likely than the other generations to conduct research online prior to purchase and to have concerns regarding affordability, which emphasizes the importance of the negotiation phase for Gen Y,” said Chris Sutton, vice president, U.S. automotive retail practice at J.D. Power. “Both Gen Y and Gen X buyers spend less time taking delivery, likely because they need less instruction on the features and functionality of their new vehicles.” According to Sutton, “It’s
important for dealers to be efficient with customers’ time. Customers will value specific parts of the process, such as finding the right vehicle, understanding features and controls and understanding how much and for what they’re paying. The dealer needs to strike an effective balance between educating the customer and efficiency.” The 2014 SSI Study data finds that time spent in the dealership has a significant impact on overall customer satisfaction. While satisfaction among new-vehicle buyers who spend less than two hours in the dealership averages 861 on a 1,000-point scale, satisfaction declines to 844 among those who spend between two and three hours in-dealership and drops to 807 among those spending four to five hours to complete the purchase process. www.DealerBusinessJournal.com
Strong Economy and Low Gas Prices Keep Customers Shopping for Trucks and SUVs With summer gas prices at a five-year low and the economy going strong, shoppers looking for certified pre-owned (CPO) vehicles on Autotrader.com flocked to trucks and big SUVs last month. These insights are the result of an analysis of Autotrader’s Trend Engine data, which measures shopping activity on the site each month. Of the top 20 most-popular CPO vehicles, five were trucks and five were large SUVs. “Americans’ love affair with large SUVs and trucks has been fueled by several factors, from low prices at the pump to the bustling economy,” said Michelle Krebs, senior analyst at Autotrader. “In addition to cheap gas driving people to larger—and less fuel efficient—new and used vehicles, the recent uptick in housing starts and construction puts people back to work who need trucks for their jobs. Steadier employment also means people are using SUVs for not only work but also recreation. A growing pool of certified pre-owned models enable them to get into quality vehicles at a pre-owned price but with the peace of mind that warranties provide.” www.DealerBusinessJournal.com
Rank
Make
Model
1
Ford
F-150
2
Chevrolet
Silverado 1500
3
Honda
Accord
4
BMW
3 Series
5
Jeep
Grand Cherokee
6
Ford
Mustang
7
Mercedes-Benz
E Class
8
Chevrolet
Tahoe
9
GMC
Sierra C/K 1500
10
Toyota
Tacoma
11
Porsche
911/911 Turbo
12
Jeep
Wrangler
13
Toyota
Camry
14
Chevrolet
Corvette
15
Toyota
Highlander
16
Mercedes-Benz
C Class
17
Chevrolet
Camaro
18
Toyota
Tundra
19
Ford
Explorer
20
Honda
Civic
Overall, five trucks and five SUVs made the list of most-popular CPO vehicles on Autotrader.com in June, with four of the five trucks earning placement in the top 10. The CPO Ford F-150 took the top spot, with the CPO Chevrolet Silverado 1500 coming in at No. 2. The CPO GMC Sierra 1500 and CPO Toyota Tacoma came in back-to-back at No. 9 and No. 10, respectively. The
CPO Toyota Tundra landed at No. 18. On the SUV front, the Jeep Grand Cherokee was the fifth most-popular CPO vehicle on the site, and four other SUVs also made the top 20 list: the CPO Chevrolet Tahoe at No. 8, the CPO Jeep Wrangler at No. 12, the CPO Toyota Highlander at No. 13, and the CPO Ford Explorer at No. 19.
NEWS
BRIEFS Recall is Reminder to Brush Up on Security Chrysler’s latest recall of 14 million vehicles due to remote hijack vulnerability is a simple reminder that all companies need to keep up with computer security and car standards. The recent software vulnerability in the Chrysler cars allowed hackers to wirelessly take over vehicle steering, transmission, and breaks. The exposure led to a massive recall of 1.4 million Jeeps, Dodge trucks, SUVs, and other Dodge and Chrysler cars. Chrysler was unable to fix the software flaw over the air, so current vehicle owners have three options to fix their cars. They can either: download the security update onto a flash drive and manually upload; drive to a car dealership and have the update installed; or, Chrysler is offering to mail out USB sticks to the owners with the update.
Send us your news:
Send press releases and news announcements by email to info@dealerbusinessjournal. com. Subject line: News Briefs.
DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 7
VENDOR ANNOUNCEMENTS SEND YOUR HEADLINES TO INFO@DEALERBUSINESSJOURNAL.COM
PRODUCTS AND
DEVELOPMENTS
PARTNERSHIPS
GWC Warranty, the largest, best-in-class provider of vehicle service contracts sold through used car dealers, has taken steps in recent years to revolutionize the relationship between used car dealers and vehicle service contract providers. In providing more than just vehicle service contracts, GWC Warranty has built and delivered a No Worries, Just Drive experience to more than 1.5 million drivers since 1995. GWC does this by providing automotive dealers with four pillars for success: • An expansive and flexible product set aimed at meeting the diverse needs of its dealer population • Best-in-class service to drivers that minimizes post-sale dissatisfaction and includes more than $350 million in claims paid to date • Innovative technology that allows dealers to be more efficient and progressive, including a new iPad App and online contract processing capabilities • A consultancy relationship
Spireon Inc., a leading innovator of Mobile Resource Management (MRM), announced that Megasys, a leading provider of consumer loan servicing systems, will partner with Spireon to provide out-of-box integration with Spireon tools. The integration between Spireon GoldStar GPS and Megasys Omega marks the auto lender industry’s first integration between major companies and allows customers to save time and money by centralizing all critical information into one convenient loan servicing system. API’s enable automotive finance companies to automate order entry and use key GoldStar GPS features within Megasys Omega such as locating vehicles, enabling or disabling the starter and sending payment alerts. “We are excited to enter this partnership with Spireon,” said Theo Austin, President and Chief Operating Officer for Megasys. “Time is money to our lender customers, and we are thrilled to offer additional time-saving tools with the performance and reliability that GoldStar GPS has brought to the market for years. This integration will give lenders the best analytical tools available to help them improve their bottom line and gain the competitive edge.” Spireon’s industry-leading automotive solutions, including its groundbreaking GoldStar GPS, support the broad automotive ecosystem, allowing dealers and lenders put more of their customers into vehicles. With Spireon’s solutions, dealers have the tools necessary to make smarter lending decisions while protecting their investment. GoldStar GPS provides an intuitive user interface, predictive analytics and capabilities that help customers ensure longer performing loans and improve their business fundamentals. GoldStar GPS is built on Spireon’s award-winning NSpire M2M intelligence platform, providing unparalleled reliability and the industry’s first 99.9 percent performance guarantee. “Our partnership with Megasys allows us to provide customers with a turnkey, end-to-end system to automate auto loan management,” says David Meyer, Executive Vice President for Spireon’s Automotive Telematics Group.
Megasys and Spireon Integrate GWC Warranty Helping Used Omega Loan Servicing System with Car Dealers Sell More Cars GoldStar GPS that delivers dealers the support and training they need to sell more cars and make more money. “At GWC, we work each day to provide our dealers more than just vehicle protection plans,” said GWC Warranty CEO and President Rob Glander. “By providing our dealers with products, service, technology and training to make them more successful, we are helping them level the playing field with larger, franchised dealerships against whom they compete.” GWC Warranty’s approach has worked, as evidenced by the company’s growth since 2009. In a used car industry that grew just 15 percent from 2009 through 2014, GWC Warranty grew revenues by 136 percent – a product of the value used car dealers see in the services GWC provides. “By providing a superior product that gives their customers the confidence to make a purchase – as well as the service, technology and training to back it up – we have been fortunate to do just that,” said Glander.
8 | JULY/AUGUST 2015 | DEALER BUSINESS JOURNAL
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How Well Does Your Smartphone Case Really Work? Protect Your Bubble by Assurant, a nationwide insurance provider, released findings from its latest survey to identify how effective smartphone cases are for consumers. The online survey was presented to approximately 350 people across the U.S., and found more than a third of consumers polled said they still damaged their smartphone despite having it protected by a case.
The survey also showed that men (41%) are more likely than women (26%) to damage their smartphone even though it is in a case. Along with protection plans for smartphones, Protect Your Bubble also offers protection plans for tablets, electronics and appliances, as well as travel, flight, rental car and renters insurance. For more information, visit www. us.ProtectYourBubble.com.
View the infographic at http://us.protectyourbubble.com
Eyewitness Surveillance Launches Beta Program of New Line of Automotive Dealership Tools Eyewitness Surveillance (Eyewitness), the industry leader in remote interactive video monitoring solutions specializing in serving mid and large-sized automotive dealerships, have launched the beta program of three new value-added products for automobile dealerships. “We develop our prototypes for the beta program by listening to both existing and prospective clients to best determine what the market needs. This first-hand insight enables us to then work with our R&D team in creating solutions that help our clients and prospects drive business efficiencies, and ultimately business growth,” said Eyewitness’s CEO, Rush McCloy. Eyewitness developed www.DealerBusinessJournal.com
three new beta product tools that go beyond security, and deliver solutions relating to sales and customer management, false claims, and financial compliance: Sales Direct – Provides real-time communication between prospective customers and sales associates after hours. Allows an interested customer to communicate directly with a sales associate at the dealership via text message and email. The sales associate then is able to quickly reply to the prospective customer in real-time, markedly increasing the chances of a resulting sale. Customer data is captured in the system database. Managers are able to track the timing and nature of after-hours sales in a transparent, responsive system.
Service Lane 2.0 – Captures high-level, real-time details on vehicles in service lanes to address and dispute false damage claims. Utilizes HD, wide-angled cameras with low-light capabilities to accurately tag each vehicle to be searchable by VIN, time, or tag. Reduces dealership infrastructure requirements as all images are stored in and accessed from Eyewitness’s cloud server. Accessible through mobile devices. Finance Audit Service – Monitors finance transactions to ensure compliance and quality standards are upheld. Offered in both audio and video format. Allows clients to review any flagged transactions noted by the Eyewitness team on a scheduled basis.
All records can be securely stored for compliance purposes, as client needs dictate. “We have several clients participating in our beta program. Their input is essential as we make the necessary modifications for final delivery,” said Eyewitness’s President, R.T. Arnold, “New products enable us to improve the customer experience and ultimately forge deep, long-lasting partnerships. We are looking forward to expanding our beta program to further bolster these relationships.” For more information on Eyewitness and its services, please visit www.eyewitnesssurveillance.com.
DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 9
DAVID BROTHERTON BHPH BOOT CAMP
THE CASE FOR EVOLVIN
UNDERWRITIN
10 | JULY/AUGUST 2015 | DEALER BUSINESS JOURNAL
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LEEDOM GROUP
B START
NG
NG
Proposed regulations from the CFPB should make you take a look at your underwriting processes, with a much needed emphasis on verifications before giving approvals.
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ack in March 2015, the CFPB issued a press release entitled “CFPB Considers Proposal to End Payday Debt Traps” (http://www. consumerfinance.gov/ newsroom/cfpb-considersproposal-to-end-paydaydebt-traps/). Ostensibly, the proposal covers “Payday Loans, Vehicle Title Loans, and Certain High-Cost Installment and OpenEnd Loans” and focuses on the need to avoid “debt traps” that are originated “based on a lender’s ability to collect and not on a borrower’s ability to repay.” There is a lot to digest in these proposed regulations and I won’t be discussing them all. There is one proposed change in particular that merits discussion: the regulations require that lenders be required to “verify the consumer’s income, major financial obligations, and borrowing history to determine whether there is enough money left to repay the loan after covering other major financial obligations and living expenses.” This is quite a mouthful and is what really made me sit
up and take notice. Don’t let the intended target audience (pay day and title loans) fool you. These rules, if accepted, could easily be made to apply to non-bank automobile finance companies as well and, as such, represent a substantial paradigm shift for our industry if we allow ourselves to be blind-sided. Caveat Emptor (let the buyer beware) simply will not fly with regulators.
Verify The Consumer’s Income
Industry-standard underwriting already includes this. I do, however, routinely see examples where we clearly don’t actually look at the documentation provided and this represents just as much a danger to our businesses as not requiring it at all. Paying attention to the customer’s actual, provable, net income is essential to qualifying the borrower at a payment they can afford. It is important to review year-to-date income information as well to make sure that the income being used to qualify is consistent for the borrower. A onetime check with a lot of overtime can easily overqualify a borrower if we aren’t paying attention.
DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 11
DAVID BROTHERTON BHPH BOOT CAMP
Simply taking income on faith and believing that a borrower will always find a way to pay if it is important to them will not work if these guidelines are applied to our industry. It also means no more deals for people with unverifiable income if we are being held to a higher underwriting standard. Cash workers will have to deposit their pay in a bank over a period of time (no letters from the boss, please) to verify ability to repay as well as consistency of income. Public assistance funds must be documented and verified as well.
Verify Major Financial Obligations
This is where it starts to get sticky for the industry. To verify major financial obligations, we would have to do two things. The first of which is to list the customer’s financial obligations as they are and determine whether their monthly budget can handle including a vehicle payment, insurance and upkeep in this budget calculation. Listing their obligations is not enough, however, because borrowers have been conditioned to lie to get and keep a vehicle. They will figure out pretty quickly that if their bills are too high, they won’t qualify – so they
lie. As a result, things like rent must be verified and a reasonable estimate of food and utility costs must be included.
Verify Borrowing History All of you “no credit check” lenders out there take notice! How would we verify borrowing history without pulling credit reports? The truth is that you can’t. May lenders have developed solid, stable portfolios based on the “no credit check” model but, as written, I don’t see how this could continue if the proposed rules were applied to our industry. This is the second step: we would also have to use the information from the borrowing history to include other debt payments they do make to build an accurate budget as described above. Verifying borrowing history is so much more than simply looking at their repayment history with you. How the borrower has handled other, similar, obligations may become a lot more important when you start to think about the borrower’s willingness to repay as well.
Verify Ability To Repay
Current industry practice is to set a maximum monthly equivalent payment
12 | JULY/AUGUST 2015 | DEALER BUSINESS JOURNAL
as a percentage of verifiable net income. This is typically between 20 and 25 percent and is much simpler than the budget analysis described above and removes the temptation for the borrower to under-estimate their expenses. What it doesn’t do is recognize that all “25% of Net Income” borrowers are not created equal—$400 per month means different things to different people once you consider their actual expenses. The greatest shift for us would be basing a decision on verifiable income and sticking to a standard. So that 20 to 25 percent of net income payment would have to fit into their overall budget as well.
Comments On Underwriting
That the CFPB clearly feels its mandate is to extend consumer protection is not in dispute. What is interesting is that many of the proposed regulations working their way through the system are designed to protect consumers from themselves as much or more than from lender abuses. Underwriting decisions must be based on the lender’s ability to collect the debt or no lending will take place. Lending is a business, not a charity, and
sound business principles dictate that a lender have a reasonable expectation of a return. Returns must be commensurate with the risks taken or no lending will take place. Regulations must not be so onerous as to increase administrative costs to the point where that reasonable return is threatened or no lending will take place. Being responsible lenders does, however, mean that we should be taking the customer’s ability and willingness to repay the obligation as agreed into our underwriting decision making. No lending should take place in an environment lacking good faith. Please don’t remove accountability for what you agreed to from the equation! It takes both borrowers and lenders to make lending work. Both must be expected to hold up their end of the contract. David Brotherton is a consultant and Twenty Group moderator with the Leedom Group Contact him at davidb@ leedomgroup.com
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Save the Date!
April 18-20, 2016 stay up-to-date at BHPHWorld.com www.DealerBusinessJournal.com
We asked attendees of the 2015 BHPH World Convention where to go next and more the vote was to move to Orlando, Florida. O-Town here we come! Mark your calendar and join us in The City Beautiful next April for the industry’s leading BHPH event. Get BHPH World updates on Facebook. Find us under Leedom Group’s Buy Here Pay Here World Convention. DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 13
PAXTON WRIGHT DEALER OPERATIONS
14 | JULY/AUGUST 2015 | DEALER BUSINESS JOURNAL
www.DealerBusinessJournal.com
LEEDOM GROUP
UNDERWRITING FUNDAMENTALS:
THE 4 C’s A
common blunder, made by numerous Buy Here-Pay Here dealers is focusing too much of their efforts on growing sales and too little on improving collections. Keep in mind, selling cars may post big numbers to your balance sheet, but no money is actually made at the time of sale. Your cash and profit is collected one payment at a time, over an extended period. Your job is to maximize the number of payments you can collect from each and every car you sell. The challenge is taking a pool of high-risk customers
Selling cars may post big numbers to your balance sheet, but not money is actually made at the time of sale. Your cash and profit is collected one payment at a time, over an extended period. www.DealerBusinessJournal.com
Evaluating the capability, consistency, character and collateral of your customer is how successful collections are made. and creating a portfolio of loans with a high probability of repayment! Trust me when I tell you, getting this right from the start will greatly improve your chances of success. This article will focus on the fundamentals of underwriting, or otherwise known as the Four C’s: capability, consistency, character and collateral.
CAPABILITY
Simply put, you must evaluate the applicant’s ability to repay the loan. It may sound obvious, but many dealers make excuses why this is unnecessary. Without it, you might as well be a rental company. Ensure every customer is employed and verify this prior to delivery. Yes, prior! Oftentimes, you can achieve
this trough a simple phone call and by getting copies of pay stubs. Don’t make the mistake of not checking the validity of these documents. Authenticate the applicant’s name, address, social security number, pay period, year-to-date income, and calculate an average weekly, bi-weekly, or monthly net income. Remember, it is the responsibility of the dealer to calculate the income and determine if the income is sufficient. I have yet to hear a customer say, “I can’t afford that payment.” With so many ways of measuring capability, which is best? Some dealers will complete entire customer budgets, some use total debt-to-income ratios, and others regrettably use stated income (bad idea). I prefer a simple and highly predictive, payment-to-net income (PTI) calculation. A sensible PTI limit is 20 percent. While there is evidence of dealers being successful
DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 15
PAXTON WRIGHT DEALER OPERATIONS above this threshold, there is very little data to support a strategy that exceeds a 25 percent PTI. Once you add insurance, fuel and vehicle maintenance into the equation, driving costs could surpass 50 percent of their take home pay. That is simply too high.
CONSISTENCY
This is a review of the customer’s life stability, both personal and professional. Measuring the stability of your applicants is critical to booking well performing loans. Document and verify each customer’s time on job, time at residence, time in your market area and get a strong list of local, personal references. Take time to execute proper due diligence up-front and your payment collectors will benefit on the back end. Develop a score card for each of these components or look into software that can help you with this process. The life consistency of your clients is likely the single greatest predictor of future
performance, pay close attention to these details.
CHARACTER
This is a perplexing step in the underwriting process. Measuring the character of your applicants is quite difficult due to limited knowledge, resources, and time. If the average car deal takes no longer than a couple hours to complete, how well can you really get to know the applicant? The answer is, not very well. However, there are ways to gain some knowledge and do so quickly. First utilize the many public record and reporting tools available to dealers and compare results with the completed credit application. Tools such as credit bureaus, Accurint, LexisNexis, and others should provide you with enough data to validate the information provided by the customer. If you detect inconsistencies, request an explanation. Find additional comfort in customers that take responsibility for past credit and stability issues. Remember that we are
not here to judge them, but rather, to ascertain as much useful information as possible. The more information you have, the better your underwriting decisions are likely to be. Lastly, don’t hesitate to deny credit to applicants that are dishonest or demonstrate poor attitudes in the interview. A good interview can certainly be the difference maker in a credit decision.
COLLATERAL
Never forget, if you put good people in bad cars, this model doesn’t work. The tricky part is determining what “good” collateral actually is? The best solution is to sell cars that are competitive in your market, will run the length of the note, need the fewest repairs, and fit the income level of your community. The number one reason for customer’s not paying you is a poorly or non-operating vehicle. You must do all that you can to avoid giving the customer a reason not to make their payment.
I recognize this is much easier said than done. Without question, this is the most difficult part of being in the Buy Here-Pay Here business. The dealers that execute well in inventory are often the leaders in their respective market. Be sure to focus your attention on the vehicles that customers need and NOT the ones they want. You are in business to provide your community with reliable and affordable transportation. As a result, fill your portfolio with the types of vehicles that individuals and families need to get to work and school safely. Sports cars are nice eye candy and draw extra bodies to the lot, just make sure you’re also attracting the types of customers you want to place in your portfolio. Get your underwriting dialed-in by focusing on these fundamentals, the four C’s. Capability, Consistency, Character, and Collateral are all major components of your success or failure as a dealer. Trust the process and implement an underwriting plan that will provide you with best opportunity to generate lots of payments, profits, and happy customers!
Paxton Wright is a professional Twenty Group Moderator and consultant with over 10 years of experience in lending, finance and BHPH operations. Paxton has worked with numerous lenders and understands BHPH financing and how to fund BHPH dealerships. He has deep operational knowledge and consults on an array of topics including credit facilities, asset sales, portfolio performance as well as general dealership operations. He is a recognized industry leader and has been featured at numerous national conventions as a speaker. Contact him at paxton@leedomgroup.com
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CHRIS LEEDOM COVER STORY
You’ve spent years building your business, but now you’re ready to take a step back. Make sure you have a plan before you do.
O
ver the past three decades, since 1995, I have had the chance to work with a countless number of clients. Typically dealer-owners from across the country. Some of these clients have been “big,” some “small,” and most “medium.” They have been older and younger. Some have made lots of money others have struggled. Some have family involved in the business others have no family involved. Some had tragedy strike and suffered illness or death others are involved well into their latter years. Regardless of the situation or differences they all have contemplated and face one key question every business owner should address – “What is my exit or succession strategy?” I feel like I have virtually “grown up” in business with many of these clients. Right now most are probably between 40 and 70, have had a good life, earned a
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LEEDOM GROUP
good living and built a good business. Over the past few years I have observed many of them contemplating the serious question of succession planning and exit strategy. Our Dealer Business Journal team decided we should dedicate an issue to this serious topic virtually every business owner must face sooner or later. So I got the lead assignment, since I have worked with so many dealerowners on this very topic. Many owners have built businesses with millions or tens of millions in assets. It is not uncommon to have net profit earnings of several hundred thousand or several million per year. By any measure you may have a very successful and profitable enterprise – as long as it operates. But the question remains what options do you have with respect to exiting the business? This topic is one that is very near and dear to me for two reasons. First, I have a chance to work with many dealer-owners in an advisory capacity to facilitate this process. Secondly, because as an owner of multiple businesses I face the same issues. In the simplest terms you only have a few basic options as an owner. You should not over complicate this part of the process. Generally your options are: Liquidate your assets – sell www.DealerBusinessJournal.com
the inventory, collect the receivables, count the money and go home. Sell your business to a third party that sees value in what you have built and wants to continue the enterprise. Develop a succession plan with either family or key management that essentially “buys out” your interest and someone you have handpicked, continues what you have built. That is pretty much it. Sure there are probably some hybrid versions of the above three options but as an owner these are the basic decisions you face. One thing is certain and that is you will not do what you do forever. Some clients have asked, “Which is the best option?” The answer is, it depends on many factors and ultimately rests upon your specific personal and financial goals and objectives. There are advantages and disadvantages to each option. The difficulty is in evaluating a myriad of contributing factors and doing some serious soulsearching to determine which option is best for you. Lets address some of the considerations.
Liquidate Your Assets
In my opinion this one might be the least attractive.
You simply sell or collect everything, lock the doors, turn off the lights and go home. The advantage is you have control of the business to the very end. You are also exposed to the perils of winding down a business. When do I cut expenses and by how much? How do I achieve maximum liquidation value? There is no enterprise value or goodwill with this option. In the reverse, there is likely a discount as the only real assets you have from a liquidation perspective is inventory, receivables or notes and possibly real estate if you own your property. Nevertheless it is sometimes the best – and only – option for some dealer-owners.
Sell Your Business
For many owners this may be an attractive option. The idea of selling to a third party and striking a deal that you accept could be a good strategy. We have received more calls from interested parties looking to acquire dealership groups in the past year than in the previous five. Our team have served as advisors in many of these situations and there is no question that there are more opportunities to sell than ever.
ABOUT LEEDOM DEALER ADVISORY GROUP Leedom Dealer Advisory Group was formed as part of the Leedom Group of Companies to specifically advise and consult with dealers that are looking to either sell their business or develop a succession plan. The Dealer Advisory Group is headed up by Chris Leedom and includes a staff of advisors specifically tailored to the automobile business with a focus on non-franchise and BHPH operations. “More and more dealers are looking to establish exit strategies and/or adopt succession plans. Additionally, we have potential buyers that are looking to acquire dealership assets in various markets. This caused us to form a specialized service to cater to these unique opportunities” said Leedom. The Dealer Advisory Group offers a full array of services designed to assist buyers and sellers in evaluation, due diligence, and placement. For more information contact David Leedom at 941.371.7999
941.371.7999
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CHRIS LEEDOM COVER STORY Typically these potential acquirers fall into two categories. One, they may be private equity groups or investor that have followed the industry and are attracted by the business model. The second category consists of other dealers either in your market or outside your market that would like a presence similar to the one presented by your business. Either one of these buyers will want to assess the ongoing enterprise value of your business. In almost all cases they will want to continue the operation of the business – this may involve you committing to “stay on” for a certain period of time. These opportunities are usually for mid to large size operations. With assets of five million or more, it is likely someone may want to acquire your business. That is not to say a smaller operation is not attractive. It is simply a matter of achieving the right returns for the time and money invested by most buyers chases larger – and more profitable operations.
Develop a Succession Plan
This may be the most complex option but it is also the most common. With either key management or family in the equation it often provides for an attractive buy out that satisfies the wishes of the ownership group as well as provides an opportunity
for equity for either the next generation or key management. These situations often require the input of a third party to serve as the arbiter and voice of reason to reach an agreement that is fair to all. I have had a chance to do this more than a few times and have become very familiar with the inherent issues. The very first consideration of this option is can the business continue to succeed based on the skill set and business acumen of either the family or management group that wishes to acquire the business? This is, in my opinion the most fundamental question that needs to be addressed. Nothing else matters if you cannot get comfortable that the business is going to succeed – and pay you off – without you continuing to manage it each and every day. Once you get past that you then must address valuation and terms. The valuation of any closely held enterprise can be challenging. Once you get past that sticky subject then the question becomes how do I finance the business so that I get a fair return on a timely basis but not burden it with an insurmountable debt? These are all critical issues to consider and are just the tip of the iceberg. This process can take months or even longer to properly execute terms, documentation and complete the transition. Melissa Leedom, COO and member of the Dealer
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Advisory Group suggests “As a CPA I believe that there is no such thing as starting too early to plan for the future. Do it. Do it right now. Understand the value of what you have created and decide what success looks like in the next phase of your business.” One key component of the entire process if financial planning. Many dealerowners simply lack a qualified financial professional. Jay Henderson, a Senior Portfolio Manager with UBS offers the following advice: “Here in America, everyone is familiar with the quote, ‘We don’t plan to fail, we fail to plan.’ Research shows only 25% of auto dealers have succession plans in place. Having a succession plan can be the first step to those imaginable retirement years, but if you don’t include a Financial Plan, how will you know what the probability of being a successful retired person? Every retirement situation is different. Some dealers are ready to walk away from the day-to-day activities of being a business owner. Other dealers would be miserable without the adventure of being in the battle. That’s the first discussion to be had in this transformation. It is also critical to have a discussion with someone about retirement. Today’s Financial Planning involves a discussion of assets, wants & needs, levels of risks, and the eventual probability of being successful. The
conversation needs to include inherent dangers and risks that are to be eliminated, opportunities to be focused on and captured, and the strengths to be reinforced and maximized.” Regardless of your choice of exit strategy or succession plan the most important consideration is to have a plan. I have witnessed first hand situations where there is a sudden loss of life or change in circumstance that can leave a business and a family in a precarious situation with creditors, employees and customers. You can avoid this risk by properly adopting a plan and a strategy. This can sometimes require years of planning in advance. My advice is if you have any substantial business that you would not want to see simply “shut down” then you need to start investigating your options now. Chris Leedom is the President and CEO of the Leedom Group of Companies. He has helped countless clients face succession planning and exit strategy issues and he heads up the Leedom Dealer Advisory Group assisting owners and potential buyers. He also owns several successful companies and is based in Sarasota, FL.
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TOM HUDSON LEGAL OPINION
LOTS OF PAGES, BUT A SINGLE DOCUMENT There is a lot of paperwork involved in selling and financing an automobile, and a recent court decision in Maryland is welcome news for dealers who face single document challenges.
T
he process of selling and financing vehicles is, as we have noted before, very highly regulated. With each step, there are potential land mines just waiting for a careless dealer. One of those pesky land mines is something we lawyers call a “single document� rule. A single document rule requires that all documents, or certain documents, evidencing
the sale and financing transaction between the dealer and the buyer be contained in one document. Sometimes the state law
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LEGAL & LEGISLATIVE
containing the rule can be read to require that all the terms of the transaction be printed on one sheet of paper, which can make for some interesting-looking contracts. Usually, however, a state’s rule will permit multiple pages. Not all states, thank goodness, have these rules, and the ones that do have varying versions of the rule. Some versions of the rule seem to require the nonsensical combining of all documents, even arguably including service contracts, credit and GAP coverage and the like, into a single document. Other states’ rules limit themselves to the sale and credit documents only. The rules have been
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used by plaintiffs’ lawyers against dealers, with the lawyers seeking to have some or all of the contractual language (like an arbitration clause) used in a deal tossed out by the court. Sometimes the rules are used to argue that because the dealer broke the law, the documents used in the deal are unenforceable. Depending on the wording of the rule, dealers have fought these attacks in various ways. One defense offered by dealers is the argument that when multiple documents are used in a transaction and signed more or less at the same time, those documents will be “read together” in a way that satisfies the single document rule. A recent Maryland case offers an example of this dealer argument. In 2010, Willie Ford and Rashad Beale bought and financed a car from Antwerpen Motorcars, Ltd. In 2013, Ford and Beale sued Antwerpen when they discovered the car had been involved in a collision and had also been used as a short-term rental prior to their purchase. Antwerpen moved to compel arbitration under the agreement to arbitrate included in the Buyer’s Order signed by
Ford and Beale. The trial court ordered the parties to arbitrate the claims, and Ford and Beale appealed. In order to complete the sale and financing of the car, Ford and Beale signed both a Buyer’s Order and retail installment sales contract. The Buyer’s Order included an agreement by the parties to arbitrate any claims arising from the transaction, while the RISC did not. However, both the Buyer’s Order and the RISC included an “integration provision,” contractual language “incorporating by reference” all other documents signed by Ford and Beale in connection with the purchase. Ford and Beale argued that Maryland regulations governing auto financing require that all of the terms of the vehicle sale and financing be contained in a single document. In this case, Ford and Beale argued that the controlling document was the RISC, which did not include an agreement to arbitrate. The Maryland Court of Appeals disagreed, holding that nothing in the Maryland regulations supplants the common law principle permitting the reading of multiple documents together as part of a single transaction, particularly where the documents contain
integration provisions. Therefore, the appellate court affirmed the trial court’s decision to compel arbitration. Maryland’s courts tend to be pro-consumer, so a practical, dealer-friendly decision like this one comes as a pleasant surprise. The courts in other states are not bound by this decision, but dealers in those states facing single document challenges should find this opinion helpful in persuading their courts that sometimes the practical answer is the right answer. Ford v. Antwerpen Motorcars Ltd., 2015 Md. LEXIS 480 (Md. April 1, 2015). Tom Hudson, Esq. is the author of several compliance-related books that are available online at www.counselorlibrary.com. He is also the publisher of Spot Delivery®, a monthly legal newsletter for auto dealers, and the Editor in Chief of CARLAW®. Reach him by phone at (410) 865-5411 or by email at tbhudson@hudco.com.
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CATHERINE M. BRENNAN COMPLIANCE UPDATE
PAY PAL T ORDERED TO PAY UP The CFPB recently took aim at PayPal Credit for multiple violations, resulting in a $25 million settlement. Heads up for dealers who may offer this type of online financing to customers.
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he Consumer Financial Protection Bureau has exercised its authority to target lender practices as “abusive” on a handful of occasions since Dodd-Frank bestowed this new authority on the federal regulator in 2010. Now, in its settlement announced yesterday with PayPal Inc., we have more guidance on the kinds of acts or practices the CFPB thinks are “abusive” as consumers navigate the variety of consumer credit products offered to them. The settlement stems from Civil Investigative Demands (“CIDs”) PayPal reported in its securities filings in the last few years. In August of 2013 and January of 2014, PayPal received CIDs from the CFPB requesting that it produce documents and provide testimony and information relating primarily to the acquisition, management, and operation of the Bill Me Later business, a financing subsidiary of PayPal, including online credit products and services, advertising, loan origination, customer acquisition, servicing, debt collection, and complaints
handling practices. PayPal cooperated with the CFPB in connection with the CIDs, which resulted in the $25 million settlement announced yesterday against a company with annual revenues of $6.6 billion in 2013. In the complaint filed along with the proposed settlement order, the CFPB took direct aim at PayPal Credit (the new name for Bill Me Later), which allows consumers to pay for purchases online and in some stores over time and for a fee. Interestingly, the CFPB did not name the actual lender under the program Comenity Capital Bank. As part of the “seamless” process for PayPal consumers, PayPal allegedly enrolled some of its customers in PayPal Credit (and its electronic billing method) without their knowledge or consent, simply because these customers established a PayPal account for money transmission. PayPal also allegedly caused consumers to pay for purchases with PayPal Credit even where consumers expressly sought to use a different payment method. The CFPB also asserted that PayPal Credit failed to process payments www.DealerBusinessJournal.com
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promptly (or at all) and failed to honor and apply promotional offers they advertised. Additionally, once a PayPal Credit account was established, it allegedly became the default payment method for all purchases, causing consumers to use the account even though many consumers intended to use another payment method, such as a linked bank account. The CFPB asserted that PayPal Credit’s practice of enrolling consumers without consent constituted an unfair practice because it caused substantial injury to consumers that they could not reasonably avoid. According to the CFPB, the injury included a credit report inquiry that impacted consumers’ credit scores as well as accrued interest and late fees for failing to pay an account they did not know existed. Interestingly, the CFPB did not note negative credit reports from PayPal Credit as an injury. In addition to other unfairness claims, the CFPB asserted that PayPal Credit’s advertising was deceptive. Specifically, PayPal Credit repeatedly offered promotional credit or money back, and did not honor www.DealerBusinessJournal.com
these representations. The abusive claim came in connection with how the Company allocated payments. Under DoddFrank, an act or practice is abusive if, among other things it “takes unreasonable advantage of...the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product.” As noted above, PayPal Credit would apparently entice consumers that it did not simply automatically enroll with offers of promotional credit. Such promotional credit offers would often mean that consumers had credit balances that accrued interest at different rates. The CFPB claimed that PayPal Credit’s practice was to apply amounts in excess of the minimum payment to lower interest balances, leaving higher interest balances to continue to accrue higher interest. Although PayPal Credit claimed that consumers could control payment allocation, the Company allegedly made it virtually impossible for consumers to exercise this right. Consumers who tried to reallocate how payments were applied could not reach Company representatives or
were given misinformation. Allegedly, in some cases, the Company simply ignored consumer requests to apply payments to higher credit balances. The CFPB also asserted that consumers could not clearly understand how PayPal Credit applied payments to deferred-interest promotions, and that the Company applied payments in a way that consumers would not have chosen. As a result, the CFPB claimed that consumers could not protect their interests in selecting and using the account, thus leading the agency to assert that these acts and practices were abusive. To settle the lawsuit, PayPal agreed to pay $15 million to victimized consumers. The Company agreed to reimburse consumers who were mistakenly enrolled in PayPal Credit, who mistakenly paid for a purchase with PayPal Credit, or who incurred fees or deferred interest as a result of the company’s inadequate disclosures and flawed customer-service practices. PayPal also agreed to improve its consumer disclosures related to enrollment in PayPal Credit to ensure that consumers
know they are enrolling or using the product for a purchase. These improved disclosures would also apply to fees and deferred interest to ensure that consumers understand how their payments will be allocated. Finally, the Company agreed to pay $10 million to the CFPB’s Civil Penalty Fund. There are a number of online companies that operate similar programs, most notably the Amazon. com Store Card, through which Synchrony Bank extends the line of credit. Any online creditor or vendor who offers such financing must ensure they carefully review the PayPal settlement to ensure that they are not running afoul of known pressure points, especially given the CFPB’s willingness to exercise its “abusive” muscle against these types of programs. Catherine M. Brennan is a Partner with the law firm of Hudson Cook, LLP. She can be reached at cbrennan@hudco.com
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DAVE ANDERSON LEARN TO LEAD
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LEADERSHIP
THE DANGER OF MICROMANAGEMENT If your goal is to produce productive employees with trusted decision-making skills, then it is vitally important that you lead in a way that gives direction without encouraging dependence.
M
icromanagement is often misunderstood. On one hand, leaders are wrongly accused of it by followers not wanting to live up to certain standards; in other cases managers strangle the potential and drain the passion from its best people by nitpicking them and becoming overinvolved in their jobs. To accurately assess whether micromanagement is taking place, or not, we should first understand its definition: to control with excessive attention to minor details. Two key words in this definition are: excessive and minor. Based on this www.DealerBusinessJournal.com
understanding, here are three examples of what micromanagement is not: • It is not holding someone accountable for violating one of the core values of your organization. Values are not minor details, they are major components of an organization’s culture. Enforcing them is necessary to protect both the team member and customer experience. • Micromanagement is not terminating an employee because they failed to attain your performance standards, for the same reasons I
offered concerning core values. Performance failure is not a minor detail. • Establishing clear expectations for what a person must accomplish and by when is not micromanagement. Creating clarity is a primary leadership responsibility and failing to do so betrays your people, leaving them confused and demoralized.
three amigos of misery: the underachieving, entitled and ungrateful. Here are three examples of micromanagement in practice:
• A manager who expects to make every decision, solve every problem and have every idea, making his people so dependent on him they are immobile in his absence. • A manager who designates desired outcomes, but then lays out every step a person Frankly, there are must take to get there; some aspects within an this leaves nothing to organization that must be the creative license of the held in an iron grip; that are employee and ensures not up for discussion, debate, the person takes no polls or census. They are the ownership of the plan or “this is the way we do things responsibility for failure here” aspect of a culture since it was all his boss’ that define what you stand idea. for, and what you won’t fall • A manager who for, as well as appropriate persistently gets overconsequences for failing to involved in the work of live up to them. Without this subordinates; nitpicking, level of clarity and resolve second guessing and your culture will devolve into basically making his a politically correct cesspool, people’s lives miserable. creating a sanctuary for DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 27
DAVE ANDERSON LEARN TO LEAD With a clearer picture of what micromanagement is not, and what it is, consider the nine following truths about micromanagement: 1. If you hire the wrong people you’ll have little choice but to micromanage them. After all, you’d be foolish to allow incompetent or corrupt employees to make decisions, solve problems, or implement their ideas. 2. Micromanagement is a primary de-motivator for top performers. Your best people despise having to check with you for everything, and not being trusted enough to make the right decision or do the right thing. 3. Micromanagement assures your people won’t grow. If people aren’t allowed to think for themselves, to innovate, try new things, or implement their ideas they may not make many mistakes, but they won’t grow either because the mistakes they make and learn from are essential to their development. 4. Micromanagement assures you won’t grow personally. If you’ve become the “go-to” person for every decision, problem and idea you’ll become so bogged down in nickel and dime nonsense you won’t have any time for
bigger picture leadership responsibilities like creating vision, mentoring high potential people, strategizing or brainstorming future possibilities. 5. Micromanagement works in the short term. This is why so many managers are addicted to it. It’s always easier to make the decision personally, or perform a task yourself than it is to teach someone else how to do it. Micromanagement will, however, extoll a significant price over the long haul though, as you consider the consequences of points three and four. 6. Micromanagement is symptomatic of insecurity and an inflated ego. You’re afraid to push power down or give discretion to others because you feel it diminishes your value and importance; you’re afraid of losing control. 7. The opposite of micromanagement is empowerment. Empowerment provides latitude and discretion for others to make decisions, spend money to solve customer problems, and implement ideas to move the organization forward. Whereas micromanagement
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alienates subordinates, empowerment engages them. 8. Empowerment is about delegating outcomes without defining step-by-step methods. Naturally you may have certain processes where each sequential step must be followed, but in other cases you can empower employees by defining precise outcomes and deadlines, telling them what not to do in order to make it happen, and then let them run with it using their own creativity and talents to create a successful outcome. In cases like this they “own” it, will be more responsible for the result, and highly engaged throughout the process. They are also likely to discover a better way of doing something than has been done previously. 9. A leader’s job is to ultimately make his or her people less, not more, dependent on them. Micromanaging actually has the opposite effect and makes people more dependent on their manager. Just as your objective when raising a child is teaching them to be self-sufficient—so they can eventually move out of your basement—the goal when leading a team is to do likewise.
This multiplies your leadership throughout the organization, helping people to become more valuable in their roles so that together you can accelerate the organization’s progress. If all this talk of empowerment makes you a bit nervous, and you prefer to hold the people reins in your dealership in a deathgrip, to make every decision, solve every problem, and have every idea , let me take the pressure off you; you’re not that good. No one is. To lead your organization to its fullest potential you’ll need to give up to go up; releasing some tasks and decisions you’re now executing to those in a better position than you are to do them; equip them, hold them accountable for results, and get out of their way. Dave Anderson is President of LearnToLead which provides in-person and virtual training to many of the world’s best dealerships. Dave speaks to dealer groups over 125 times each year and has given seminars in 15 countries. Dave’s 13th book: “It’s Not Rocket Science” will be available in the fall of 2015. For daily leadership tips follow Dave on Twitter @ DaveAnderson100.
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DAVID J. WIGGINS ACCOUNTING PRINCIPLES
TOUGH TIMES CALL FOR TOUGH DECISIONS
I
think it is clear to many dealers in the Buy Here-Pay Here (BHPH) industry that the easy credit available for auto loans by captives and sub-prime lenders has made the business tougher. We are working harder than ever for sales and financing lower credit customers than we had to just three years ago. This is starting to show up in higher charge-off trends. These are similar times to those that new vehicle dealerships endured about
To survive downturns in the economic cycle, you have to toughen up on certain business disciplines that will guide you through the challenges. five years ago. As such, the business demands that you adopt strong disciplines to ride through the current economic cycle. The strong disciplines you need to implement are as follows: • Focused and disciplined management • Strong and accurate monthly financial statement reporting • Analysis of monthly financial information • Decisions made based on financial and other quantifiable information • Measurement and
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accountability in setting and meeting goals and objectives
Focused and disciplined management
Often when times are the most difficult, work becomes less fun and results aren’t as satisfying. This can lead to disinterest in the business and the feeling of losing control. Although this is a normal human condition you must have the personal discipline to overcome these feelings and instead
focus more. It will generally require spending more time at the office and will require that you motivate your team more than ever. It is hard to motivate others when you don’t feel motivated, but it is a must. Set daily objectives and monthly goals.
Strong and accurate monthly financial statement reporting
As many of you know that read my articles, this is not a strong point for www.DealerBusinessJournal.com
BUSINESS OPERATIONS
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DAVID J. WIGGINS ACCOUNTING PRINCIPLES many dealers. You need to insist on accurate accounting information and financial statements from your internal accounting office, or seek outside assistance. During challenging times you are not able to accept late or poor reporting.
Analysis of monthly financial information
Look at your monthly financial statements, your related bank covenants, and your delinquency and charge-offs. Make decisions based on the actual information present. If delinquencies have risen over the past few months, make immediate changes based on what the information is telling you. Challenge your managers to implement changes and tighten up processes. Processes are more important when things are tough than when business is good. Hold meetings with key employees and managers and listen closely to what they are telling you is happening.
Make decisions based on financial and other quantifiable information Look at financial statement trends with gross profits, cash invested in vehicles, cash in deal and monthly expenses. Remember, small changes yield big results. Reducing average cost of inventory
or reconditioning by just $200 per car results in savings of $4,000 per month (assuming 20 monthly sales). Implement small monthly improvements that your team can buy into; don’t make huge sweeping changes. These leave employees feeling overwhelmed and can discourage larger changes. Talk with your vendors. Good vendors will work with you on ways to assist your business and reduce costs. Don’t beat up your vendors, you will likely need their help to assure you survive the tough times. Having constructive honest discussions with your vendors will generate results. Again, wholesale cuts are not necessary, just some belt tightening. If sales are falling more than industry averages, work with your team on creative sales approaches and marketing. Adding three sales a month is more achievable than striving for unrealistic numbers. Complement people making a difference and work to help or replace underachievers. Anybody can take orders, these times demand sales strategies.
Measurement and accountability
The final piece of the puzzle is measurement and accountability. We talked above about setting small incremental goals for improvement. This
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When goals are set and measured and people are held accountable you will generate focus and good results will follow. step requires you and your management team to actually measure results for the goals that you set. Each month you should consciously set aside time to review the past months results. If you set a goal (as listed above) to reduce the cash invested in inventory and reconditioning by $200 per unit, look at the cars purchased last month to determine if it worked. If it did, then consider whether further cash in inventory reductions are possible. If it didn’t work as intended, discuss it with responsible employees to understand the cause. Either way, it is the process of measurement and accountability that is valuable and important. You will notice that when goals are set and measured and people are held accountable you will generate focus and good results will follow. Establishing these processes is hard work, but once you see results you and your employees will get more engaged and feel a greater sense of control over your business.
At these times it is more important than ever to lead. Don’t shy away from the business; become more engaged. By doing this, you will be able to keep your business strong during these challenging times and continue on when economic times turn and the business is easier to manage with better profitability. Don’t fall into the trap of listening to others in the industry and accept sub-par results. Tough times have fallen on various industries for years. There will always be those that survive and those that fail. Be sure that you are one that survives by working on the processes outlined above. Remember when times are tough, the tough get going!. Dave Wiggins, CPA is a principal with CliftonLarsonAllen’s dealership and Buy-Here, Pay-Here group team. He has extensive knowledge of the inner workings of dealership and finance company operations, including new developments regarding regulatory compliance issues. Dave specializes in federal and state taxation with the unique perspective of those specific strategies that apply to dealership, finance companies and their owners. He can be reached at david.wiggins@ CLAconnect.com.
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TIM BYRD DEALER REINSURANCE
PROBABLY THE
SMARTEST
THING I EVER DID Buy Here-Pay Here dealers are always looking for bright ideas to save money and increase profit. A reinsurance company might be a smart choice.
P
robably the smartest thing I ever did, is what I hear many of the Buy Here-Pay Here dealers who have smartly created a Dealer-owned Reinsurance Company say. Why Reinsurance? Buy Here-Pay Here dealers, reinsurance helps you provide great service without going broke doing it. In fact, you can improve your profit while doing it. Statistics show that onethird of failed relationships with customers is over mechanical breakdown. They buy a car, it breaks down, and they cannot www.DealerBusinessJournal.com
afford to fix it. In case you are wondering, in most cases this is your fault as a dealer. Now, I am not naive. Cars break. Don’t you be naive. When they break, the payments are going to stop, unless you fix their cars and get them back on the road! As the saying goes, “Customers don’t pay for cars that don’t run!” Consider how much it costs to get a customer in the door the first time. Consider that payments are the lifeblood of the BHPH business. That car is a payment producing machine. Then if your attitude is still “too bad,
so sad” when they have a breakdown, your current system is going to cost you a fortune. You can fix that with reinsurance. Reinsurance allows the car dealer to warranty their vehicles by establishing a nationwide mechanism, customer-funded, which insures that there are always ample funds available to fix those vehicles—not a third party service contract, which costs you in the long run more than the repairs—your own warranty company. Why not have a system in place that no matter where your customer drives that vehicle, should they
breakdown you have a plan and the money set aside to get them back on the road. The beautiful thing is, that with reinsurance, your customer continually and painlessly reserves for the unexpected breakdown. They are the ones reserving for it. For the BHPH dealer your reinsurance company will provide premium finance for your customer’s warranty; therefore, not requiring you to pay the full price of the warranty up front, which would deplete your lending pool. A prorated portion of the cost of the warranty is
DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 33
TIM BYRD DEALER REINSURANCE
Since you require your collateral to be covered, and you make collection calls on it, doesn’t it make sense for you to profit from it?
collected from the customer’s payment and forwarded to your reinsurance trust account. This will provide a constant stream of reserve to ensure when problems arise there is a well-funded system in place. Problems are taken care of, your customers stay on the road and they continue making payments. Another problem BHPH dealers face every day is lapsed insurance. When the customer allows their coverage to lapse, therefore putting into jeopardy the dealer or finance company’s collateral. Industry research indicates that 50 percent of most BHPH books of business, are uninsured. Customers put an average of $300 into insurance policies that they let lapse within 90 days, essentially throwing away that money. Many dealers have personnel assigned strictly for the purpose of making collection calls for the Insurance Companies who are reaping the financial gains off the dealer’s man hours. What if you made a deal with your customers? “You pay a little extra each pay period to me, in return, if you total your car or it’s
stolen and not recovered, I will forgive your debt to me.” That is the definition of Debt Cancellation Coverage. You collect the premium with each car payment. You can make it a part of their monthly payment to you or a side note. Debt Cancellation Coverage is a solution to relieve the lapsed insurance problem and turn what once was an expensive, never-ending problem into a tremendous profit center. By capturing the money the customer would be spending with the insurance company and ceding it to your Dealer-owned Reinsurance Company, you profit instead of the insurance company. DCC alleviates the need for you to require full coverage insurance. DCC puts you in control when there are claims. Instead of dealing with the insurance adjusters, you have a professional claims team looking out for your best interest, nationwide Dealers who offer DCC avoid unprotected collateral on the road and having to absorb uninsured losses. Further, DCC makes it simple for you to enroll,
right away, your current customer base and your new customers, at time of sale. This is not Liability Insurance. The State requires liability. You only require your collateral to be covered. Since you require it and you make collection calls on it, doesn’t it make sense for you to profit from it? Besides, an added benefit for the customer is that they can usually get DCC and a VSC for less than they can buy just insurance from that other guy. Tim Byrd is Founder and President of DealerRE a Tim Byrd & Associates company, a managing agency located in Gloucester, Virginia. An Auto Industry Expert on Dealer Owned Reinsurance Companies, BHPH Operations and F&I Development. A 25+ year veteran of the car business, Tim is a trusted advisor to many car dealers and can be reached at www. DealerRE.com or by calling 804-824-9533.
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JODY DEVERE SALES AND SERVICE
MARKETING TO THE MEME GENERATION Move over WASPs and widows, there is a new market for luxury vehicles–the Millennial Woman. Do you know how to connect with this growing group of customers?
L
uxury car dealers, do you know your audience? If you’re like most that I’ve spoken to, you may be selling cars with the wool over your eyes, assuming that the affluent male is your crème de la crème, and some wealthy widows, female executives, and women entrepreneurs round out your market – but a recent study seems to show that just isn’t the case, and as the CEO of AskPatty. com, a website dedicated to providing automotive resources to women and helping auto dealers like
yourself attract and retain more women customers, it surprised me, too! The Shullman Luxury, Affluence and Wealth Pulse, Autumn 2014, has revealed some very intriguing findings on who is actually buying in the luxury market. First of all, it’s not all affluent people. In fact, 61 percent of buyers with a household income of $250,000 or more don’t own a luxury car! Interestingly, it seems that the Millennial generation of women are driving more luxury vehicles than one might assume. While most of us are
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targeting the older crowd, it seems that millennials are more interested in a luxury lifestyle than boomers or generation X members! According to the study, “The $75,000-249,999 affluent segment is the primary buyer of all the luxuries consumer spending, including luxury vehicles. The second-largest buying segment for all luxuries was mass-market America (those with less than $75,000 in household income). The very high-income buyers (those with $250,000+ incomes), although fewer in number, typically spend
the most on average for each luxury bought and tend to buy more luxuries per adult than the other two income segment. ... The number one luxury buying generation today, according to this survey, is the Millennial generation (18-34 years of age in 2014) who constitute 45% of luxury buyers.” So, let’s take a moment to consider our target – the new target, the millennial woman!
Mucho Millenia! Facts About the 18-34 Segment of Women Today
So, if we’re going to be selling to millennial women, we need to understand how they operate. They’re not baby boomers, and they’re not Gen-X, so those approaches are going to ring false with this group. It’s also worth noting that in my experience at least, these are women who are actively working in advertising much of the time, so the trite marketing methods are going to fall flat. They know all those tricks! Today’s millennial women are a technologically connected, diverse, and an educated generation. They prefer the speed and convenience of smart phones and email to telephone www.DealerBusinessJournal.com
SALES AND SERVICE
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DEALER BUSINESS JOURNAL | JULY/AUGUST 2015 | 37
JODY DEVERE SALES AND SERVICE conversations or walk-in business. In terms of work, they tend to have more job market equality than previous generations, and are earning four year degrees at a higher rate than male counterparts. This higher income translates to higher overall household income for their families, and it also means a new kind of family – one where the mother is the sole breadwinner. Millennial women share some things in common with boomers and GenXers. They are also brand influencers who are quick to share their opinions with friends, family and their online communities. A majority of social media outlets are predominantly female users, and they use them to speak their minds! Millennial women want to be included in the conversation, rather than being told what to do or what to purchase. They value inspirational messages, important causes, and most of all, they support brands who support them. When it comes to advertising to millennials, remember that this is the generation of the “meme.” That means that iconic, engaging visual marketing plays an important role in what resonates with them. Don’t shy away from humor, and focus on making your messaging instantly accessible and simple. Ever looked at Pinterest? It’s just a wall of photos, but to the millennial women, it’s a
Know your audience: Shift your marketing practices to encompass the generation of Pinterest projects and Tumblr blogs.
wall of ideas, conversations, and opportunities to do something amazing. Consider this: 58 percent look to Pinterest or Instagram for inspiration for everything from meals to makeup to home décor. Most of all, these women are “social shoppers,” social media users who value the opinions of their social media peers more than anonymous reviews or snappy slogans. Cause-related marketing also works with millennial women, as long as you take care to ensure that your cause means something. They’re quick to spot practices like “pink-washing” (that is, coloring a product pink for breast cancer awareness month but not actually providing any meaningful support for the cause), so choose your charities wisely and remember that
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transparency is key! When you commit to a cause, it should embrace your entire company. For example, consider TOMS Shoes. Their message is clear, simple, cause-driven, and instantly accessible: for every pair of TOMS Shoes you buy, they will donate a pair to a child in need. This clear, concise message, coupled with transparency and accountability, has made the company absolutely huge with millennial woman – to date, they have provided shoes to over 10 million children. So let me ask you again, luxury car dealers: do you know your audience? Are you shifting your practices away from the older executives and widows to encompass the generation of Pinterest projects and Tumblr blogs? If you’re not
approaching your marketing plans with the goal of making instant accessibility the core of your brand, then you could be missing out on the number one buying segment of luxury vehicles today. Jody DeVere is the CEO of AskPatty.com, Inc, a website, blog, and marketing to women agency providing automotive education to women consumers, as well as training, ongoing marketing support and education, and certifications to car dealers, independent service locations, tire dealers, collision centers, and other automotive retailers. - See more at: http://www.askpatty.com.
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You know where you want to go—let Leedom & Associates help you get there. Whether you are trying to take your business to the next level, train your staff or arrange financing for your dealership, we can help! Our world-class programs are recognized throughout the industry! You will find our staff of seasoned professionals to be among the best in the business. In the past 20 years, we have helped tens of thousands of dealers turn their dreams into reality by helping them create a strategy for success. Now it’s your turn.
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