BHPH Dealer THE
OFFICIAL
NIADA
PREMIER
SUBPRIME
AUTO
RESOURCE
•
DECEMBER
2016
MAGAZINE
IT’S NEVER TOO EARLY TO
DOMINATE
TAX REFUND SEASON PAGE 6
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C A R
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M A G A Z I N E
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BHPH Dealer •
THE
OFFICIAL
NIADA
PREMIER
SUBPRIME
AUTO
RESOURCE
•
MAGAZINE
CONTENTS DECEMBER 2016
BHPH Dealer •
THE
OFFICIAL
NIADA
PREMIER
F E AT U R E S 6 COVER STORY
SUBPRIME
AUTO
RESOURCE
•
COLUMNS 4 Editor’s Message
MAG Z I N Eplanning process What’s your plan for 2017? Before theAstrategic can begin, BHPH DEALER editor in chief Chuck Bonanno says, you must determine your true goals.
Chip Wiley of TRS Tax Max explains how tax refund season can benefit BHPH dealers throughout the year.
10 Best Practices
Tim Byrd, founder and president of DealerRE, explains how BHPH dealers can prepare for the obstacles that lie ahead in 2017 by creating a dealer-owned reinsurance company.
8 Best Practices
12 Leadership
earnToLead’s Dave Anderson provides some “game-changer L mindset builders” to help develop the mental focus, toughness and consistency to execute daily.
NIADA 20 Groups moderator Mark Dubois offers three key steps that can help you create an effective business forecast.
14 Dealer Perspective
tlanta dealer Hudson Biondo reminds us it’s our job as dealers to A change the public’s perception of Buy Here-Pay Here.
16 BHPH Advocate
A D V E RT I S E R S AMERICAN CREDIT ACCEPTANCE / SPARTAN FINANCIAL PARTNERS 19 ARA GPS 14 AUTOZONE 11 CLIFTONLARSONALLEN 14 DEALERRE 10 DEALERSOCKET IFC INTERACTIVE FINANCIAL MARKETING 9,12 PASSTIME 13 PERITUS 16 QUOTEPRO 7 SPIREON 17 STARS GPS 15 TRANSFIRST 4,5
Do you GPS? If so, NIADA senior vice president of legal and government affairs Shaun Petersen warns, legislators and regulators are on the lookout.
18 Management
lanning might be difficult, David Brotherton, moderator/ P consultant for NIADA Dealer 20 Groups says, but it’s essential – it’s the difference between being prepared and being surprised.
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DECEMBER 2016
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EDITOR’S MESSAGE
ARE YOU PLANNING TO FAIL? As I travel the country moderating Twenty Groups, I always ask my members about their strategic plans. Those are the plans that go beyond a monthly sales goal or the annual budget. They are the plans that determine the organization’s and the dealer’s future – the big picture plans, the short-, medium- and long-term plans. They are the plans that lead to the annual budgets and monthly goals. They are the plans that require careful consideration, thought and introspection from the dealer. The two replies I get that are troublesome are: “I want to sell more cars,” and, “I hope we sell more cars.” I will start with the second reply first. Hope is not a strategy. Hoping and wishing for things is fundamentally flawed. It implies you have no control over achieving your goals.
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BY CHUCK BONANNO
Hope is what I use for things I cannot control, such as weather or peace on earth or my favorite hockey team winning the Stanley Cup. Hope can, however, play a role in your strategic plan. An example: I am hopeful subprime auto finance will contract and BHPH dealers will benefit. My plan will include strategies that take into account those things, which I cannot control. My plan(s) will include scenarios in which subprime retreats, remains static and even grows. My plan will take into account any eventuality. The most common reply to my question is, “I want to sell more cars.” I never understand that response. Our mission is not to just sell more cars. Selling more cars might help achieve your underlying goals but it is not the end, it is the means. Selling more cars in a BHPH environment will help you grow
your portfolio, create better cash flow down in the future, even justify your overhead. But BHPH car sales are a negative cash flow event. The more we sell, the weaker our cash position. As you create your strategic plan, think about your true goals. Those goals can include building wealth, creating cash, deleveraging, debt retirement, an exit strategy or a succession plan. Every one of these strategies involves a sales projection, but that projection and its successful implementation allow you to achieve the underlying plan, your true goal. Once you have determined your goal, then the strategic planning process begins. It requires you to project sales, collections and the expense control needed to achieve your goal. You need to communicate those goals to the key personnel in your organization. Those key people determine your ability to
achieve your goals. Don’t just dictate – get feedback and verify their comprehension of the goals. Be certain they understand their role and buy in to your vision. Without that, you are back to hoping. Finally, you need to review progress periodically to ensure you are moving toward your goal. If you are moving in that direction, make sure your team knows you are pleased. If you are not moving in the right direction, only periodic review will allow you to shift, modify or correct your course. The adage “failing to plan means planning to fail,” is a cliché, but clichés are often truths. As we near the end of 2016 and look forward to 2017, there is no better time to create your strategic plan and begin implementation. I hope you are successful.
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Think About Your True Goals
CHUCK BONANNO IS EDITOR IN CHIEF OF BHPH DEALER.
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COVER STORY
IT’S NEVER TOO EARLY TO DOMINATE TAX REFUND SEASON
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ere it comes. Tax season is upon us … at least for the fortunate and the vigilant Buy Here-Pay Here dealers across the country. Sadly, many dealers sit and hope tax season comes in January, only to wonder where it went as St. Patrick’s Day approaches. Tax season is dead? How can it be dead when the average refund within the special finance market has more than doubled in the last 10-12 years? In my 15 years of helping car dealers maximize their tax refund season, I have learned many things. The one lesson that tops them all is the refund season is a dynamic animal. It is constantly changing from year to year and week to week. The phenomenon is dead for those who do not adapt and profitable for those who seek it. As the holidays approach, many Buy Here-Pay Here establishments are starting their second month of tax season. They aren’t merely preparing to sell cars in January and February. They are actively moving cars in October, November and December. They are stealing your customers from under you in the “slow” months before the traditional tax season. Some are even selling all 12 months of the year based on the customer’s future tax refund, with zero additional risk in their portfolios. But it’s not too late. Franchise dealers, Best Buy, furniture stores and manufactured home retailers will not be entering
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the market until January. You, as a Buy Here-Pay Here dealer, can still get in and steal their customers. How? • Find a tax refund partner to help you estimate a customer’s upcoming refund. Some due diligence will point you toward the right service provider with experience with car dealer customers. • An online calculator or the tax place down the street can help you calculate, but you need someone to help you sell with no additional risk. Don’t settle for an accountant or a website. Find a partner who understands your business and your customers. • Expedite and update your marketing. Customers cannot find you if you don’t tell them what you can do for them. “Why wait for the bus in the snow as you do your holiday shopping? We can put you in a quality car NOW in advance of your upcoming tax refund!” • Don’t forget to update the text of your website to maximize your Google results. Spread the word on Facebook and reach thousands of people within a few miles of your location for less than $100. • Train your staff. Teach them how to hold a customer’s hand to maximize the tax refund opportunity. Otherwise, customers will spend every dime of their $5,000$10,000 refund within 2448 hours. • When you have the right tax season partner, you will be able to have better control of the refund
BY CHIP WILEY
money. That is not so you can get $5,000 from it. The goal is to get an amount the customer is comfortable with and that helps reduce your overall risk. • Change your company’s culture. It’s about to get busy. Expect to see onethird to one-half of your annual business within 8-12 weeks. It’s time to get our hands dirty. That’s why we are all in business. • Negativity is not uncommon leading up to a successful tax refund season due to changes in duties and workflow. It is your job as an operator to assemble the parts of your organization into a successful selling machine. Explain that refund season is a time of opportunity for everyone in the organization. It ensures job security and enhances bonuses and commissions. • Set your underwriting criteria. Here’s a hint: Don’t change it! • Whether your customer has the funds to make the down payment you want or the down payment you are willing to settle for, the goal is to get a commitment for additional funds from the upcoming refund. • Limits do apply to that concept. Remember your customer, especially those who are indifferent to their credit and repossessions. • “Why would I give a dealer $3,000 of my refund for a car that is no longer ‘new’ when I can get another one down the street for $1,000 or $1,500 down?” • If you only commit them to $800 or $1,200 in February, that is no longer an issue.
• Start planning for January and February. You should see an influx of sales in addition to increasing your cash flow here as well. Breaking news: The PATH Act is now federal law. That means most Buy Here-Pay Here customers should not expect their refunds until Feb. 15 or later. Many tax professionals fear billions of dollars could hit the market within a couple of days. If you are not prepared, your competitors will be. It also makes sense to have an experienced tax partner who can make tax season a 12-month proposition instead of an unpredictable handful of days in February. Just like any government program, tax season can be delayed by uncontrollable forces such as weather. Eliminate the question marks by controlling your customers’ refund dollars and ensuring first access. The “sit and pray” approach to tax refund season no longer works. Sit and be prey is more accurate. There are too many sharks in the refund tank these days. If you do not actively pursue tax refund customers, more aggressive competitors from multiple industries will take them from you.
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Make Tax Season a 12-Month Proposition
CHIP WILEY IS THE DEALER TRAINING AND MARKETING SPECIALIST FOR TRS TAX MAX. HE HAS 15 YEARS OF EXPERIENCE, SPECIALIZING IN THE BUY HERE-PAY HERE DEMOGRAPHIC. FOR MORE INFORMATION, CALL (813) 987-2199 OR EMAIL TRS@ TAXREFUNDSERVICES.COM.
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BEST PRACTICES
THREE STEPS TO AN EFFECTIVE BUSINESS FORECAST Design, Manage and Execute Your Plan
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ou have probably heard the expression, “Most businesses don’t plan to fail, they fail to plan.” As hard as that might be to accept, the truth is many businesses just don’t take the time to develop an effective business forecast. With 2016 winding down and 2017 on the horizon, it’s time to put some thought into your business forecast for the upcoming year. If you subscribe to the wild guess approach to business forecasting, the plan might take very little time to design but the results can range from terrible to shocking. On the other hand, if you make an effort to design a plan, then manage and execute the plan, the results will likely range from great to outstanding. To accomplish that task we will explore three steps to an effective business forecast.
EVALUATE YOUR CURRENT MARKET CONDITIONS Stop to ponder this for a moment. The market conditions your business competed in this year might not be the same market conditions your business will compete in next year. At the very least, it’s worth assessing what has changed in your market and the potential impact it would have on your business, both positive and negative. Evaluating key market elements will help determine if your market is in growth mode or decline mode. • Is the economy likely to be stronger or weaker next year? • Does the economic forecast equate to a growth opportunity for your BHPH business? • Will the BHPH industry as a whole return to growth mode next year? • Will subprime auto finance back off from the aggressive tactics we have seen in recent years? • Has your market experienced an increase or decrease in the number of BHPH dealers? • Will the increase or decrease in competition equate to a growth opportunity for your business? • Will the ACV of your vehicle inventory increase or decrease next year? Will wholesale auction prices and vehicle supply increase or decrease next year?
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BY MARK DUBOIS
• What other market conditions will impact your business next year? The answers to those questions might not be readily available or easy to predict. But a meeting with your management team to discuss and brainstorm the potential effects of those market conditions will go a long way toward developing an effective business plan for the upcoming year.
ASSESS YOUR BUSINESS STRENGTHS AND WEAKNESSES It’s time for a reality check. In most cases it’s difficult to conduct an impartial assessment of the strengths and weaknesses of your own business. We all like to think we do a pretty good job in all areas. But if you belong to a BHPH 20 Group, your business results are well documented. Comparing your business results to other BHPH dealers in addition to national benchmark averages will provide a more accurate measure of how well your business is performing, and what areas need time and attention to improve. Some of the more common areas dealers struggle with are:
Staff: Many dealers suffer from hiring too fast and firing too slow, so if you fall into that category you’re not alone. Like most things, hiring good staff requires time, effort and knowledge. The knowledge comes from knowing how to attract good employees, where to search for new employees and how to keep good employees. Details on those important strategies will be discussed in other articles. Chargeoffs: How much more profitable would your business be if you could reduce annual chargeoffs by just 10 or 15 percent? Having said that, reducing chargeoffs is not an instant or overnight fix. Excessive chargeoffs are not a result, they are a symptom. Poor deal structure, faulty underwriting and ineffective collections are usually the root cause of excessive chargeoffs. Once again, participating in a BHPH 20 Group will provide the benchmarks and comparisons into what would be considered excessive chargeoffs for your BHPH business and size of portfolio.
BEST PRACTICES
What other revenuegenerating opportunities are available for your business? Many dealers have success selling service contracts, collateral protections insurance, GAP insurance and other revenuegenerating products. Just be aware of the risk of loading your customers with more payment than they can afford and setting them up for failure. Decrease expenses: We have already touched on what is generally the largest expense item affecting the bottomline profitability of BHPH dealers – chargeoffs. The degree you can reduce net chargeoff dollars in your business will determine how much more profitable your BHPH business can be. Other opportunities to decrease expenses require an assessment of specific fixed expenses,
semi-fixed expenses and variable expenses. Once again, dealers in a BHPH 20 Group have the benefit of analyzing and comparing their expense numbers to the group average and benchmark average to determine if their expense structure is in line with the size of their operation. Many times we see a dealer has more staff than the revenue side of the business can support. Right-sizing your business is an important exercise in developing an effective business forecast. Policy adjustment, or repairs to customer vehicles that are paid for by your business after delivery, is another silent killer of profitability. Closely monitoring policy adjustment and taking corrective action to control that expense item can have a huge impact on increasing profitability.
Both: The best formula for attaining increased profitability is to develop a business forecast with a focus on both increasing revenue and decreasing expenses. Consider: A 10 percent increase in revenue combined with a 10 percent decrease in expenses can have a substantial impact on the bottom-line profitability of your business. Focusing on one area but not the other might not produce the same result. The most successful BHPH dealers take the time to develop an annual business forecast and view it as an integral part of their year-toyear business strategy. They have a structured approach, with details on specific areas of the business they will work on to improve. Those dealers also monitor the results on a monthly basis to
determine if they are on plan, and make adjustments to the business forecast if events occur that have a positive or negative impact on it. Finally, the most successful BHPH dealers network with other BHPH dealers in a 20 Group format to measure, analyze and compare business results. The end result is typically improved business results and greater profitability that is based on a sound plan – not a silly wild guess.
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IDENTIFY OPPORTUNITIES TO INCREASE REVENUE AND REDUCE EXPENSES In the most simplified terms, the formula to increase the profitability of your business is to first increase revenue; second, decrease expenses; and third, both. Increase revenue: Take a moment to assess new opportunities to generate additional revenue. Is your up-front gross profit in line with benchmark dealers selling similar ACV vehicles? In many cases new members in a BHPH 20 Group discover their gross profits are substantially lower than the benchmark average. That translates into money left on the table that could have gone directly to your bottom line profitability if your pricing model was more in line with benchmark averages.
MARK DUBOIS IS A MODERATOR FOR NIADA DEALER 20 GROUPS AND AN AUTO INDUSTRY VETERAN WITH MORE THAN 35 YEARS OF EXPERIENCE, INCLUDING SALES, MANAGEMENT, RECRUITING AND TRAINING, E-BUSINESS, MARKETING AND BHPH MANAGEMENT. HE CAN BE REACHED AT MARK@NIADA.COM.
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BEST PRACTICES
BE PREPARED FOR OBSTACLES IN 2017 P Dealer-Owned Reinsurance Circumvents Insurance Companies ayments are the lifeblood of a BHPH business. So what can you do to get ready for 2017? One of the most effective things you can do is set up a dealer-owned reinsurance company. Why? Let’s identify the three greatest obstacles to reaching the ultimate BHPH goal of avoiding repos and maintaining uninterrupted payments. Customers’ personal financial mismanagement: There is little you can do about that. It’s why they are BHPH customers in the first place. Mechanical breakdown: As Murphy’s Law dictates, it often happens at the worst possible time. It’s responsible for up to one-third of all repos. Lapsed insurance: What dealer can afford collateral exposed to risk of loss? This is responsible
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for a large percentage of repos. Those last two issues are why owning a reinsurance company is essential. Mechanical breakdown: You know it’s going to happen. Why not reserve for it? Why not have a system so no matter where a breakdown occurs, you have a plan and the money set aside to get the customer back on the road and making payments? The beautiful thing is the customer is reserving for it. Warranty your cars and let your customers provide the reserve to keep the cars repaired and on the road. How? Your reinsurance company will provide premium finance for your customer’s warranty. You will no longer be required to pay the full price of the warranty up front, which depletes your lending pool.
BY TIM BYRD
Lapsed Insurance: Insurance adjuster nightmares. Collection calls burning up your man-hours. Repos. Why not circumvent insurance companies? You have an RFC to circumvent the finance companies, right? It’s profitable and reduces tax liability. You can do the same thing with a dealer-owned reinsurance company, using a tool called debt cancellation coverage. Debt cancellation coverage covers your collateral. By providing it at time of purchase, your collateral is never without coverage. Customers love it because it saves them time and money by eliminating the need for outside coverage from the insurance company. In most cases, in the event of a total loss, their debt is wiped clean and they can get in a nicer, newer car right away
(they still need liability insurance required by the state). You no longer have to make collection calls for the insurance company or be at the mercy of adjusters. In the event of a total loss, you keep the car, not the insurance company. You are in control. The premium from your warranty and debt cancellation coverage provide the capital you need to take care of problems that arise. What is not used to pay claims becomes underwriting profit for the stockholders.
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TIM BYRD IS FOUNDER AND PRESIDENT OF DEALERRE, A GLOUCESTER, VA.BASED MANAGING AGENCY, AND AN AUTO INDUSTRY EXPERT ON DEALEROWNED REINSURANCE COMPANIES, BHPH OPERATIONS, AND DEALERSHIP AND F&I DEVELOPMENT. HE CAN BE REACHED AT WWW.DEALERRE.COM OR (804) 824-9533.
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LEADERSHIP
STAY IN YOUR ZONE Game-Changer Mindset Builders
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BY DAVE ANDERSON
ffective and consistent execution requires a combination of both skill set and mindset. The five-step execution process I laid out in my book It’s Not Rocket Science: Four Simple Strategies for Mastering the Art of Execution provides a framework to develop the skill set. But until you develop the mental focus, toughness and consistency to want to execute daily – and to hold others accountable for doing likewise – simply having another process that is implemented only occasionally won’t help much, if at all. Following are a handful of what I call “gamechanger mindset builders” – affirmations, of sorts – that focus on execution. I teach them in my workshops, and they have been helpful in influencing attendees to develop an execution mentality that helps them get more of the right things done, consistently and with more excellence. Reading them as part of your morning motivational routine, discussing them in meetings and working them into your everyday thinking and behavior can be a key to executing the daily disciplines necessary to reach your vision – to help you close the gap between knowing what to do and actually doing it.
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The reality is, until you’re thinking right, you are not likely to execute right. Just like an athlete or other performer, we all have a “zone” where we are laser-focused, energized, effective and resilient. Out of that zone, we are spread thin, overwhelmed, and trying to play catch-up. It’s tough to demonstrate a killer instinct or gain momentum when you are working outside your zone. When you are in your execution zone, work is fun, time flies and you are getting results and making a maximum impact. By getting in your zone daily – preferably before you even get to work – you will get more done in less time and do so with fewer people and opportunities. That’s the power of execution: you accomplish more of what matters most, with less. Despite having a great execution process, until you are mentally checked in and locked in each day you will miss your potential by a mile. Weaving these eight points into your thinking will help put you in your execution zone and keep you there, day in and day out. I avoid zone busters: Zone busters take me out of my zone. They break momentum, distract me
LEADERSHIP
empowers me and keeps me in my zone. Taking responsibility preserves my self-esteem, earns respect, and keeps me focused on moving forward. Blame makes me a victim. Blame is the anti-focus and is the language of losers. I will never blame. I will always take responsibility. I don’t allow external conditions to dictate outcomes: When things out of my control conspire against me, I still take responsibility. If I blame conditions it weakens me and takes me out of my zone, and I’m admitting I don’t have control or a solution – and I always proceed as though I have control and a solution. Thus, I will take responsibility and navigate through adverse conditions by focusing on the things I can control. I won’t let external conditions
dictate the outcome. I have situations, not problems: Problems are negatives, and I won’t automatically label something as a negative because it might be a positive in disguise. Problems weaken me and can take me out of my zone, whereas situations energize me and keep me laser-focused. I only have problems if I react wrongly to situations and thereby create them. I renounce excuses: I don’t make excuses because excuses weaken me and others and take us out of our zones. Excuses waste my energy and distract me from executing what matters most. I can’t have a killer instinct and make excuses simultaneously. Excuses are the DNA of underachievers, and they make me less as a person. They are the language of losers. I renounce them.
I own it: When it comes to my actions, doing my job, and handling any responsibility given to me, I own it. Regardless of the conditions or outcome, I take complete responsibility, even if it is not technically all mine to bear. I own it without excuse or explanation because owning it keeps me in control and in my zone. When conditions beyond my control conspire against me, I still own it, because my mindset is to navigate through conditions and still get results. I have two options every day: performance or excuses – and I never choose excuses because I own it. I will carry the load: Going into every day, I’m aware at least one person on my team might take the day off mentally, and possibly physically.
It will never be me. I will pick up the slack, lead by the right personal example and carry the team on my back if I have to. I’m the leader, and that’s what leaders do. Most leaders develop a game-changer mindset toward the end of the month, when time is running out and their paycheck and reputation are on the line. But if you want jump from being the occasional playmaker to the consistent gamechanger, you have to develop the mindset to bring the necessary toughness, focus and energy to execute incessantly every day. And every day means every day.
DECEMBER 2016
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and drain urgency and killer instinct. I avoid zone busters, and if I slip into one I get out fast. Zone busters include things like bitterness, blame, excuses, revenge, gossip, judging, wrong associations, garbage media, immoral activities, jealousy, envy, self-promotion, selfishness, worry, selfpity, complacency, taking offense and the like. I prove myself over again every day: Yesterday ended last night. I will prepare my mind and prove myself over again today. I won’t borrow credibility nor rehearse hurts from the past. I will bring it all, fully engage and be totally used up by day’s end. I will live with a “stay hungry” red belt mindset. I am responsible: I take responsibility because doing so
DAVE ANDERSON IS PRESIDENT OF LEARNTOLEAD.
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DEALER PERSPECTIVE
HELP IMPROVE THE PERCEPTION OF BHPH It’s Our Job to Change the Public’s Concept of Buy Here-Pay Here BY HUDSON BIONDO
I
have recently become more involved with NIADA because Buy Here-Pay Here is the industry I chose to make my career and I want to help change the general perception the mainstream has about the industry in general. The BHPH industry has had its share of bad press – some deserved and some not. But I’m a firm believer that what we do helps the community as a whole, and I want to keep doing all I can to help spread the word that there are plenty of honest, ethical operators in this space. Yes, there are some bad apples in our industry, but what industry is immune from that?
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It’s our job to change the public’s concept of BHPH. It starts with getting involved with your state and national associations. At my dealership we have a goal to assist every customer the same way, every time. The customer is not always right, but the customer is always the customer – our customer. Buy Here-Pay Here is a relationship business and your customers need to know they can count on you. We need them and they need us. Our customers need reliable transportation and it is our job to provide it to them. We have to make sure our customers receive assistance if their vehicle needs repair beyond their financial ability to pay, or if they have another financial bump in the road, like a lost job or a medical situation. Here is how we believe you can help your customers (and your dealership) be successful: · Provide your customers with a warranty or give them an option to purchase a service contract. It’s not only good for the customers – that’s how we change the industry perception – it’s also great for your reputation in the community. · Have policies in writing as to how you are going to assist a customer when there is an uncovered repair. Don’t let customers just imagine. Let them know. · Have a plan for how you are going to assist when a customer has a job change that puts him a little behind on his payments. A great way to get started is to know and understand the deficiencies within your operation, then create a strategy for improvement. Here are a few tips on what you can implement in your operation: · Compile a log with all customers who need assistance at the moment, then update it with new ones and remove the ones with a closed resolution. · Separate the log by mechanical and financial issues. Designate the most qualified team associate to handle each matter. · Have a deductible payment plan in place and uncovered repair payment assistance.
DON’T ABANDON YOUR CUSTOMER WHEN HE ASKS FOR ASSISTANCE. THAT’S WHEN HE NEEDS YOU THE MOST. Don’t abandon your customer when he asks for assistance. That’s when he needs you the most. Take great care of him – not just good, but great. Can he get that same customer service at your competition? We strive to answer that question with no, he cannot, because we train everybody on our team to deliver the best customer service experience ever, regardless if they are a sales rep, front desk, cashier, collector, porter, etc. I hope to have brought to the readers some ideas on how to improve the perception of our industry by being the best dealers we can be. Buy Here-Pay Here is what I do every day, and I’m proud to say I’m a Buy Here-Pay Here dealer.
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HUDSON BIONDO IS A BUY HERE-PAY HERE DEALER IN ATLANTA, OPERATING MASTERCARS AUTO SALES. HE IS A PROUD MEMBER OF GEORGIA IADA AND NIADA, SERVES ON THE NIADA BHPH COMMISSION AND BELONGS TO AN NIADA 20 GROUP.
DECEMBER 2016
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BHPH ADVOCATE
DO YOU GPS? Disclose Use of Payment Assurance Devices BY SHAUN PETERSEN
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A
s a parent of a teenage driver active in a bevy of extracurricular activities, I have to admit it is comforting to know I can activate an app on her smartphone and know where she is at all times. I also have to admit I am glad my parents did not have access to that technology when I was her age. Technological advances of any kind bring with them inherent policy and legal questions that never before had to be considered. The debate surrounding the use of GPS and starter-interrupt devices in automobile financing transactions is no different. On the one hand, industry advocates – including NIADA and our friends at the Telematics Service Providers Association – have been promoting the benefits of those devices, not only for creditors but also for consumers. Certainly, the creditor benefits by knowing it will have easier access to the collateral in the event of a default. But the consumer benefits are much more significant. Consider: The use of GPS/starter-interrupt devices provides immediate benefits to consumers before the device is ever turned on. Consumers often qualify for a better or more reliable vehicle. Creditors are more comfortable with providing consumers greater purchasing power because the risk of not being able to recover collateral in the event of default is diminished. Less risk to the creditor often translates to lower interest rates, higher loan-to-value ratios and longer term notes. After the transaction is consummated, consumers
BHPH ADVOCATE
to retrieve it without the additional expense that often comes with the unknown. Consumer advocates frequently raise concerns that can be lumped into three categories: safety, privacy and lack of disclosure. The advocates assert the use of a starterinterrupt device can disable a vehicle while it is in operation, a myth the industry continues to debunk. The more frequently raised and, quite frankly, more effective arguments from consumer advocates revolve around privacy and lack of disclosure. Advocates are convincing many that neither the existence of the devices nor use of the devices is being disclosed to the consumer. If it is disclosed, advocates claim, the creditor is misrepresenting the uses
of the device. As you might imagine, the debate is moving into the grand chambers of legislatures and the conference rooms of regulators across the country. Currently, several states are considering legislation that would impose significant regulatory burdens on dealers’ ability to use GPS and/or starter-interrupt devices. New Jersey is going so far as to propose a mandatory interest rate reduction of 10 percent if a device is used as a condition of financing. California, though not banning the devices, has imposed specific restrictions on their use, including clear disclosure, a warning 48 hours before use of starter-interrupt technology and providing codes for emergency use for 24 hours. Acting in the role of
consumer protection officers in their states, attorneys general have raised questions and concerns to us as we have interacted with them on motor vehicle-related issues. Lest you think this issue is being debated in the states only, it is also of great interest to the Federal Trade Commission and Consumer Financial Protection Bureau. Seldom does a meeting with those regulators pass that the issue is not broached in one way or another. It would not surprise me in the least to see the FTC or CFPB initiate an enforcement action against a finance company or dealer in which the use of the devices is a major component. So what should you do? If you are actively using
GPS/starter-interrupt technology, you’d better make certain you are disclosing its existence in writing to your customer before you finalize a deal. Your disclosure should include an explanation of how the device will be used, a waiver of right to privacy regarding location of the vehicle, the fact that emergency codes will be provided, etc. Most of all, your written disclosure should include the consumer’s consent to have the device installed and used. Have the disclosure document reviewed by an attorney to ensure compliance. In the meantime, NIADA will continue to advocate for the responsible use of these devices.
DECEMBER 2016
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realize benefits in the event of default that would not be present without the use of such devices. Lines of communication between creditors and consumers are more open. If a vehicle’s starter is rendered temporarily inoperable because a customer is in default, consumers will often cure the default much quicker so the vehicle can be restarted. Compared to the unavailability of the vehicle for up to several days in the event of a physical repossession, consumers can be back on the road much faster. The use of payment assurance devices invariably results in lower repossession costs – costs that ultimately are borne by the consumer. Creditors know exactly where the car is and can dispatch a recovery agent
SHAUN PETERSEN IS NIADA’S SENIOR VICE PRESIDENT OF LEGAL AND GOVERNMENT AFFAIRS.
← BHPH DEALER
17
MANAGEMENT
PLANNING IS ESSENTIAL
That process requires you to think about every moving part in your business and be honest about costs and your ability to influence various elements of the model. Once you’ve determined the big-picture goal, it is time to develop and implement a budget plan. There are five general steps to doing this: • Develop an operating pro-forma model. • Compare your budget to your own experience and industry benchmarks. • Allow a margin for error. • Review all expenses with a focus on both short- and longterm ROI. • Conduct variance analysis throughout the review period.
The Difference Between Being Prepared And Being Surprised BY DAVID BROTHERTON
W
e tend to spend so much time working in our business – leading, teaching, coaching and putting out various daily fires – that we struggle to find that extra time needed to work on our business and plan. It’s difficult for an owner-operator to set aside the time from the day-to-day to think about what is coming and the impact it will have on the business. Difficult – but essential. To get the most out of the coming year, you should do more than just think about what you want to accomplish. You should also develop a set of operational plans and a budget to work from for the coming year. Before you can begin developing an annual budget, it is important you start with writing down what you want to accomplish in 2017. Be as detailed as possible in describing the desired outcome as well as identifying the KPIs that drive your goal. In this case, you need to understand what moves what in the BHPH model. Don’t start in the middle. For example, starting with, “I’m going to increase my advertising next year,” isn’t appropriate. You might very well need to increase advertising but that isn’t the starting point. You would start with, “Increase net profit by 10 percent,” or, “Grow by 150 net accounts,” then determine everything involved in making that plan a reality.
DEVELOP AN OPERATING PRO-FORMA MODEL Developing the pro-forma model is the most timeconsuming part of the process because it requires you to develop the initial set of assumptions and examine all of the relationships between expenses and results. I recommend you start with your average expenses and results for 2016 and use them to determine the baseline. That means you should create a working model that approximates your actual results. Keep in mind you are dealing with averages and no model can predict everything – which is why you allow the margin for error. For this to work, it is necessary that you understand just what drives what in the model. For example, the model I use starts out with unit volume and average deal structure. Basically, getting that wrong would pretty much invalidate all of your other efforts, so I start there. The results are carried out to future months and need to make sense from the beginning. From that beginning, you develop the rest of your model accordingly. Assumption
50
Units Per Month Retail Price
$
Month
Month
Month
Month
1
2
3
4
50
11,995
50
$
599,750
50
50
$
599,750
$
599,750
$
599,750
Unit Cost
$
6,125
$
306,250
$
306,250
$
306,250
$
306,250
Reconditioning
$
750
$
37,500
$
37,500
$
37,500
$
37,500
Closing Costs(Tax+Tag+Serv.Cont) $ $ Advertising
1,100
$
55,000
$
55,000
$
55,000
$
55,000
250
$
12,500
$
12,500
$
12,500
$
12,500
Sales Commissions
$
275
$
13,750
$
13,750
$
13,750
$
13,750
Wholesale Losses/Gains
$
(1,756) $
Personnel Expense
$
30,648
$
(1,756) $ 30,648
$
(1,756) $ 30,648
$
(1,756) $ 30,648
$
(1,756) 30,648
Fixed & Operating Expense
$
14,898
$
14,898
$
14,898
$
14,898
$
14,898
Direct Expense
$
23,195
$
23,195
$
23,195
$
23,195
$
23,195
Total Overhead
$
68,741
$
68,741
$
68,741
$
68,741
$
68,741
Down Payment
$
1,100
$
55,000
$
55,000
$
55,000
$
Net Down
$
(275) $
(13,750) $
(13,750) $
(13,750) $
55,000 (13,750)
Amount Financed
$
11,995
$
599,750
$
599,750
$
599,750
$
599,750
Finance Charges
$
4,998
$
249,891
$
249,891
$
249,891
$
249,891
Total of Payments
$
16,993
$
849,641
$
849,641
$
849,641
$
849,641
Term
42
Mo. Payment
$404.59
Cash Collection Percentage
103.25% $
42
42
42
42
$404.59
$404.59
$404.59
$404.59
418
$
418
$
418
$
418
22.00%
22.00%
22.00%
22.00%
22.00%
1.80%
1.80%
1.80%
1.80%
1.80%
2.10%
2.10%
2.10%
2.10%
2.10%
Mo. Pct of Payoff Accounts
0.39%
0.39%
0.39%
0.39%
0.39%
Income Tax Basis
0.00%
0.00%
0.00%
0.00%
0.00%
100.0%
Interest Rate on Notes Static Pool Losses Per Month(Gross) Static Pool Losses # of Accounts(Gross)
Credit Line 100.0%
100.0%
100.0%
100.0%
Interest Rate on Line
9.0%
9.0%
9.0%
9.0%
9.0%
Advance Rate(Gross)
50.0%
50.0%
50.0%
50.0%
50.0%
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
Eligible Account Base Pct.
Credit Line Limit
18
BHPH DEALER
→ DECEMBER 2016
MANAGEMENT
COMPARE BUDGET TO BENCHMARKS One of the best ways to “stress test” a pro-forma model is to compare your assumptions and results to national averages. Comparing to industry benchmarks is a wonderful way to test the validity of your model. They aren’t the end-all-be-all but they can help identify where you are, perhaps, being overly aggressive in your assumptions. Look to your own historical percentages as well. After all, no one knows your business as well as you do. It also is important to remind again that you shouldn’t keep doing things the same way and expecting different results.
happen? Will you be able to move the money from other areas in the model? When you spend money, what is the expected return? Doing this part well requires a certain degree of ruthlessness on your part. There can be no sacred cows in the analysis. When people are not performing to standard, you have to either motivate them to better performance, provide the tools and/or training they might be missing or look at trading up for better personnel. What you can’t do in this analysis is tolerate more of the same. Management isn’t exempt from the analysis either. Is management doing its part to train, coach and develop people? If not, the same choices apply here as well. Ultimately, looking for the ROI in every expense helps you identify what your process and team needs.
CONDUCT VARIANCE ANALYSIS Each month’s results should be compared to the budget and the variances analyzed. Every variance should be questioned and, if you are over budget, determine what you need to do to correct the situation by year end. An example of that would be a soft tax season. You might well have to play catchup all year to make up for it. Variance analysis and a working pro-forma can help you determine what you’ll need to do each
month to catch up. Variance analysis can help identify where adjustments are needed. Meet with your senior people each month and share the results. That keeps everyone on the same page working for improvement. It also makes your budgeting process better each year and communicates why you do what you do.
ITEMS TO CONSIDER Here are some items that can really swing a pro-forma analysis: • Post-sale repairs. • Inventory outlook. • Turnover. • Compliance costs. • Technology investments. • Necessary training. • Shifts in repossession rates. • Funding growth. This is by no means an exhaustive list but it should give you a start. BHPH has gotten too big and too complex to operate by the seat of your pants. Planning – and sticking to that plan – requires a lot of soul-searching on your part, but, ultimately, it can make the difference between being prepared and being surprised.
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Once you have that in place and it makes sense, you start with your expectations for 2017. Your fixed expenses will likely remain fixed, so those are easily modeled. Your variable expenses should be looked at either as a per car sold item (sales commissions or recon) or a per active account item (repo collection expense) and modeled accordingly. This sample model summarizes the various expenses but it can be as detailed as you need it to be. It is important that you do not count on a substantial change in results without a substantial change in personnel, investment and/or process. In other words, don’t expect change just because you want it to happen. Lastly, you need to understand which KPIs drive the model and have the greatest impact on results. Consider: • Vehicle purchase price. • Recon per car sold. • Deal structure. • Repossession rate. • Cash collections rate. • Any “per car” expenses, such as advertising or commissions.
DAVID BROTHERTON IS A MODERATOR/CONSULTANT FOR NIADA DEALER 20 GROUPS. HE CAN BE REACHED AT DAVIDB@NIADA.COM OR (941) 371-7999.
BUILD IN A MARGIN FOR ERROR No budget can perfectly predict every expense item every time. Some things will come up and you will likely have unexpected turnover. Allow for this in your planning and, if you’re planning on growth, think about when you’ll need to bring on additional help. It’s OK to pad an expense or two, but don’t stray too far. The point of the budget is discipline. LOOK AT THE ROI IN EVERY EXPENSE This part can be the most painful, as it forces you to examine and challenge your own decisions. Are you getting an adequate ROI out of every employee? Does a process produce the intended results? Is your advertising working as desired? You also should consider your expectations for change. In particular, what additional investment will be needed to make your desired change DECEMBER 2016
← BHPH DEALER
19
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