BHPH Dealer THE
OFFICIAL
NIADA
PREMIER
SUBPRIME
AUTO
RESOURCE
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APRIL
2017
MAGAZINE
TECHNOLOGY AND
TODAY’S DEALER MAKE IT WORK FOR YOU PAGE 6
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BHPH Dealer THE
OFFICIAL
NIADA
PREMIER
SUBPRIME
AUTO
RESOURCE
•
APRIL
2017
MAGAZINE
F E AT U R E S C O L U M N S 6 Cover Story
Technology. It has changed our lives and the way we do business. NIADA Dealer 20 Groups moderator/ consultant David Brotherton offers advice on how to make it work for you.
4 Editor’s Message
In a time of uncertainty and transition, BHPH DEALER editor in chief Chuck Bonanno forecasts what might be in store for the industry – and offers a word to the wise.
8 Regulatory
CPA Dave Wiggins discusses current IRS issues with reinsurance and captive insurance, including the PATH Act and Notice 2016-66.
10 BHPH Advocate
Shaun Petersen, NIADA’s senior vice president of legal and government affairs, advises on liens, perfecting them and ensuring your transactions are secure.
12 Dealer Perspective
re you ready for the BHPH Super Bowl? Dealer Greg A Zak talks about the exciting tax season and the kind of preparation it takes to be at the top of your game.
ADVERTISERS AMERICAN RISK SERVICES.......................................................... 14 AUTOZONE................................................................................... 11 BERKSHIRE RISK..........................................................................18 CLIFTONLARSONALLEN ...............................................................20 DEALERSOCKET..........................................................................IFC INTERACTIVE FINANCIAL MARKETING ................................... 15, 17 PASSTIME.......................................................................................9 PERITUS ......................................................................................12 QUOTEPRO................................................................................... 21 SMART PAY ONLINE .......................................................................5 STARS GPS ....................................................................................7
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14 Management
ake sure you hire the right person for the job by M following five steps from NIADA Dealer 20 Groups moderator/consultant Mark Dubois.
16 Best Practices
Do you hold you and your staff accountable? LearnToLead president Dave Anderson discusses the importance of doing so to enhance your organization’s fitness.
20 Management
hen is bad news good for Buy Here-Pay Here? NABD W president Ken Shilson discusses recent developments in subprime auto loan performance.
APRIL 2017
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EDITOR’S MESSAGE
A WORD TO THE WISE
BY CHUCK BONANNO
Looking Forward Since the election and inauguration of a new president, there has been a lot of speculation about the future of BHPH. There is much reason to be hopeful – and much to be nervous about. There has been talk about the demise of the Consumer Financial Protection Bureau. There’s talk of reduced regulation at the federal level. There are some who say our economy is going to grow, while others say we are destined for a recession. There are signs the subprime frenzy might be slowing down. A glut of used vehicles in the wholesale markets is predicted. There are real signs of changing consumer car-buying habits. There is a clear need to shift marketing strategy from conventional media to digital marketing. What does it all mean? Regulation might be reduced and the CFPB could be significantly altered in structure as well as power. I do not, however, think the bureau will go away. I am also concerned other regulatory bodies such as the FTC and FCC will become more active in our industry. I believe we will see many more state agencies and attorneys general take a stronger position if there is weakened federal oversight. This is no time to let your guard down. It is, and will continue to be, a time to be compliant and take an active role in your state association to keep bad laws and poorly written rules from jeopardizing your business. The economy is another component of our future. It is interesting BHPH dealers enjoyed some of their best years (financially) during the Great Recession and have struggled more in the past few years than at any time in my BHPH career. The economy has recovered, confidence is high and investors have looked to the subprime auto finance business as an alternative to the challenging subprime mortgage business. As long as the cost of money is cheap and the number of high yield opportunities remains small, money will flow into the subprime business. Where it has not flowed is the availability of capital to dealers. Recent defaults have made banks think twice about lending in our arena. They tightened underwriting, increased oversight and reduced their exposure.
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I do not see anything that will change that environment in the near term. The subprime frenzy of the past few years has lessened only slightly. Some large banks, such as Wells Fargo and Chase, have reduced their subprime portfolios. Others continue to buy deep, including credit unions. As we all know, it is easy to grow a subprime portfolio and many of the simplistic metrics can show solid performance even when the underlying paper performance is actually eroding. It takes time to truly recognize how good or bad paper performs, especially in times of strong growth through originations. The only way I envision a meaningful contraction is if a large subprime player goes into default or if banks and finance companies seriously change their lending habits. Any rise in interest rates will have to be significant to have an impact. I believe a glut in the wholesale markets will have an effect on subprime lenders. If we are to believe wholesale values of used cars will fall over the next few years due to a glut of off-lease vehicles, then banks will take larger losses on repossessed vehicles. A $1,000 additional loss on every repossessed vehicle will hit profits substantially. We are also seeing a dramatic change in consumer shopping and buying habits, no matter their credit score. In general, more and more consumers are shopping digitally. They are reading reviews and those reviews shape where they shop and buy. The “new” consumers demand transparency and simplicity. They have short attention spans and almost limitless choices at their fingertips. I can shop for a specific car nationwide in a matter of seconds. I can eliminate dealerships without ever setting foot in one. The digital shopping experience is critical to sales. We are in the early stages of digital buying. Consumers are looking to shop, buy, finance and take delivery without going through the traditional – and painful – process of traveling from dealership to dealership. Consumers also demand value. We all sell used cars, but what was the buying experience like? What value was added beyond a car? How were the car and loan serviced?
Customers can be your best advocates in the market, or they can easily hurt your sales potential through reviews and word of mouth. Everyone has a digital voice online. So what’s a dealer to do? A conservative approach is best. Don’t relax your policies and procedures regarding compliance. Stay informed and help craft good laws and regulations. Get involved in your state and national associations. Don’t count on subprime competitors going away in the near term. Forecast and budget defensively. If subprime retreats, you are ready. If it doesn’t, you are ready. Make a real effort to shift to digital marketing, social media and consumer interaction. Make sure you create a great experience for consumers. Pay attention to their wishes. We no longer dictate the terms of how they buy, when they buy and where they buy. For those who adapt, there is a great opportunity. For those who don’t, the challenges will be just as great. Chuck Bonanno is editor in chief of BHPH Dealer.
TECHNOLOGY
TECHNOLOGY AND TODAY’S DEALER B Y D AV I D B R O T H E R T O N
Make it Work for You
Today’s dealer is bombarded with advertisements for every possible piece of dealership technology, from CRM, DMS, SEO and GPS to payment kiosks, payment processing and digital marketing. They all promise to improve our businesses and change our lives. Technology has changed modern dealership operations and has enabled our industry to keep pace with significant societal changes – many driven by that same explosion of technology. It has changed consumer behavior, and we either recognize and adapt to those changes or run the risk of being left behind. Understanding how consumer decision-making is shaped by technology is critical to understanding how to make that technology work for you. How does a dealer decide what is best for his or her operation? Budgets are limited and we want to maximize the return on investment, so it’s important to prioritize and recognize some of the hidden pitfalls in various types of technology. INTERNET AND SOCIAL MEDIA
The Internet and social media marketing have combined to make the single greatest impact on society and how dealers communicate with their customers. Traditional media has been eclipsed by things like SEO and pay-per-click. Google and Amazon rule the universe. Research and anecdotal evidence have conclusively shown today’s BHPH customers start and end their vehicle search online. They shop across the market in an industryblurring relentless search for the vehicle they want at a payment they can afford. The Internet has given today’s credit-challenged customers unprecedented access to the industry marketplace – and the marketplace has responded. Embracing and keeping pace with Internet marketing and social media has become the great dividing line between sophisticated dealers and old-school dealers. The good news for dealers is a strong, consistent online presence can be significantly less expensive than an all-out conventional media campaign. Expertise in that area can be hard to find but the efforts are clearly worth it.
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COMPLIANCE SOLUTIONS
The compliance framework facing today’s dealer is ever-changing, and keeping up with it is, frankly, beyond the capabilities of most operations. Fortunately, modern technology and skilled service providers have come together to offer remote, outsourced compliance solutions to fit nearly every dealer’s budget. The days of keeping your head in the sand and relying on the way you’ve always done things are over. Outsourcing your compliance work can save in both the short and long run. CUSTOMER CONTACT ENHANCEMENT AND CONTACT MANAGEMENT
Technology has progressed and provided dealers with many options for DMS and CRM solutions that provide enhanced and compliant communication solutions for the modern consumer. Let’s face it: today’s buyers live on their smartphones and many people carry out most of their day-to-day communication via text and email. Modern DMS and CRM solutions offer a time-saving and compliant approach to managing your communications and building relationships with your customers. In today’s competitive marketplace, I have trouble imagining operating without a robust, integrated CRM and DMS system. Fortunately, there is a solution for every price point and every dealer. The biggest commitment isn’t in terms of money, but rather in the culture shift needed to fully embrace contact management technology. Your system should be robust enough to handle your needs today and scalable for your needs in the future. PAYMENT ASSISTANCE DEVICES AND GPS TRACKING
Payment assistance and GPS tracking technology have provided a significant paradigm shift for the industry. Not only did it enhance both portfolio performance and customer contact, but the competition throughout the GPS provider industry has led to constant innovation and improved efficiency. Used compliantly, this technology helps keep communication lines open with your customers and is yet another positive tool available to
maintain your portfolio and advance your customers. Use the system that is going to work best for you in the long term in your market. FOR THE DEALER
The most dangerous words in business are, “That’s the way we’ve always done it.” Never has that been more the case than with embracing technology. Enhancing our ability to reach and service our customers has never been easier. But be wary of solutions that eliminate customer contact. That isn’t to say such ideas are bad ones. For example, I am a huge fan of having as many customers as possible on recurring payments, even though it does reduce the dealer’s contact with the customer. My stance is the other technologies available allow you to mitigate the dangers of reducing contact here by reinforcing it elsewhere. Stay on top of today’s technology and don’t be afraid to explore new options. Marketplaces change and we must change with them to stay competitive. David Brotherton is a moderator/consultant for NIADA Dealer 20 Groups. He can be reached at david@niada.com or (941) 371-7999.
REGULATORY
CURRENT IRS ISSUES WITH REINSURANCE AND CAPTIVE INSURANCE B Y D AV E W I G G I N S , C PA
PATH Act and Notice 2016-66 Disclosure As many dealers know, F&I products and the use of small insurance companies have become important to dealers trying to transfer various warranty risks, thereby improving collectability of note portfolios due to mechanical breakdowns and generating underwriting profits. One effective approach many dealers are using to provide those services involves reinsurance program strategies. Those risk transfer transactions involve a dealer setting up a reinsurance company that receives premiums to insure against mechanical or other losses that can arise on vehicles purchased from them. In addition to mechanical loss, there are other products – such as collateral protection insurance or guaranteed asset protection, a product that insures customers against the risk of financial loss when there is a difference between the outstanding loan amount and the actual cash value of a vehicle. Many such insurance companies are referred to as PORCs (producer owned reinsurance companies) or PARCs (producer affiliated reinsurance companies). Dealers form the companies to insure the risk of administrators or other thirdparty insurance companies (direct underwriters). In other words, a dealership will sell a product – a service contract, for example – to a customer insured with a direct underwriter, which will then reinsure its risk with the customer to the PARC established by the dealer. The customer then has a contract with the direct underwriter, who has a contract with the dealer’s affiliated reinsurance company. The dealer does this so he can assure customized, credible and convenient insurance is available to his customers. In addition, the dealer can benefit from underwriting profit generated when premium income exceeds the ultimate claims experience. Generally, PARCs are set up in foreign domiciles. While that sounds
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exotic and seems complex, the primary reason such entities are formed in foreign domiciles is to avoid the economically prohibitive capital requirements and equally onerous regulations that have historically accompanied formation in a U.S. domicile. There is no tax benefit to being formed as a foreign company. In fact, virtually all of the foreign domiciled small reinsurance companies make a 953(d) election to be taxed as a U.S. taxpayer. Those reinsurance companies also file Code Sec. 831(b) elections with their initial income tax filings, to be treated as small property and casualty insurance companies. That allows the companies to avoid paying tax on underwriting profits. It should be noted, though, that tax is paid on investment earnings from premium income net of claims and related expenses. This tax treatment is provided to encourage small insurance companies to retain their risk and use the related premiums to pay claims without being burdened by the complexity of regulations and tax rules applicable to large insurance companies. Ultimately, the owners of that type of entity pay income tax on underwriting profits earned inside the reinsurance companies when such funds are distributed to them as stockholders. That tax benefit, derived by excluding underwriting profit from taxation, is what has attracted the attention of the IRS, motivating it to determine whether potential abuses exist. In addition, the IRS seems concerned about the owners’ ability to use reinsurance companies to shift value between family members. PATH ACT CHANGES
The Protecting Americans from Tax Hikes Act, passed in December 2015, made a couple of changes regarding small insurance companies. First, it increased the annual premium limit for small insurance companies from $1.2 million to $2.2 million per year. Second, it implemented two diversification tests
that potentially restrict the use of these companies and disallow their treatment as insurance companies eligible for favorable tax treatment. The first “risk diversification test” provides that net premiums, or gross written premiums if greater, from one insured cannot exceed 20 percent of total premiums for the year. If they do, the company can still be treated as a small property and casualty insurance company if it meets the second test, the “relatedness test.” That test essentially requires the operating company remitting more than 20 percent of the premiums to have virtually identical ownership to that of the reinsurance company. It appears the IRS is concerned those reinsurance companies were being structured to transfer ownership of income and assets from the dealer to his children or others to avoid estate taxes. While the PATH Act was signed in December 2015, there are still many unanswered questions taxpayers and their advisors need answered to understand how to completely comply with the regulations. Unfortunately, it appears unlikely any such information will be received before 2017 returns have to be filed. NOTICE 2016-66 DISCLOSURE
In November 2016, the IRS issued Notice 2016-66. The notice is troublesome in that it requires taxpayers and their preparers to include certain disclosures related to various insurance transactions in the returns of the reinsurance company, the dealership and the shareholders as well as, potentially, other parties. Therefore, one reinsurance company could require the filing of five or more disclosure statements by various related parties. Notice 2016-66 outlines insurance situations about which it is seeking information that it has identified as “transactions of interest.” The transactions described in the notice are not those of most dealership reinsurance companies. In general, the notice seeks information on captives that insure “business enterprise risk” – for
example, insurance companies providing insurance to the operating business for risks such as general liability, data breach, catastrophe and terrorism. Those are generally risks inherent in the operating business, as opposed to those risks reinsured by PARCs, which insure customer-related risks directly linked to mechanical breakdowns, vehicle collision or other similar risks of the dealerships’ customers. Unfortunately, even though the notice outlines, albeit vaguely, those risks it is interested in to require disclosures, it does not exclude reinsurance transactions for which a dealership assumes responsibility, as the contractual obligor, and acts as a “dealer obligor (DO).” Those DO products are not uncommon in dealer insurance transactions, whereby a dealership insures a customer’s risk, which is subsequently transferred to the PORC. Even though the actual risk is with the direct writer, it still appears to meet the requisites for reporting under the notice. This notice has bewildered dealerships, insurance administrators, shareholders and tax advisors on how to respond. The penalties for failure to file are significant – $50,000 per non-disclosure, per entity required to disclose, per year. So one reinsurance company’s failure to disclose could cost the related companies $50,000 per entity.
For that reason, many preparers and their clients feel disclosing might be the only alternative. Disclosing could result in scrutiny of the dealership or other disclosing parties as the IRS determines how it is going to use the information included in the admission. Obviously, many parties would rather not disclose, hoping to avoid the unpleasantries typically associated with a potential examination. The disclosure for years prior to 2016 (2013-2015) was initially required to be completed by January 30, 2017. Fortunately the IRS issued Notice 201708, which delayed the requirement until May 1, 2017. While industry groups in the legal, tax and other professions are working to persuade the IRS to revise its notice and exclude traditional dealer reinsurance companies from the disclosure’s requirements, it is unclear if the IRS will do so. That leaves taxpayers and their preparers in a dilemma regarding 2016 tax return filings. Most such calendar year taxpayers are required to file their returns either March 15 or April 18. To file those returns in a timely manner will require disclosure. If the returns are extended until after their original due dates, it is possible those returns might not require disclosure – particularly if the groups mentioned are successful in
getting the IRS to eliminate PORCs or PARCs from its reporting requirements. In the early 2000s, the PARC industry was subjected to similar scrutiny. The resulting examinations and IRS guidance ultimately resulted in such transactions being eliminated from IRS scrutiny. At this time, no one can predict what will ultimately happen with any certainty. The decision to file timely or extend will be left to each taxpayer. Since Congress expanded the premium cap from $1.2 million to $2.2 million, it is clear Congress feels such entities, and the related tax provisions, are valid and should be maintained. However, with the additional diversification requirements of the PATH Act and the “transaction of interest” disclosures required by Notice 2016-66, it is clear the IRS is concerned about abuse in this area and is trying to only allow transactions it feels are within the intent of the law. In the meantime, it leaves taxpayers with decisions to make in an environment that is not clear. We can only hope the IRS will issue more guidance. If not, important decisions will have to be made by taxpayers and their preparers without full guidance. Dave Wiggins, CPA, is a principal with CliftonLarsonAllen’s dealership and BHPH group team. He can be reached at david.wiggins@ CLAconnect.com or (314) 925-4300.
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BHPH ADVOCATE
PERFECT YOUR LIEN
BY SHAUN PETERSEN
Make Sure Your Transactions Are Secured Every BHPH dealer knows customers filing bankruptcy is a risk you face in this business. You also know the rules governing your ability to collect on a consumer’s account once bankruptcy has been filed. The automatic stay triggered by the bankruptcy filing is a far-reaching shield put in place to protect consumers. Violation of that stay can bring severe consequences to the creditor. But there is a lesser-known requirement pertaining to bankruptcy I have seen burn BHPH dealers once too often. It happens when a dealer is no longer a secured creditor. Perhaps you are asking, “What do you mean?” A quick primer: A secured transaction is a loan or credit transaction in which the lender acquires a security interest in collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrower’s default. The purchasing customer is entitled to take possession of the car subject to your rights of possession on default. As a BHPH dealer extending credit, you theoretically – and hopefully – make secured transactions every day. You extend consumers credit subject to obligations in your retail installment contracts and clearly spell out your rights to repossess the collateral on default. Those rights are contingent on the proper notation of your lien on the vehicle title. In effect, the lien notation is the essence of a secured transaction. What laws govern those types of secured transactions? Most states have adopted Article 9, the secured transactions portion of the Uniform Commercial Code. Article 9 defers to the laws of every state, which requires a lien notation on a certificate of title to perfect a security interest in a motor vehicle. Perfecting a lien means you have taken all necessary legal steps and filed all necessary paperwork to establish a lien on someone else’s property. Article 9 also makes it clear a motor vehicle is covered by a certificate of title when a valid application for certificate of title and the appropriate fee are delivered to the appropriate authority in the state. Dealers should look to the local law of the jurisdiction that covers the certificate of title, because those rules will govern perfection and priority. If the same transaction is unsecured, the buyer receives the title to, and
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possession of, the car while the creditor receives only the buyer’s promise to repay the loan. If the buyer defaults on the payments, the creditor can sue the buyer but would not have the option to simply take the property. In essence, an unsecured vehicle transaction is no different than a bank giving a credit card to a customer. It’s the same type of transaction as a customer going to the local furniture store to purchase a leather couch with his credit card. In doing so, the credit card bank does not receive any ownership interest in that couch if the customer fails to make timely payment. While I recognize much of this primer is common knowledge to most readers, I rehash the distinction between secured and unsecured status to illustrate the gravity of loss in going from secured to unsecured. How might that happen to you? I have frequently been asked by dealers if they can wait to transfer title until after all deferred down payments are complete – some of which might be paid more than 30 days after delivery. Of course, many state laws require title to be transferred to the buyer within 30 days. Failure to do so will certainly land you in the crosshairs of state regulators and a plaintiff’s attorney or two. However, failure to transfer title with your lien noted within 30 days will have catastrophic consequences in a bankruptcy case. You will lose your status as a secured creditor. If a dealer fails to file a lien within 30 days of the sale and the customer files bankruptcy, the dealer goes from being a secured creditor to an unsecured creditor, no questions asked. In bankruptcy proceedings, secured creditors are much better off than unsecured creditors. The unsecured creditor is at the bottom of the barrel of the bankruptcy trustee’s priorities. In many consumer bankruptcy filings, unsecured creditors get nothing. As one of my former clients found out, becoming an unsecured creditor is a high price to pay for failing to do something as simple as filing a lien. Don’t make the $26,000 mistake that client made. Get those liens perfected before 30 days is up. Shaun Petersen is NIADA’s senior vice president of legal and government affairs.
IN BANKRUPTCY PROCEEDINGS, SECURED CREDITORS ARE MUCH BETTER OFF THAN UNSECURED CREDITORS. THE UNSECURED CREDITOR IS AT THE BOTTOM OF THE BARREL OF THE BANKRUPTCY TRUSTEE’S PRIORITIES. IN MANY CONSUMER BANKRUPTCY FILINGS, UNSECURED CREDITORS GET NOTHING.
DEALER PERSPECTIVE
IT’S AN EXCITING SEASON
BY GREG ZAK
Practice and Prepare for Used Car Industry’s Super Bowl I like this time of year – the holidays have passed, warm weather is on the way and the NFL season just concluded with one of the most exciting Super Bowls ever. Late February and March has something else that really, really appeals to me – and most other independent car dealers. Tax time! This is our Super Bowl. The Patriots and Falcons worked on their game all season so they could perform at their best for the Super Bowl. Have you been working on your game since last season? One of the greatest mistakes we can make is not learning from our mistakes. What did you learn from last tax season? This business continues to be more challenging. I found myself redefining my business model several times last year thanks to our ever-changing industry. One thing is certain: If your tax season strategy is to keep doing the same thing you’ve always done, it has flaws that need shoring up.
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Our industry has seen more change than the leaves in the Northeast during the the fall. We have all heard about finance companies being much more aggressive in the subprime arena. Whether you’re in BHPH or retail sales, you’ve experienced the “subprime effect.” You have to account for that momentum change during tax time. So how do we tackle this season without spending time on the bench or suffering a season-ending injury? Football players practice and condition their bodies. What are you doing to get your dealership in shape? Have you increased your inventory? Have you reconditioned and detailed all those new units? Are those vehicles ready to go? Is a Buyers Guide placed on every vehicle on your lot? What’s your marketing game plan? Have you run through the plays with your staff? Are they ready to handle increased customer traffic? Are all of your loan documents up to date and compliant? What about your collections personnel – do they have a
game plan to help delinquent customers get caught up? Is your BDC prepared to handle the increase in customer calls and appointments? Are the sales personnel ready to handle several customers at one time? Have you trained new salespeople who have never experienced tax-selling season? Every professional team – football, basketball, baseball or any other sport – has to practice, practice, practice. The team or player doesn’t just show up for the game and say, “OK, I’m ready,” without putting in the preparation time on the front end. We as professionals in our industry are no different. If we want to be successful in our game, we need to take the time to practice, practice, practice. The last thing any of us want is to be on the bench because we didn’t prepare for the game or be injured by not paying attention to our business and keeping up with what’s going on in the industry. Suit up and be ready. This is our Super Bowl. It’s game day! Greg Zak owns and operates Dixon Motors, a BHPH dealership in Houston. He is an active leader in his local, state and national independent automobile dealers associations.
B Y S C O T T B AT E S , C PA
Support Cash Flow and Valuation
There are two common scenarios that lead to auto dealership cash flow problems. Some dealers focus too much on buying vehicles, tying up their cash in inventory and experiencing a lag between car sales and collections. For the more frugal dealerships that try to balance inventory investment with receivables, it is difficult to sustain cash flow due to the nature of car financing. Until they reach a certain size, dealers don’t collect enough in receivables alone to support regular investment in inventory, coverage of overhead or anything else. Even if their balance sheet is healthy, dealers on the shy side of $1 million in receivables will likely get a less favorable interest rate on credit than more established or larger dealers. That does not mean smaller dealers should accept rates of 10 to 15 percent. They do, however, need to understand how a bank or private equity firm will consider things like the health of their loan portfolio, location, traffic and collections to justify their terms. Dealers might be required to provide reviewed or audited financial statements. Because of that additional expense – and to get more favorable terms – dealers should actively seek lower interest rates. It is perfectly acceptable to shop around. Contact competing banks as well as your existing lender and ask about new credit options. Talk to colleagues about the banks they are using. Request multiple offers. Strong accounting, tax and compliance practices help with that process. On the accounting side, owners need regular financial statement preparation to view trends and forecast cash flow – helping them prepare for lending conversations and extensions of credit at the right time each year. On the tax side, the number one tax planning technique for Buy Here-Pay Here dealers is the discount on the sale of notes from the dealership to the RFC, which requires cash. Dealers can also qualify for opportunities such as bonus depreciation and deductions with regard to employee perks and compensation. Management might also consider a review of operational efficiencies or gaps in controls that can affect cash flow. Keep in mind every dealership is different when it comes to managing cash flow, so best practices must occur within your own dealership. As BHPH dealerships grow to portfolios
of $4 million and above, more favorable financing opens up. But it’s not a guaranteed scenario. Dealers should weigh the benefits of obtaining more financing against the extra administrative costs of public accounting services. Once you have the credit you need, there are various ways to reinvest in your business. Some dealers might decide to purchase their location – adding real estate holdings that support the extension of credit in the future. If the dealership has a service department, cash flow can be set aside to cover repairs and maintenance on recently sold cars. Some dealers choose to cover repairs on cars shortly after purchase to support a customer’s ability and willingness to keep making monthly payments. For example, a repair might cost $800, but it leads to another six to 12 months of customer payments. At certain points in the life of a dealership, you will still experience challenges. Some of those challenges can’t be handled alone. Whether you’re with a big bank and have secured a favorable interest rate or your dealership is still considered high risk for lenders, don’t ignore cash flow problems. Your CPA can help you formulate a plan to show numbers and communicate effectively with lenders in a way that is focused on solutions rather than the immediate problem. Lenders don’t like to call a loan for a short-term issue, and there is usually room for negotiation on loan modifications that will support cash flow as well as repayment. However, year-over-year problems make lenders less willing to keep taking a risk on default. As soon as an issue comes to light, prepare your strategy to keep a strong lender relationship. Work through it like you and your lender are on the same side. It’s in the best interests of you and the lender to find a solution. DEBT MANAGEMENT ALSO SUPPORTS VALUATION
It is in the best interests of the dealership long-term to show a consistent history of loan financing, healthy cash flow and debt management. Owners want to show a return on investment and consistent profitability tied to valuation of the business. There are different approaches to valuation. A key component, however,
WHETHER YOU’RE WITH A BIG BANK AND HAVE SECURED A FAVORABLE INTEREST RATE OR YOUR DEALERSHIP IS STILL CONSIDERED HIGH RISK FOR LENDERS, DON’T IGNORE CASH FLOW PROBLEMS. is determining equity value, which is the market value of the dealership assets minus the market value of its liabilities. Assets include such things as the dealership’s auto inventory and fixed assets, including real estate. They can include intangible assets such as the goodwill value of the dealership’s name and location and sales and service agreements, and also synergies such as multiple locations and strong management. Liabilities include debt, excess compensation, tax and rent issues, inventories and contingent liabilities such as environmental issues related to the storage and disposal of fuel, oil or batteries. The bottom line is that a well-performing portfolio, a good location and healthy foot traffic – combined with properly managed debt – will be attractive to a potential buyer. A dealership that is attractive to lenders is also attractive to buyers or outside investors, even with debt factored in. If your dealership struggles with cash flow either intermittently or throughout the year, don’t let it hinder your opportunities to grow. Use your debt more effectively to fill the gaps between inventory and collections. Scott Bates, CPA, is an assurance and business services partner at Cornwell Jackson, PLLC and supports the firm’s auto dealership practice group. Contact him at (972) 202-8000 or scott.bates@ cornwelljackson.com.
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MANAGEMENT
SMART DEBT MANAGEMENT
MANAGEMENT
5 STEPS FOR SELECTING THE RIGHT SALES REPS Hiring the Right Person Hiring great people is difficult in almost any business, and BHPH is no exception. To find the right people for your business, it is important to identify what your business is – and is not – then determine the kind of people you need. That step requires you to ask some important questions. Are you in the car business or the finance business? For sales positions, are you looking for someone with car sales experience or someone with loan experience? Are you looking for an experienced car salesperson or someone who can interview and counsel customers about your auto finance program? The answers to those questions will be the starting point for selecting the right people. They refine the search for each position in your business. In many cases the cause of employee turnover is a bad fit between the skill
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BY MARK DUBOIS
set required for the job and the skills of the person hired to do it. Here are five steps for hiring the right sales representative – the position I prefer to call finance specialist. Clearly define your business: For the purpose of this article, we are in the finance business, not the car business. I prefer someone with finance or loan experience over someone with car sales experience. Since our typical customers cannot get traditional financing, are generally not good money managers and need a vehicle, sales experience is not as high a priority as someone with good listening skills and good people skills, someone who is highly organized and trainable. Identify the specific tasks required for the position: This is a very important step in the sequence. Make a list of all the key tasks for this position. Remember, this list is about the tasks he or she will be required to do, not the experience or personality
required for the position. Make this a group project and include as many key employees as possible. For example, depending on your business model and size of staff, the finance specialist position might be required to perform the following tasks: M eet and greet potential customers. P resent interview questions designed to help select the right vehicle for the customer’s needs. T est drive the selected vehicle with customers. C omplete detailed application forms with customers to apply for the vehicle finance program. P resent finance terms and conditions to potential customers. C ollect down payments and any tradein related information. C omplete closing paperwork and related forms. P rospect for new business. F ollow up with customers for repeat and referral business.
Develop a list of interview questions designed to identify the required skill set: Now that the list of job-specific tasks is complete, developing a list of interview questions should be easy. In this step, we want to be sure every applicant is asked the same questions. Their answers to the questions will determine if the applicant has the required skill set for the job. Each question should be based on the identified job tasks. The interview is the key step to weeding out potential candidates who are wrong for the job. For example: “Tell me about a job or position you had that required you to meet and interview prospective customers for a service or a product.” Notice that question does not ask for sales experience. “Tell me about a job or position you had that required you to complete paperwork in a detailed manner based on information you were taking from a prospective customer.” The answer to that will help determine if this person is detail oriented or just a “git-’er-done” hardsell closer who doesn’t worry about details.
Implement an interview evaluation form: Create a simple interview evaluation form that will permit you to rate responses based on how well applicants match the required skill set for the job. It can be a simple 1-5 scoring system in which 1 means the applicant does not meet the required skill set and 5 means the applicant is highly proficient in the specific skill sets. The interview evaluation form will also help determine the training that will be required for the applicant. Focus on what skill sets can be trained, such as time management skills, computer skills or telephone skills, and what skill sets cannot be trained, such as personality, reliability and honesty. Select the top three candidates for an additional interview: In interviewing, there is an old saying: “If you only interview one candidate for the position, he generally looks pretty good.” Interview multiple applicants for every job. Never hire based on a desperate need to fill a position. Always request a second interview with the final candidates and involve other members of your management team. It’s a strange phenomenon, but sometimes the second interview will
HIRING THE RIGHT PERSON FOR A POSITION DOES NOT HAVE TO BE DIFFICULT. LIKE MOST THINGS, IT JUST REQUIRES TIME, EFFORT, EXPERIENCE AND A WELL THOUGHT-OUT PLAN. give a very different perspective on an applicant than the first interview – good or bad. Take the time to do a second interview. After all, if this is an important position to fill, it’s worth the time and effort to make the right hiring decision. Hiring the right person for a position does not have to be difficult. Like most things, it just requires time, effort, experience and a well thought-out plan. With these five steps properly executed, hiring the right person for your BHPH operation should produce great results. 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
ACCOUNTABILITY IS UP TO YOU
B Y D AV E A N D E R S O N
Enhance Your Organization’s Fitness By definition, someone who leads is expected to “go in front; to show the way.” A key to leading by the right personal example – showing the way – is holding people accountable for behaviors and performances you’ve determined essential for the organization’s success. Frankly, if you’re in a leadership position, holding others accountable isn’t an option – it’s your duty. Failing to consistently execute that duty results in ongoing damage to your culture, team morale and momentum, as well as your brand, the customer experience, your personal credibility and more. Doing your job by holding people accountable brings forth numerous benefits that enhance your organization’s fitness. Here are a few compelling benefits that should encourage you and your leaders to work harder to develop the skill set and mindset to effectively hold others accountable – making sure every person in your dealership is held responsible for
the behaviors and results you’ve outlined as non-negotiable. Holding people accountable protects and strengthens your culture: When deficient behaviors or results cause your dealership’s culture to weaken, the foundation of your entire organization is at risk. By doing your job and establishing clear values and standards – a compelling mission that unites a team – and providing team members the training and tools they need to be successful while holding them accountable throughout the process, you become a productive chief architect and primary influencer of your culture. The alternative is to fail in shaping your culture according to the right standards, allowing outside forces – often influenced by societal trends like a rising sense of entitlement, a growing absence of absolutes and a participationtrophy-non-performance mindset – to shape your culture in their image.
After all, you can’t not have a culture. The telling questions are whether you’ll take control and shape it according to productive values and standards, or leave it up for grabs and allow it to be shaped from the outside in. Many weak-minded, untrained, politically correct people in leadership positions today are choosing the latter and reaping a harvest of mediocrity. Holding people accountable ensures they work toward their fullest potential: Effective leaders are effective developers of human capital. Through coaching, training, mentoring, empowerment, resolute clarity and accountability, their objective is to continue to stretch team members to their fullest potential. That’s not going to happen if you let people just “get by,” because you lack the skills or mental toughness to hold them accountable for using the resources and opportunities you provide and for executing what you’ve determined as essential for their growth. Political correctness has seduced some
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leaders into believing it’s somehow harsh or offensive to tell people the truth about how they are doing or to apply consequences for failures. But what’s truly harsh is letting people fail on your watch because you won’t do your job. The objective of accountability isn’t to fire people. It’s to prevent you from having to fire them because you don’t let things get that far. Accountability also ensures top performers continue to grow rather than slide back into their comfort zones. We live in a pampered age in which many people have been coddled long enough about the realities concerning their performance. If you care about people, you will challenge them, equip them, empower them and confront them when necessary. The most effective leaders I know convey the following with both their words and actions: “ I’m hard on you because I believe in you.” “I hold you accountable because I care.” “I stretch you so you never have to regret giving less than your best.” Those leaders understand that in their endeavor to help the people in their charge reach their fullest potential, they are not likely to hear these words: “Thanks for being easy on me. You changed my life.” Holding people accountable facilitates effective execution: This one doesn’t
require much elaboration. Without effective execution, vision is irrelevant and strategy is worthless. At the end of the day, people do what they are held accountable for. You teach them how to treat you. If there aren’t consequences for poor behaviors or performances, you can expect to see more of them. The behavioral science principle rings true: If you want to change a behavior, you must change the consequence for that behavior. Holding people accountable ensures better team member experiences: This one is obvious, and painful. When people don’t do their job or don’t live the values, productive team members can become distracted, overwhelmed and demoralized. They also tend to feel they’re working in a less special workplace since people who shouldn’t even be there in the first place are showing up and being paid every day – and making their lives miserable in the process. Holding people accountable ensures better customer experiences: Since employees having a better experience will create better experiences for customers, the stakes are high to make the former a reality in your culture. The payoffs are numerous, but perhaps the biggest is that customers who enjoy better experiences are more loyal, find price
less relevant, are more likely to return and are potential referral machines. Those are just a few of the benefits. To earn greater buy-in and leadership credibility, it’s essential to understand that holding yourself accountable to values and standards is where accountability must begin. Your number one duty concerning accountability is first expecting more from yourself than you do from others – being a living embodiment of consistently excellent performance and living core values. In my two-day workshop on How to Master the Art of Accountability, we spend a fair amount of time evaluating our own attitudes, behaviors, adherence of values and execution of job duties to ensure our talk and walk are consistent. Letting ourselves slide while we preach accountability to others is hypocritical. It’s essential we as leaders provide the clarity, feedback, tools and empowerment our people need to live out and execute the behavioral and performance objectives we have set forth for them. Thus, our first duties are to do our job well and walk our talk. Dave Anderson is president of LearnToLead. www.learntolead.com
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MANAGEMENT
HIGH SUPPLY, HIGHER DEMANDS
B Y G W C WA R R A N T Y
You Need Not Fear
The surge of off-lease vehicles set to hit the market – 3.6 million as estimated by Manheim – is a great source of excitement for used car dealers. But it can also be a cause for concern. Will such a supply flood push down prices and compress margins? Will competition within the market make it difficult to maintain strong profits per unit? These are all valid questions dealers need to prepare for. To combat margin compression from an overloaded used market, it’s important to first know what vehicles you can move most quickly. Go back in your books and see what vehicles sat on your lot for the least amount of time. Try to identify any trends for what types of vehicles you should seek out at auction. Moving more vehicles each month will help combat outside forces applying pressure on your margins and help you stay price competitive within your market. The protection you offer on your vehicles can help you safeguard your profits as well. Offering vehicle
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service contract protection provides profit opportunities on the back end of deals that can make up for any margin compression you feel on the front end. This allows you to price competitively without putting profits at risk. A bonus benefit is the confidence you’re giving customers to drive off your lot worryfree. But a service contract only provides these benefits if it’s presented to every customer, every time. Perhaps the most straightforward way to put all these pieces into motion is to offer a certified pre-owned program. Statistics published in Auto Remarketing show certified pre-owned vehicles can demand, on average, $700 more per unit. Similar statistics report they are sold an average of 12 days more quickly. Simply by offering a certified preowned program, you can meet all the demands of a higher used car supply: move vehicles more quickly; protect your margins; and earn extra profit per unit through service contract protection. A massive supply surge doesn’t need
THE PROTECTION YOU OFFER ON YOUR VEHICLES CAN HELP YOU SAFEGUARD YOUR PROFITS AS WELL. to be feared if you have the right plan in place. By acquiring inventory you can move quickly and providing service contract protection that preserves your margins, you can bask in this rare opportunity to move mass quantities of high quality used inventory.
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MANAGEMENT
WHEN BAD NEWS IS GOOD FOR BUY HERE-PAY HERE BY KEN SHILSON
Subprime Auto Loan Performance
Recent press about subprime auto loan performance has highlighted concerns about that market segment. The Federal Reserve recently expressed concern that delinquencies among auto borrowers with weak credit has been rising. A recent article in USA Today noted the number of subprime auto loans – those requiring a FICO score of 600 or lower – that were at least 90 days late on payments hit their highest level since 2010 at 6 million in the third quarter of 2016. The bulk of bad loans, it said, were by auto finance companies rather than banks. In February, Wall Street analyst Wolf Richter published an in-depth report and analysis called “Seriously Delinquent Auto Loan Surge” that provided some excellent insights into the causes of the surge and predicted what might be ahead. “Auto loan balances in 2016 surged at the fastest pace in the 18-year history of the data series,” the report said, “driven by the highest originations of loans ever. Alas, what the auto industry
has been dreading is now happening! Delinquencies have begun to surge. “At $1.112 trillion (or $1.6 trillion according to the New York Fed) they’re now 35 percent higher than during the crazy peak of the prior bubble. No way is this an auto loan bubble. Not this time. It’s sustainable – or at least containable when it’s not sustainable. These ballooning loans have made the auto boom possible.” “Seriously delinquent” auto loan balances, which includes all loans 90plus days past due, rose in Q4 of 2016 to 3.8 percent of total auto loan balances. That puts them right between Q1 and Q3 of 2013, when auto credit was recovering from the financial crisis. Those seriously delinquent auto loans are an indication of what is next, Richter said. And what’s next are losses for auto lenders, particularly those specializing in lending to subprime borrowers – but also other lenders, including captives such as Ford Motor Credit, which has already warned in its most recent outlook that “we continue to see credit losses begin to
exact their pound of flesh from the lenders.” “Some specialized lenders might keel over,” Richter predicted. “Larger lenders with good quality loan portfolios will bleed but go on while tightening their underwriting standards to weather the storm, and that’s precisely what the auto industry is dreading – tightening credit. “The auto boom over the past few years was funded by historically low interest rates and loosey-goosey underwriting, with loan terms and loan-to-value ratios often over 120 percent. They made everything possible, but they infused $1.1 trillion in auto loans with some very bad risks. “So it’s all there – the ingredients for bigger losses among banks and investors, a few failures of smaller specialized lenders and belated credit tightening, both out of necessity and due to lower competition among lenders as some of the most aggressive ones will be licking their wounds.” As president of NABD and Subprime Analytics, I have been tracking and analyzing subprime and deep subprime market performance for the past 20 years and publish annual industry benchmarks. I agree with Richter’s analysis and the reasons subprime delinquencies are now increasing. I also agree we are not headed for another crisis like the subprime mortgage market with subprime auto paper. A new credit loss measurement standard requiring lenders and borrowers to increase bad debt loss reserves for all receivables in the future will convert the aforementioned delinquencies into bad debts. However, if you are an independent used car operator who refused to match the underwriting aggressiveness in the markets during the past few years, this bad news creates some exceptional new opportunities to regain market share and increase future profits. The pain suffered by the increased level of defaults in subprime auto finance can result in gains for those who capitalize on them. To capitalize on this opportunity operators must avoid making the same mistakes that caused the past performance problems. Specifically, longer loan terms, lower down payments, loose underwriting, higher amounts financed and too much vehicle for too little customer are all recipes for failure, not success. Therefore, operators must embrace changing their approach and implement more prudent underwriting strategies in the future to prosper. Kenneth Shilson, CPA, (ken@ kenshilson.com) is president of Subprime Analytics (www.subanalytics. com) and NABD (www.bhphinfo.com).
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