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LEGISLATIVE NEWS | BY SUBPRIME AUTO FINANCE NEWS STAFF

HOUSE BILL CLARIFIES INTEREST RATES WHEN CONTRACTS ARE SOLD Law Affects Auto Financing The House of Representatives recently passed two strongly bipartisan bills from the Financial Services Committee, one of which could have a significant impact on auto financing. Lawmakers highlighted that H.R. 3299 – the Protecting Consumers’ Access to Credit Act of 2017 – clarifies current law to ensure innovative marketplace lending remains intact while simultaneously providing safe consumer protections. Authored by Financial Services Committee vice chair Rep. Patrick McHenry, a North Carolina Republican, officials indicated H.R. 3299 ensures the lawful interest rate on a loan originated by a bank remains valid if the loan is sold, assigned or transferred to a non-bank third party. The bill was included in the House-passed Financial CHOICE Act. H.R. 3299 passed through the House by a vote of 245-171 and went on over to the Senate, which received it, read the measure

twice and referred to the Committee on Banking, Housing and Urban Affairs. Hudson Cook partner Catherine Brennan cheered the action by House members. “H.R. 3299 will ease uncertainty in the market, as it affirms the longstanding rule that a loan is valid at the time it is made if it is made pursuant to the lawful interest authority of a lender,” Brennan said. “The idea that a loan made by a bank should become retroactively invalid is absurd. “Indeed, former President Obama’s own solicitor general recognized this to be the case in a brief to the Supreme Court. Nothing in this legislation undermines the rights of consumers, and it was the right thing for the House to do in passing the bill.” This legislation passed along with H.R.

3978, which is a package of five bills that committee members say will provide important regulatory relief that reduces burdens for financial institutions and strengthens and makes the capital markets more attractive, competitive and efficient. “These bills will help cut at least some of the red tape that places such a disproportionate burden on Main Street businesses and financial entities and limits consumer access to credit,” Financial Services Committee chairman Jeb Hensarling said. “These bills are practical, they are strongly bipartisan and they are needed.” “I applaud the sponsors of each of these commonsense regulatory relief bills for their hard work in bringing these bills to the floor.”

MARKET WATCH | BY SUBPRIME AUTO FINANCE NEWS STAFF

BLACK BOOK OFFERS SUBPRIME SUCCESS STRATEGIES White Paper Provides While some auto finance companies are backing off their originations in the subprime space, Black Book is arming managers and underwriting departments with new analysis for institutions still looking to add paper developing in lower credit tiers. Black Book recently released a new educational white paper focused on subprime and deep subprime auto finance companies. The paper is titled, “Subprime & Deep Subprime: How to Remain Competitive and Profitable Despite Growing Risk.”

At the same time, editors noticed larger banks became full spectrum financing providers that opened up space for subprime paper opportunities. While subprime and deep subprime originations have remained in check, Black Book insisted institutions have had to grapple with ways to remain competitive and profitable in spite of any growing risks. As origination volumes increased, Black Book recapped that financial institutions began relaxing their underwriting criteria for credit and collateral to remain highly competitive for subprime and deep subprime, resulting in higher loan-to-value ratios using inflated values up front, placing even more importance on building the contract off the most accurate collateral value possible. As these LTVs rose, Black Book pointed out banks took on more risk, exposing themselves to more negative equity in their portfolio combined with longer loan terms.

How Subprime and Deep Subprime Spaces Have Grown Following the recession, and as the economy has improved, Black Book recognized an increasing number of finance companies began to offer subprime and deep subprime contracts, and more independent financial institutions saw their way into the market as well.

Various Scenarios Faced By Subprime and Deep Subprime Finance Companies The new Black Book white paper offers specific examples showing finance companies where and how collateral data can pinpoint profitable opportunities in subprime and deep subprime, while minimizing exposure to risk. These data examples include high-term scenarios even with decent credit profiles;

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higher LTV scenarios; and higher LTV, higher term, higher APR and higher depreciation scenarios. When a finance company is looking to evaluate the amount of risk tolerance in a long-term loan, Black Book emphasized there are four elements to consider: • How much initial loan-to-value they want to establish. • The rate of annual depreciation of the collateral. • Credit profile of customer, whether subprime or prime. • Determine if the risk-adjusted return on capital is sufficient. “Subprime and deep subprime loans have remained a profitable opportunity for lenders, particularly following the recession since the economy is stable, yet there’s still a lack of understanding of layered risks associated with these credit profiles,” said Black Book executive vice president of operations Anil Goyal. “This white paper takes an in-depth look at different scenarios lenders face in trying to grow their portfolios profitably to remain competitive while quantifying their associated risks.” To view Black Book’s white paper “Subprime & Deep Subprime: How to Remain Competitive and Profitable Despite Growing Risk,” go to www.blackbook.com/subprimeand-deep-subprime-white-paper. April/May 2018

TENNESSEE DEALER CONNECT

ASSOCIATION NEWS

INSIDE

03........................................ Subprime Success Strategies 06.... Why it’s Time Your Store Invested in a CRM System 07.... How to Contend (And Win) Against Big Competition 09............................................ NIADA Government Report 10........................The Most Important Sales Conversation 14..................... Does Your RFC Pass the IRS Validity Test?

NEW TNIADA EXECUTIVE DIRECTOR Phyllis Sartin TNIADA would like to introduce our new executive director, Phyllis Sartin. Phyllis previously served on the TNIADA board. She holds a degree in business management/marketing from Columbia State Community College. Sartin is the founder and owner of Creative Marketing, an automotive products firm formed in 2008. She takes a vision and makes it a reality through consistent processes and procedures. Her inspirational demeanor and credible personality translates into action that assures solid relationships. Prior to starting her venture at Creative Marketing, Phyllis spent time in the financial services, advertising, and automotive retail industries. Her first automotive job was with the RC Alexander Group. Phyllis has consistently led successful business development for her clients that include Wells Fargo, NAC, Norman and Company, and Protective Insurance.

WHAT’S NEW

CONVENTION ROOM BLOCK FILLING FAST RESERVE YOUR ROOM NOW

The NIADA room block at Rosen Shingle Creek is quickly filling up. Make sure you secure your spot at the special NIADA rate. Also, a preliminary agenda for the 2018 NIADA/NABD Convention and Expo is now online! Review the agenda and reserve your room today at www.niadaconvention.com.

ADVERTISERS INDEX

Automotive Finance Corporation.................................. IFC DAA Dealers Auto Auction Group, LLC............................. 5 Manheim......................................................................... 11 NextGear Capital............................................................. 12 VAuto............................................................... Back Cover

OFFICE

Phyllis Sartin P.O. Box 2219 • Lebanon, TN 37088 1-866-5TNIADA

NIADA HEADQUARTERS

NATIONAL INDEPENDENT AUTOMOBILE DEALERS ASSOCIATION WWW.NIADA.COM • WWW.NIADA.TV 2521 BROWN BLVD. • ARLINGTON, TX 76006-5203 PHONE (817) 640-3838 The Tennessee Dealer Connect is published bimonthly by the National Independent Automobile Dealers Association Services Corporation, 2521 Brown Blvd., Arlington, TX 76006-5203. Periodicals postage paid at Dallas, TX and at additional offices. POSTMASTER: Send address changes to NIADA State Publications, 2521 Brown Blvd., Arlington, TX 76006-5203. The statements and opinions expressed herein are those of the authors and do not necessarily represent the views of TNIADA or NIADA. Likewise, the appearance of advertisers, or their identification as members of NIADA, does not constitute an endorsement of the products or services featured. Copyright © 2018 by NIADA Services, Inc.

STATE MAGAZINE MGR./SALES

Troy Graff • troy@niada.com

BOARD MEMBERS Executive Director

Phyllis Sartin P.O. BOX 366 Bell Buckle, TN 37020 1-866-5TNIADA (586-4232) director@tniada.com

President -Elect

Brandy Steiner 615-982-9842

Sonja Hopkins 615-364-6259

Treasurer

President

Robert Villucci

Stephanie Baker 615-217-2848

931-707-8899

Secretary

Chairman of the Board Mark Noble 615-977-3313

David Stancil

Tracy McMurtry 615-865-7350

Don Isakson 865-310-3505 512-318-8642

EDITORS

Jacinda Timmerman • jacinda@niada.com Andy Friedlander • andy@niada.com

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MANAGEMENT MATTERS | BY ZACH KLEMPF

WHY IT’S TIME YOUR STORE INVESTED IN A CRM SYSTEM Help Your Dealership Succeed Over the past several years I have had the opportunity to travel across the United States as well as Canada speaking with independent and BHPH dealerships of all sizes. The most evident observation I have had is most of these dealerships operate without a CRM system. In the franchise dealer world, customer relationship management is a de facto mandatory system critical for managing a dealership’s sales pipeline. Typically, used car dealerships believe they are too small or CRM is too expensive for their store. In fact, these dealerships need CRM/ILM technology the most. Historically, most industry-focused CRMs were built for new car stores and large independent operations. The complexities of these tools were barriers to entry for independents. In recent years, that has dramatically changed with more costefficient options entering the marketplace. When I talk with an independent dealer manager I often ask the following three questions: • What is your customer acquisition cost across your different marketing channels? • What lead provider is performing the best and what is its close rate? • What is your cost per sale across the different lead providers you work with? The majority of the time the manager cannot give a concrete answer to these questions, which points to a deficiency in their business. Many used car dealerships spend the majority of their marketing budget on Internet lead providers like TrueCar, Car Gurus, and Autotrader. However, they don’t invest in tracking these data sources, which could save thousands of dollars per month as well as provide key performance indicators for their business. With fierce competition from franchise dealer pre-owned departments and automotive e-commerce players like Carvana, used car dealers need to be more data driven in their day-to-day operations. A decrease in front/back margin means all of the “fat” of the business must be trimmed, and making an investment into tools that provide analytics is key. If your dealership is making the marketing investment into multiple lead providers there is a real need to track how many deals close rather than how many overall leads you are receiving. Often I hear a dealer say they get the most leads from “X” lead provider but when further reviewing the data many of those

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leads are not closing as high and it may not be the best overall performing lead provider. When looking at the performance of a lead provider it cannot solely be based on the number of leads, which is a vanity metric. It should be attributed to deal conversion, and unless there is a CRM or other system in place this is very difficult for an independent dealership to track. One of the most fundamental components of effectively implementing any CRM, especially in a smaller independent store, is the “garbage in, garbage out” philosophy. Paradoxically, this tends to be a cause of churn in independent dealerships fully leveraging the capabilities of a CRM. Let me run through the three most common CRM implementation and usage issues I have observed with independent dealerships’ adoption of a CRM program. Onboard training: This is one of the most crucial components of the CRM setup process. Often dealerships do not take this call as seriously as they should. During the onboard call everyone who plans on using the CRM should be present, attentive, and listening carefully. This is where the nuances of the system will be explained and important features like lead reassignment rules will be set up. Missing out on this call or not paying attention will hinder a dealership from reaching the true potential of the CRM.

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Hold your team accountable: Often dealerships will get set up on a CRM, excited about the “idea” of implementing a CRM, and let the system primarily be used only by the salespeople. Management should also be involved in using the platform and oversee whether salespeople are completing follow ups and are on task. While a CRM adds some automation to this, it is up to management to enforce usage. Always greener on the other side: Some independent dealers make a decision on an impulse and terminate a vendor on a whim. It’s important to realize each CRM system will have its own quirks. Constantly changing vendors “to find the right fit” can lose momentum and unnecessarily take employee bandwidth with setup. Be sure to vet and research your new CRM provider before signing up. Then allow 3-6 months for your store to adapt to the new system. Implementing a CRM is sometimes a painful process, especially if technology has not been previously embraced in the dealership. Nonetheless it’s important to understand that being more data driven and putting the proper systems in place will ultimately help your dealership succeed in today’s competitive marketplace. Zach Klempf is founder and CEO of Selly Automotive. He can be reached at zach@ a1softwaregroup.com.

ACCELERATE | BY GWC WARRANTY

HOW TO CONTEND -AND WINAGAINST BIG COMPETITION Level the Playing Field Being an independent dealer in a world of new big box stores, online retailers and nearby competitors can feel like being the small fish in an ocean of competition. You can level the playing field, though, with nothing more than an open mind and a willingness to adapt. Keep It Simple And by this, we mean keep it simple for your customers. Is it easy for them to get to your website? Is your inventory laid out in a way that’s intuitive for customers to browse? Can they contact you with just one click and limited information? Today’s customer wants the information they need exactly when they desire it. Your website is the most important piece in making sure they get information quickly and easily. Merchandising As an independent dealer, you don’t have

the luxury of manufacturer certified preowned programs. But that shouldn’t stop you from merchandising your inventory the same way. This goes for both on the lot and online. Having a certified pre-owned program in place helps you make the same promises as bigger stores while giving your customers the confidence that comes with the perception of a certified vehicle. Communication Flexibility Not every customer will want to send messages through web form. And not every customer will want a phone call. Some will want to send you a Facebook message, others might want to tweet at you and some might want a text message. Being able to communicate with your

customers in their desired format lets you reach more potential leads. But it’s dependent on your commitment to learning how to communicate in all these different formats. Unique Experience The advantage an independent dealer will always have over bigger competition is a truly unique experience customers can’t get anywhere else. When done correctly, independent dealers can offer a more intimate, lower-pressure experience than big box stores to go along with a friendly local feel that only an independent dealer can provide. Once you’ve used tools and merchandising to attract the same business as bigger competition, use your friendly, comfortable environment to bring it all home.

ASSOCIATION NEWS |

NOMINATIONS OPEN FOR COMMUNITY SERVICE AWARD Deadline for Nominations Is May 1 Nominations are open for the 2018 NIADA & Cox Automotive Community Service Award presented by Manheim, the used car industry’s most prestigious award honoring community service by independent dealers. The deadline for nominations is May 1. Nominations of NIADA member dealerships can be submitted at www.coxautoinc.com/ community-service-award. The national award recognizes a dealership that goes above and beyond to give back to its community through its donations of time, money and leadership to charitable efforts, and works to find innovative and meaningful ways to collaborate with community partners to help further its mission. The award includes a $10,000 donation to the charity of the winning dealership’s choice from Manheim. The winner will be announced during the 2018 NIADA Convention and Expo, June 18-21 at the Rosen Shingle Creek Resort in Orlando, Fla. Last year the award was presented to Matthews Motors in Clayton, N.C., owned by

Steve and Dale Matthews accept the 2017 NIADA & Cox Automotive Community Service Award from Cox Automotive’s Janet Barnard (right).

Steve and Dale Matthews, with Clayton Area Ministries receiving the $10,000 donation. Cox Automotive’s Janet Barnard said Matthews Motors “embodies the principles of helping shape a better world through individual actions and demonstrating how every person, every organization, every day can make a difference when it comes to serving your community.” If you know of a dealership that makes an extra effort in community service and charitable work, let us know. Nominations are accepted from individuals, dealerships, community organizations, agencies or vendors. For more information or to nominate a dealer, visit www.coxautoinc.com/communityservice-award or www.niada.com. www.tniada.com

April/May 2018

TENNESSEE DEALER CONNECT

INDUSTRY PERSPECTIVE

| BY DALE POLLAK

A MANAGER’S VIEW OF A VOLATILE USED VEHICLE MARKET Tips to Tackle the Problem I had an eye-opening conversation the other day with used vehicle manager Jim Mason of Steven Toyota in Harrisonburg, Va. We were discussing how the dealership’s average front-end gross profit was lagging its target by about $300 for the current month. Mason knew exactly why: The store’s average days in inventory had crept up about four to five days, and the average price to market at the time of retail sale had dropped to 90 percent. “There’s a combination of factors at work,” Mason said. “But the biggest hurdle is the incentives being offered on new cars. The incentives are huge, and they’re across the board in terms of manufacturers. It means that the ‘16 and ‘17 model year cars become ‘new car bait,’ for lack of a better term.” In this scenario, Mason explained, customers ultimately end up purchasing

a new vehicle because there isn’t enough difference between the payment and price of the used vehicle – a problem that’s most profound on the certified pre-owned vehicles that make up about 30 percent of Mason’s monthly retail sales. “Our grosses on certified cars are anemic,” he said. “We have to be a lot more aggressive on these cars than what we have been, and that has a direct impact on gross profit.” I asked Mason how he’s tackling the problem. He offered three tips that seem relevant to share with other dealers. Source more near-new inventory from trade-ins. “There’s about a $2,000 spread between MMR and retail asking prices on 2016 and 2017 used Toyotas,” he said. “By the time you get it here, by the time you pay to certify, and by the time you pay the other costs, there’s nothing left. These are not cars I should be acquiring from auction unless I absolutely have to fill a hole in my inventory.” Price the vehicles more aggressively. Mason said the current market doesn’t allow you to initially price near-new vehicles at or near a price-to-market ratio of 100 percent. “You have to start at 90 percent because that’s where you can sell

it,” he said. The danger is “getting it in your head that you’ve got to make $1,200 or $1,500 a copy. That’s not going to happen.” There is a silver lining, though. Mason correctly noted that while you won’t make as much in front-end gross profit as you might like on these vehicles, they are available and in demand, which offers the opportunity for a repeatable, quick-turn retail cycle. Diversify your inventory mix. Like many dealers, Mason is looking to auctions to source slightly older, highermileage vehicles to diversify his inventory. “Those cars are expensive today, relatively speaking,” he said. “It’s like the expensive cars are cheap and the cheap cars are expensive right now.” Mason shares my sense that there will be more market volatility in the months ahead, particularly as rental companies unload their fleets and wholesale prices adjust. The good news is Mason and other managers will be ready. They’ll know that time isn’t on their side. They’ll make the necessary adjustments to fare the best and suffer the least. Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column originally ran on his blog. For this story and all his posts, visit www.dalepollak.com.

ACCELERATE | BY GWC WARRANTY

HELP! REPEAT BUYERS GONE MISSING Did You Disappear? Used car dealers are well aware just how important repeat buyers can be. But are you really getting the repeat business you’d like to see? Far too often when repeat buyers go missing, it’s because the dealer disappeared in the months and years following a sale. To tell the tale of the missing repeat buyer, you first must look at what happened with the dealer after a sale. Whether customers engage with you or not, maintaining front-of-mind awareness with them keeps you relevant while ensuring the lines of communication are always open. Post-sale communications can range from a variety of topics, such as service reminders, trade-in offers or just a friendly note to say hello. But if you’re not at least getting started with the basics, the likelihood of your repeat business fading off into another dealership’s lot increases with every passing day. Be strategic. Knowing what to send customers and when is the first step in making sure you don’t disappear from their memories. A good example of a relevant, timely follow up message is checking in with a customer if you’ve sold them a vehicle service contract. Checking in at the expiration of a contract gives you the opportunity to

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April/May 2018

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inform the customer of their expired coverage while offering the opportunity to trade that vehicle in for one with a new service contract. At the very least, this scenario allows you to offer a service contract renewal, where you can still land some unexpected profit. Be creative. A simple text-based email or an unsuspecting voicemail won’t do the trick. But a video-based email or personalized text message might strike the right chord. Anything you can do to stand out from the countless phone calls, emails and solicitations customers receive on a daily basis will help prevent your message from getting glazed over like the rest of them. Be persistent. But not too much. It could be a while until your customers are in the market for a new vehicle, so they may not want to hear from you every week or even every month. Set a messaging cadence that ensures your customers never forget about you. Because even if they aren’t in the market for a vehicle, landing messages with them consistently could remind them of a friend or family member who is in the market. So the next time you’re asking yourself where all the repeat buyers have gone, take a step back and see if your customers should be asking where their selling dealer has disappeared to. Often the mystery of the missing repeat buyer can be solved by finding the dealer who went missing after the sale.

WASHINGTON UPDATE | BY SHAUN PETERSEN

NIADA GOVERNMENT UPDATE

Latest Government Issues and Activity

NIADA IS YOUR VOICE IN WASHINGTON D.C., ADVOCATING FOR INDEPENDENT DEALERS, THE USED VEHICLE INDUSTRY AND SMALL BUSINESS. HERE’S A LOOK AT THE LATEST NEWS AND NIADA EFFORTS REGARDING LEGISLATIVE, REGULATORY, PAC AND GRASS ROOTS ACTIVITIES.

REGULATORY Department of Labor: DOL has proposed a new rule that would permit small businesses and selfemployed individuals to join together in an association health plan. The proposed rule, issued in response to an executive order by President Trump, would allow those associations to purchase cheaper health insurance that’s not subject to some of the current limitations in federal law. The rule would expand the types of groups that can form an AHP and allow for membership across state lines. It would also allow self-employed individuals to take part in a large-group AHP. The proposed rule has the support of many in Congress, including Sen. Lamar Alexander (R-Tenn.), chairman of the Senate Health Committee. “If made final, this rule should help up to 11 million hard-working Americans who don’t have access to employersponsored coverage,” he said, “and in addition, provide new, more affordable options to Americans in the individual market who are getting hammered by skyrocketing premiums.” NIADA submitted comments supporting the proposal with some changes designed to provide small businesses greater access to less expensive health care. CFPB: The retooling of the Consumer Financial Protection Bureau continues under acting director Mick Mulvaney. The CFPB has now issued seven requests

for information, seeking public comment on enforcement, supervision, external engagements, reporting on consumer complaints and rulemaking in addition to the original two – civil investigative demands and administrative adjudication. The requests are aimed at assessing those processes and identifying changes that need to be made. The bureau also announced it has formulated a five-year strategic plan that includes three primary goals: • Ensure all consumers have access to markets for consumer financial products and services. • Implement and enforce the law consistently to make sure markets for consumer financial products and services are fair, transparent and competitive. • Foster operational excellence through efficient and effective processes, governance and security of resources and information. Mulvaney said the CFPB will focus on equally protecting the legal rights of all – including the businesses regulated by the bureau – and will use its rulemaking authority rather than “regulation by enforcement.” “We have committed to fulfill the bureau’s statutory responsibilities, but go no further,” Mulvaney said, adding that doing so will help guard against “the misuse of our unparalleled powers.”

GRASS ROOTS RAGA meeting: Republican state attorneys general from across the country gathered in Washington, D.C. in February for meetings of the Republican Attorneys General Association. NIADA had a front row seat as a panel of AGs from Utah, South Carolina, Nebraska and Arizona discussed their office’s role in consumer protection – particularly in light of the recent changes at the CFPB. They engaged a representative of the White House to discuss how the President’s regulatory reform initiatives are impacting the states in the private and public sectors. Republican candidates for attorney general from several states were also present, giving NIADA the opportunity to discuss the virtues of our industry and the good independent dealers do in their communities. Of course, the campaigning was not limited to potential future AGs. Many of the current AGs attending the meeting are running for higher offices, including governor and the U.S. Senate. The relationship NIADA has developed with them as attorneys general can certainly benefit the industry as they move on to new positions. Colorado: Over the past several legislative sessions, the Colorado IADA has been working with the state legislature and Gov. John Hickenlooper to strengthen and revamp

laws aimed at preventing curbstoning, including increasing penalties and permitting additional law enforcement authorities to enforce the statute. This session, CIADA won the unanimous support of the legislature for an amendment allowing the DMV to share penalty revenues with the agency that initiates the enforcement proceedings. The governor is expected to sign that bill. LEGISLATIVE CFPB funding: The President’s proposed budget for fiscal year 2019 calls for reduced funding for the CFPB over the next two years as the administration seeks to restrict the bureau’s enforcement authority to prevent burdening the financial industry and consumer choice. The budget would cap agency’s budget at $485 million for FY 2019 and $610 million for 2020. For comparison, the CFPB’s FY 2018 budget request under Obama-appointed director Richard Cordray was $630.4 million. The White House said the two-year “restructuring period” will create an “efficient transition” as the CFPB imposes “financial discipline” and reduces “wasteful spending.” The administration is hoping the bureau undergoes legislative overhaul that would bring its budget under Congressional oversight. Currently, the CFPB is funded from the Federal Reserve. Interim CFPB director Mick Mulvaney requested a $0 budget for the first quarter of 2018, saying the CFPB will draw from

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reserves. Recall issues: The Trump Administration released its plan for a massive infrastructure bill Feb. 12, and Congress is expected to take up the issue soon. The infrastructure bill is likely to be the platform for Sen. Richard Blumenthal to try once again to introduce an amendment that would prohibit the sale or lease of a motor vehicle subject to a recall until the recall defect has been remedied. The Connecticut Democrat has attempted unsuccessfully to attach the so-called Blumenthal Amendment to a number of bills over the past three years. NIADA has worked with Congressional leaders to help block the amendment in the past and will continue to monitor any action on the recall issue. Shaun Petersen is NIADA’s senior vice president of legal and government affairs.

April/May 2018

TENNESSEE DEALER CONNECT

SALES MATTERS | BY JOHN CHAPIN

THE MOST IMPORTANT SALES CONVERSATION Self Talk There is a much overlooked aspect of sales success that is rarely talked about and people pay little attention to. It is self-talk. The most important conversation is the one you have with yourself. The reason that conversation is so important is because the words and language you use both reveal and reinforce your beliefs about yourself and the world. Those beliefs dictate the action you take, or don’t take, and ultimately determine success or failure. If you have a problem selling, you more than likely have a self-talk problem. The difference between top salespeople and everyone else is the top people became aware of their negative self-talk and beliefs and reprogrammed their language and beliefs to positive ones, or they were one of the lucky few who received positive programming right from the get go. The latter is the exception. Most of us received negative programming growing up. Either way, if you want to become a champion, you need to ensure your self-talk is positive, upbeat, and supports you. HOW TO IDENTIFY AND SOLVE POSSIBLE SELF-TALK ISSUES Step 1: Awareness. Like everything else in life, awareness is step one. You can’t fix a problem you don’t know you have. If you are overweight, but don’t think you are, the problem won’t get fixed. If your finances are wrong, but you don’t know there’s a problem, you won’t get them right. If you have a self-talk problem, you need to be aware of it before you can change it. The first thing you want to do is monitor your self-talk. What do you catch yourself saying about yourself and the world around you? Are most of your conversations negative or positive? Do you find yourself saying negative things about the economy, your particular market, your industry, or your product? How about your self-talk about you? Do you believe you aren’t smart enough, young enough or old enough? You don’t have enough energy or have too much energy? Do you believe bad things always happen to you, or the odds are always stacked against you? Your beliefs will be your reality. Step 2: Getting your self-talk right. If you realize you have a self-talk problem, here are some ways to work on it. Positive Affirmations Many people are familiar with affirmations and have either tried them in the past or use

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them currently. In a nutshell, positive affirmations are a series of positive statements that reinforce a belief you want to have about yourself. For example, if you want to have more self-confidence, you might use affirmations such as: “I am confident,” “I believe in myself,” “I feel my confidence increasing every day,” and other similar statements. Positive “Afformations” Noah St. John coined the phrase “afformations” in his book by the same name. Afformations are similar to affirmations but they are in the form of questions versus statements. In the case of afformations, if you wanted to have more self-confidence, you would use questions such as: “Why am I so confident?”, “Why is it so easy for me to believe in myself and do the things I need to do?”, and “Why do I have so much talent and ability?” The theory is that while your brain may be able to argue with a statement, as in affirmation, it searches for an answer to a question. You can check out Noah’s book for a list of afformations for most areas of life people struggle with. Note: There are four ways to work with affirmations and afformations: listening to a recording of them, reading them, writing them, or saying them to yourself, either out loud or silently. Ideally if you are vocalizing them, you want to say them with as much feeling and emotion as possible. It’s best to work with affirmations and afformations first thing in the morning, right before going to bed, and then, if possible, during the day. Psycho-Cybernetics The most popular psycho-cybernetic technique to shift self-talk is to cancel out negative statements. You do this by saying the word “cancel” after you catch yourself saying something negative and then following the word “cancel” with a positive statement. For example, if you catch yourself saying, “Why do things always go wrong for me?” you’d say “cancel” – out loud if possible – and follow with either an affirmation – such as, “Things always go right for me” – or an afformation, such as, “Why do things always go right for me?” Clean up your environment. Specifically eliminate negatives and negative people from your environment. Where you end up five, 10, or 15 years from now will come down to what you put in your brain and who you hang out with. You cannot watch the evening news and be positive. You also cannot hang out with negative people and have positive self-talk for any length of time. Finally, keep in mind everyone has some www.tniada.com

LIKE EVERY THING ELSE IN LIFE, A WA R E N E S S I S S T E P O N E . Y O U CAN’T FIX A PROBLEM YOU DON’T K N O W Y O U H AV E .

negative self-talk occasionally. In fact, the majority of champions have had self-talk problems caused by major self-esteem and self-confidence issues. Many were plagued by insecurities constantly reinforced with negative self-talk. The key is that they recognized it and did something about it, and that’s the key for you too. Become aware of these thoughts, catch yourself in the act, and shift the conversation. Reinforce the positive until it becomes your new habit. This does not happen overnight and takes work, but if you commit yourself to positive words and language, you should see a fairly substantial and positive shift in about 30 days. By the way, another great book related to self-talk is What to Say When you Talk to Yourself by Shad Helmstetter. John Chapin is a sales and motivational speaker and trainer. He has over 27 years of sales experience as a number one sales rep and is the author of the 2010 sales book of the year: Sales Encyclopedia. For more information, visit www.completeselling.com or email johnchapin@completeselling.com.

MARKET WATCH |

KELLEY BLUE BOOK BEST RESALE VALUE AWARD 2018 Winners Announced Kelley Blue Book recently announced the 2018 model-year brand and category winners of the annual Best Resale Value Awards, which recognizes vehicles for their projected retained value through the initial five-year ownership period. “Once again, Toyota and Porsche earn top honors in the brand and luxury brand categories, respectively, with the highest average projected resale value among their full model lineups,” said Kelley Blue Book director of residual values Eric Ibara. “The top 10 vehicle winners are predominantly trucks, reflecting the high demand that exists for these models. Despite the higher incentives available on trucks today, used car buyers are willing to pay more for trucks, relative to the initial MSRP, than they are for sedans. Without the prospect of higher gas prices, this trend doesn’t appear to be slowing.” This is the third Best Resale Value: Brand win for Toyota, which previously won in 2014 and 2017. This year marks Porsche’s second consecutive Best Resale Value: Luxury Brand win.

2018 BEST RESALE VALUE: Luxury Brand Porsche

2018 BEST RESALE VALUE: By Vehicle Category

Subcompact Car: Honda Fit Compact Car: Subaru Impreza Sporty Compact Car: Subaru WRX Mid-Size Car: Honda Accord Full-Size Car: Toyota Avalon Entry-Level Luxury Car: Lexus RC Luxury Car: Lexus GS High-End Luxury Car: Porsche Panamera Sports Car: Porsche 718 Cayman High Performance Car: Porsche 911 Hybrid/Alternative Energy Car: Toyota Avalon Hybrid Electric Vehicle: Chevrolet Bolt EV Subcompact SUV/Crossover: Honda HR-V Compact SUV/Crossover: Jeep Wrangler Mid-Size SUV/Crossover: Jeep Wrangler Unlimited Full-Size SUV/Crossover: Chevrolet Tahoe Luxury Compact SUV/Crossover: Porsche Macan Luxury Mid-Size SUV/Crossover: Lexus RX Luxury Full-Size SUV/Crossover: Lexus LX Mid-Size Pickup Truck: Toyota Tacoma Full-Size Pickup Truck: Chevrolet Silverado HD Minivan: Honda Odyssey

2018 BEST RESALE VALUE: Top 10 Cars Chevrolet Colorado Chevrolet Silverado Ford F-Series GMC Sierra Honda Ridgeline Jeep Wrangler Subaru WRX Toyota 4Runner Toyota Tacoma Toyota Tundra

CHEVROLET BOLT EV

Toyota

2018 BEST RESALE VALUE: Brand

HONDA ACCORD

s TOYOTA TUNDRA

Note: Residual values used for award calculations are based on the 2018 model-year vehicles that appear in the January/February 2018 Kelley Blue Book® Residual Value Guide. Top 10 models appear in alphabetical order. The 2018 Jeep Wrangler and Wrangler Unlimited honored in this year’s Best Resale Value Awards is the JK model. Depreciation often is the greatest expense incurred by drivers during the first five years of vehicle ownership. An average 2018 model-year vehicle will only retain about 35.1 percent of its original value after a five-year ownership period. Vehicles with average or below-average resale values are generally plentiful in the marketplace. However, certain vehicles are projected to hold their value better than others. While much of a vehicle’s resale value is based on supply and demand, as well as current and projected future market conditions, vehicles that retain their value best are typically discounted the least and tend to generate high levels of consumer interest. By comparison, all vehicles in Kelley Blue Book’s Top 10 for Best Resale Value are projected to retain more than 46 percent of their MSRP after five years. Kelley Blue Book’s Best Resale Value Awards are in their 16th year and are based on projections from the Kelley Blue Book Official Residual Value Guide. These values are established by experienced automotive analysts that review the output from statistical models built upon millions of transactions. Vehicles that earn the highest five-year residual values, expressed as a percentage of their original Manufacturer’s Suggested Retail Price, are selected for these prestigious awards. Low-volume vehicles are excluded from award consideration, except in the electric, luxury, sports car and high-performance categories. For more information about Kelley Blue Book’s Best Resale Value Awards, please visit www.kbb.com/new-cars/best-resale-value-awards/.

TENNESSEE DEALER CONNECT

April/May 2018

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MANAGEMENT MATTERS | BY DALE POLLAK

THE USED VEHICLE DONUT HOLE Three Ways to Work Around and Through

I’ve been struck by three trends in the current used vehicle market. First, late-model – three years and younger – vehicles account for almost 60 percent of retail sales, a fact affirmed in the latest Used Car Market Report from Edmunds. You can trace this development to the rise of offlease supply, which many analysts expect to continue, albeit at a slower clip than recent years. Second, the prevalence of late-model inventory is a bit tricky. Lower-mileage, nearnew used vehicles are facing competition with heavily incentivized new vehicles. As a result, the near-new vehicles aren’t selling nearly as fast as similarly aged units with higher miles. The Edmunds report affirms this trend. It said, “High levels of lease returns coupled with increasingly stringent mileage limits will feed an expanding pool of low-mileage used vehicle inventories that have proven to have a limited buying audience.” Third, there’s strong demand and interest for older, higher-mileage vehicles, but they aren’t nearly as plentiful as the later model

year inventory. The consumer demand for these vehicles isn’t surprising. There’s always strong demand for cheap, reliable transportation. Indeed, Edmunds noted these vehicles are turning faster than most other used vehicle inventory. In many ways, these trends force dealers to work around and through what might be described as a “donut hole” in today’s market. Here are three recommendations to help dealers address these market conditions: Re-assess your inventory strategy. The best Velocity dealers have been evaluating whether their inventory allocations for vehicle types and cost segments are truly correct and sufficiently precise for the current market. In some cases, dealers realize they’ve effectively given up on lower-cost vehicles and their buyers as they’ve placed a greater priority on higher-cost, late-model inventory. Inevitably, as dealers examine their allocations they find corrective opportunities to right-size segments they’ve overlooked, overstocked and understocked. Examine your inventory age/days to sale by segment. This analysis can affirm and illuminate inventory strategy assessment takeaways. Which vehicle segments are moving faster or slower than they used to and why? How do the Market Days Supply and Price to Market metrics compare to those of your fastest sellers? Dealers who conduct this analysis often find one of two factors, and sometimes both,

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account for slower-movers – either the vehicle itself or its merchandising/pricing isn’t “right” for the market. Both suggest an opportunity for process changes. Dealers who apply these lessons learned are more likely to achieve the goal of retailing at least 55 percent of inventory in less than 30 days. Address Cost to Market creep. I have written before about the rise of inventory-level Cost to Market metrics climbing close to 90 percent, leaving only a maximum 10 percent spread for front-end gross profit. Dealers often know they should strive to maintain an inventory level Cost to Market ratio of 85 percent, but the creep occurs nonetheless. It’s true the prevalence of near-new inventory contributes to the Cost to Market increase. But it’s also true these vehicles are the easy pickings and perhaps reflect a lack of desire, discipline or interest in finding vehicles with more favorable Cost to Market ratios. I also recommend dealers revisit their reconditioning costs, particularly those associated with outside vendors, to find additional savings to help reduce Cost to Market ratios. The good news is that most forecasts call for a relatively robust used vehicle market in the months ahead – a suitable environment to make inventory management adjustments that help you work more effectively around and through the donut hole. Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column originally ran on his blog. For this story and all his posts, visit www.dalepollak.com.

April/May 2018

TENNESSEE DEALER CONNECT

F&I MATTERS

| BY SCOTT BATES & MIKE RIZKAL

DOES YOUR RFC PASS THE IRS VALIDITY TEST? Don’t Let Your RFC Become a Liability

WE FIND MANY RFCS AND DE ALERS

DO NO T REGUL A RLY RE V IE W T HEIR OP ER AT ING AGREEMEN T S OR OP ER AT IONS T O COMP LY W I T H VA L IDI T Y FAC T ORS FOR T HE RFC A ND I T S T R A NSAC T IONS.

TENNESSEE DEALER CONNECT

April/May 2018

Related finance companies were not designed to be a tax-planning vehicle to reduce or defer auto dealership income. If the IRS validity test discovers noncompliance that cannot be explained in the RFC’s or dealership’s documentation, additional taxes and penalties can be severe. We find many RFCs and dealers do not regularly review their operating agreements or operations to comply with validity factors for the RFC and its transactions. The process is understandably time consuming and complex. You can rest assured, however, that if the RFC receives an IRS query, a dealership query often follows. RFCs are usually set up as S Corporations. The RFC acts as the lender in the dealer’s financing of used vehicles. The notes are sold to the RFC at a discount due to the higher risk the RFC incurs in the transaction. The RFC accrues the income as it is earned from the car buyer’s weekly or bi-weekly payments. The dealership collects cash up front then books a current and deducted loss for the difference between the full contract and the discounted contract. According to the IRS, a valid RFC must have the following characteristics. • When the finance contract is sold to the RFC, title has been transferred to the RFC in accordance with title and lien holder laws. • The discounting of the car dealer’s receivables is sold to the RFC at their fair market value. • There is a written arms-length contract between the dealership and the RFC. • The finance contracts are normally sold without recourse between the two related parties. • The RFC is responsible for repossessions. • The RFC is operated as a separate entity from the dealership and has the following characteristics: •A dequate capital to pay for the contracts. •M eets all state and local licensing requirements. • Maintains its own bank accounts. •H as its own address and phone number and operates as a separate entity from the dealership. •M aintains its own books. •H as its own employees who are compensated directly by the RFC. •P ays its own expenses. •C ustomers make payments to the www.tniada.com

RFC, not to the dealership. The IRS Audit Technique Guide cites two common issues that put the validity of the RFC into question. Either the dealership and RFC do not treat and record the sale and financing properly or the RFC is operating like a shell company rather than a legitimate separate entity: • At the time of each transaction, the RFC must show actual cash reserves in its own bank accounts to pay the dealer. The dealer in turn must record receipt of payment for the note. Each entity must have separate journal entries for the transaction. If journal entries don’t match up, the IRS may disallow the transaction. • As for its validity as a separate entity, if the RFC doesn’t have a separate address and does not advertise itself as a separate company, it factors into the validity test. It must also be proven the RFC is directly collecting payments and paying actual employees.

T H E R F C M AY B E C O M P L E T E LY VA L ID, A ND T HE L EG A L FOR M A BL E TO BE PROVEN, BUT DEALERS AND MANAGERS MUST BE CONFIDENT IN THEIR ABILIT Y TO SHOW P R O O F A N D D O C U M E N TAT I O N IN THE EVENT OF AN IRS QUERY O R A U D I T. S H A R I N G S TA F F O R RUNNING RFC BOOKKEEPING AND A D M I N I S T R AT I O N T H R O U G H T H E DE A L ER SHIP T O S AV E NOW C A N P R O V E C O S T LY I N TA X E S A N D P E N A LT I E S L AT E R O N . If the IRS does not view the RFC as a separate entity by these tests of validity, it will not allow the dealership to claim a deduction for losses on the sale of discounted vehicles to the RFC. It will defer to related party rules under IRS code 267 that do not allow loss deductions in transactions made between related persons. Without proper structuring as a separate operation, an RFC can become a liability. The RFC may be completely valid, and the legal form able to be proven, but dealers and managers must be confident in their ability to show proof and documentation in the event of an IRS query or audit. Sharing staff or running RFC bookkeeping and administration through the dealership to save now can prove costly in taxes and penalties later on. The IRS may determine the RFC is not a valid separate entity. This finding, in effect, invalidates the cash method of accounting for the sale of notes to the RFC. Interested in more details about RFCs and auto dealership accounting? Download our whitepaper at http://info.cornwelljackson. com/rfc-irs-target. Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department. Contact him at scott. bates@cornwelljackson.com or 972-202-8000. Mike Rizkal, CPA, is a partner in Cornwell Jackson’s Audit and Attest Service Group. Contact him at Mike.Rizkal@cornwelljackson.com or 972-202-8000.