Why it’s the right time to sell, and to buy – September 25, 2006

Given the huge response to my column in the July 24 edition of Powersports Business, I would like to follow up on that article and address many of the questions that were asked.
I believe I have responded individually to everyone who contacted me following the article. The responses were from coast to coast and some from Canada.
The first two questions I get are: Is it a good time to sell? And, is it a good time to buy?
The answer to both questions is yes. The retail business is better than it has ever been, and it is tougher than ever. You can make more money, but the investment required is greater and there is an absolute need for structure and systems. If you have established the ability to make the most of the current market conditions and have developed some key players, this is a great time to expand by acquiring additional dealerships.
The benchmarks are pretty clear. A well run Harley-Davidson dealership should make 11-12 percent in pretax operating profits (EBITDA). A metric dealership 7-8 percent (EBITDA). If you find you are not making that return and you lack the energy or desire to force the processes that will bring that about, it is a great time to sell to someone who can reap more and pay you more based on the potential of the dealership.
My advice to a buyer is always to base the purchase price on what you are going to do with it. I have assisted in a number of acquisitions where the buyer never bothered to look at the financial records or tax returns in determining what to offer.
There is some key operating information required. We do need to have unit and total dollar sales and some fixed expense information to develop a forward earning picture. It does not make sense to pay more than three times that number and less if there are significant capital expenditures required to bring about the forward earnings estimate. To make the transaction a win-win, that number needs to be five times trailing earnings for the seller. The good news is that is often attainable.
Another question: Would I be better off to seek a buyer from outside the industry?
I have learned to never say never because once in a while the “tooth fairy” does appear, and somebody with more money than common sense shows up with a wad of cash. They inevitably make a small fortune in the business by starting with a large one. What happens the vast majority of time is they find out what lines of credit are required and that they have to personally guarantee those lines. Then they fade away. Lenders and OEMs have learned to take a very hard look at neophytes seeking to become dealers. When there was lots of “low hanging fruit” and the retail business was easier, someone new to the business had a lot more time to learn. There really is no such thing as a turnkey dealership.
Question: What about selling to my son, daughter or protégé?
To fully answer this I would need a couple of pages of this publication. The short answer is both yes and no. One of the questions I received was “how do I get out of a sale I made to my kids?” There are a lot of reasons why we want to pass on our business to our kids. If done improperly, you are setting them up to fail and setting yourself up for more angst than you experienced operating the dealership. While I have experienced far more bad experiences than good, there are a number of glaring success stories in the industry. So, if you want to sell to your kids, all I am stressing is do it right.
Assuming Junior is not going to give you cash up front, the acquisition has to be in defined increments. In 1997, Lemco & Associates introduced the Dealer Candidate Program. Over a period of one year, the candidates were exposed to, and had to demonstrate, a full understanding of each department in the dealership. This program has been used extensively by Ridenow and APS and other groups to prepare general managers to take over acquired dealerships. There have been numerous success stories and I believe my former company, now doing business under an alphabetical acronym, still offers the program. Even if your son or daughter or protégé has spent a long time in the dealership, they have inevitably gravitated to the area of the dealership they like best. In the future as dealer principal, they will not be able to hide there. Make sure they are genuinely prepared.
So, once they fully understand the boss does more than sit in the fancy office you have in your new designer store, in between playing golf, sailing the boat, flying the airplane and going to dealer conventions and incentive trips to exotic locations, there is a good chance of success. The closer the relationship, the more you need to delineate in the contract. There is no one boiler plate or template that fits all, but there are some proven structures that work.
If you need some expanded information on structuring a buyout for the next generation, please feel free to contact me at 340/719-8591. For the right participants in the right market there is even funding available.
Cheers, Ed. psb
Ed Lemco has been involved with the powersports industry for more than 30 years. Lemco, the former owner of Lemco Management Group, is the founder and executive director of the National Council of Motorcycle Dealer Associations.