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Planning – and Accounting – in Advance of a Sale

For dealers considering a sale, or even just thinking about one over the horizon, it’s a good idea to start planning well in advance. After all, the sale of your business is likely one of the most important transactions of your career. It is well worth the time required to prepare.

As with any sale, you want to clean up your asset before you go to market. This is true when you are selling your house, your car, and it is certainly true when selling your business. This applies, in particular, to your financials.

A common issue we face when advising on a sale is very messy dealership accounting. Ideally, your financials show a clear picture of your performance and your assets, and facilitate the valuation of your business for top dollar.

In reality, accounting systems – and the methods employed – are often created incrementally over many years, as stores and facilities are added and subtracted, as organizational structures change, and office staff come and go. As a result, dealership groups can end up with accounting that resembles spaghetti without a recipe to explain the method to the madness. While there is sometimes solid internal logic as to the way accounting is being done, it can be very difficult to understand for an outsider.

For example, many dealers, and their accountants, choose to do a lot of “clean up” in the 13th month statement, in addition to legitimate year-end tax entries. This can seriously complicate the valuation process, and reduce confidence in the store’s true performance. As a general rule, log all operational entries consistently in the first 12 months, and use the 13th month solely for tax planning.

Accounting relationships between dealerships and management companies can be very, very complicated. Review this within your organization, and see if you can simplify the relationship between the dealership and the management company. One suggestion is to be consistent with how you cost out the management company’s services to each dealership and keep a very detailed accounting of: (1) what the management company does for the dealerships, (2) how much it charges the dealerships and (3) where those charges are accounted for in the dealership income statement. In some cases, management companies are providing specific services required by the dealerships and are being appropriately compensated; in other cases, the management company is used to shift profits out of the dealership and into the management company. This can be difficult to unravel when trying to depict the true earnings of the dealership.

Another issue to evaluate – accrual accounting. Guide your team to use the accrual method when booking major revenue and expense items. For example, account for your manufacture bonus money as it is earned, instead of showing minimal profits in some months, followed by very large profits in others when the bonus money is funded. Likewise, semi-annual and annual expenses such as insurance should be accrued each month so as to show true, and consistent, earnings performance on a monthly basis. The more consistent the earnings, the less explanation required to justify large profit swings.

For dealers who are accustomed to running virtually all of their earnings through management companies, or other entities, consider reallocating profits back to your dealerships in the years leading up to a sale. As a general rule, the more a dealership’s financials stand on their own, the easier the sale process. The more add-backs, adjustments and explanations required to interpret a dealership’s financials, the longer the due diligence process and the riskier the sale. Complexity is never a good thing when selling your business.

All that said, every dealership and dealership group is unique, and requires a tailored approach when characterizing earnings –and potential earnings. There is more art than science to the dealership sale and valuation process. However, when your financial statements clearly reflect your performance, you bring a bit more science to a naturally unscientific process. The sale of your business is likely one of the most important transactions of your life. It is worth it to prepare.

Failure to prepare is preparing to fail.” John Wooden

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