Rest in Peace? – Inadequate succession planning could equal strife rather than success for the next generation in the dealer market.

By: Denise Branch

The franchise dealer market is no doubt generational.  Many dealerships are now on at least their second generation of ownership with the next generation poised to take the reins. Yet some Dealers mistakenly wait until the time of their death to transition ownership or dealer principal status creating enormous headaches for named successors and OEMs alike.

Successor dealers identified after death often face long approval processes from OEMs and/or challenges from relatives regarding their appointed status.  Without having pre-death ownership interest or approved successor dealers identified and agreed to by the OEM, the transfer of power in a dealership after an owner’s passing can be anything but peaceful.

Many owners also incorrectly assume that just because they identify an heir, especially a child, as a successor dealer that the OEM will approve the status as dealer principle.  However, the OEM may, through their vetting process determine the appointed successor is not appropriate and deny the issuance of a sales and service agreement.  While some states have franchise dealer protections that make it more difficult for an OEM to deny an heir the position of successor dealer, it is still possible for the OEM to find that they are unsuitable to serve.  Even if the OEM finds the successor suitable, the hurdles of floorplan lending and captive approval must still be cleared.  Working through these approval processes naturally distract from the continuing operation of the dealership and declining sales can certainly serve as a basis for disqualification by the OEM and/or lenders.

Some owners also mistakenly believe that waiting to reveal their succession planning until the time of death will avoid familial conflict.  They operate under the misconception that once the estate contents are revealed, though there may be disappointment, the appointment shall stand.  However, estate planning shrouded in secrecy is a ripe environment to challenges of accuracy and validity.  Any items of ambiguity must be litigated as the deceased cannot be consulted for clarity.  

Estate planning and successorship are complicated issues that require critical examination by tax and estate professionals. However, dealers should also consider speaking with their OEMs to ensure that their planned successors meet the thresholds for approval as a successor dealer and to inquire if ownership prior to death is a consideration.  Succession plans should also be discussed with those affected to avoid unnecessary and costly litigation regarding ownership and status.

While planning for one’s death may be unpleasant, a well-constructed and well communicated plan of successorship will ensure success rather than struggle for the next generation, and ensure the legacy of the founding dealer continues.