The “Dirt” on your Buy-Sell: Don’t Let It Stall Your Exit

By: Gregory A. May, Partner

In a dealership Buy-Sell transaction, the “Blue Sky” value of the franchise often takes center stage during negotiations, and there are typically numerous discussions regarding vehicle pricing, parts inventory, incentive reimbursements, WIP and fixed assets, but for many dealers, the real estate is the most significant asset on the balance sheet—and frequently the most overlooked until the eleventh hour.

Whether you are looking to exit the business in the next twelve months or the next five years, the “cleanliness” of your real estate may very well dictate the speed, certainty, and tax efficiency of your closing.

Here are four strategic ways to prepare your real estate before the LOI (Letter of Intent) hits your desk.

1. The Environmental “Skeletons” in the Closet

For most dealers, it is not a matter of if there is an environmental question, but when.  The fact of the matter is that environmental regulations and the regulatory scrutiny of environmental conditions are both ever increasing. Management practices that were deemed acceptable in the 80s are now frowned upon, and document retention procedures have significantly evolved over the years.  It is easy to ignore these issues and hope for the best, but keep in mind that every commercial lender will require a Phase I Environmental Site Assessment; and if the buyer can’t get funded, you don’t get paid.

• Proactive Tip: Don’t wait for the buyer’s consultant to find an old underground storage tank or leaking hydraulic lift. Conducting your own “pre-flight” environmental review allows you to address issues or obtain a “No Further Action” (NFA) letter from the appropriate authorities on your own timeline, rather than under the pressure of a prospective buyer.

2. The Manufacturer “Image” Trap

As part of pre-sale due diligence, a Seller should consider the interplay between applicable franchise laws, current facility conditions and factory incentive initiatives.  If your facility isn’t compliant with the latest “image program,” the factory and prospective buyer may foresee the need for imminent renovation expenses.

• Proactive Tip: Review your current facility’s standing with the manufacturer and legal counsel now. Knowing the timeline and projected costs of future projects, and the factory’s ability to force those renovations, allows you to proactively address these issues on the front end, setting expectations, baking those costs into the purchase price, or negotiating a “sharing” of the burden.  Addressing these issues early during the negotiation process can help you avoid uncomfortable surprises that could arise well after you have inked a deal and the Buyer and their representatives have trounced all over your property.

3. Lease Audits

Many of our clients’ dealership operations involve third-party lease arrangements concerning dealership premises, billboards, independent collision centers, and offsite parking arrangements.  Often times these leases are neglected over the years, and the result may be that you’ve unknowingly renewed the lease, or allowed it to expire.  These circumstances may not pose an immediate risk, but upon assignment or transfer of the lease, it could give a 3rd party landlord leverage that leads to uncomfortable renegotiations of the lease terms.

• Proactive Tip: Review third-party leases with your counsel to confirm that they are properly papered, and attractively positioned for a prospective buyer. A “handshake” agreement with your old neighbor-friend likely won’t satisfy a buyer or their legal team. Also, ensure that your inter-company leases are formal, written, and defensible at market rates.

4. Survey and Title Housekeeping

Florida’s rapid growth means that fence-line encroachments, undocumented easements, and faulty deeds are incredibly common. A buyer’s title insurance company will make “exception” for these items, which can hold up financing.

• Proactive Tip: We recommend a “Pre-Sale Title Audit.” By running a preliminary search through our in-house agency now, we can clear these “ghosts” before they become leverage for a Buyer to demand a price reduction. Also, do you have an ALTA survey from the last five years? If not, consider obtaining one. Identifying a neighbor’s shed that is two feet over your property line is a ten-minute conversation today, but quite stressful if discovered months into a transaction.  

The Bottom Line: A dealership is a high-speed machine, and the real estate is the foundation it sits on. By treating your real estate with the same “preventative maintenance” you give cars in your service department, you can ensure that when it is time to sell, the only thing that you are focused on is the wire transfer.

Ready to discuss your long-term real estate strategy? Let’s schedule a brief “Portfolio Review” to ensure your assets are positioned for maximum value.