Finding Hidden Profits in Unusual Places in Your Dealership

There are many messages landing in your inbox these days. The vast bulk (beside the amazing “pharmaceuticals”) pertain to running your core business and “how to”…Build Successful Internet Sales; Increase Service Revenues; Avoid the Top 10 Sales Killers; Re-make F&I Menus for Fun and Profit; (and the always interesting) Increase Body Shop Profitability Because You are Doing it Wrong.
You are bombarded with so many messages that you need to ask yourself: “how many things can a dealership really do to increase sales?” The answer is the same as that to the age old question, “How many licks does it take to get the center of a tootsie roll tootsie pop?” Three, then crunch! Walk with me and I will show you what I mean…

Improving aspects of your dealership (it really doesn’t matter what they are…) requires attention, specifically management attention. Your extremely busy GM, Sales and/or F&I Managers are where the rubber meets the road when it comes to implementing business process improvements. Establishing new ways of doing something is a learning process that requires:
1) A curriculum to study or at least copy
2) A set of trainings with assessments to show how to do something and measure how much your people understand what is expected of them
3) And lastly, it requires that your managers/supervisors spend time overseeing the outcomes of each of these steps in the learning process. CRUNCH!

The first two are easy…content for improving sales across departments is readily available and probably sitting in 3-ring binders on your shelves as I write this, as are the training videos/DVDs from two years ago, or perhaps recent subscriptions to online sales trainings. All unused from past improvement initiatives that went fallow as soon as it got busy again, or the manager pushing the effort walked across the street…and there’s the rub. All of this takes time, supervision, and management monitoring of progress. This is the CRUNCH time necessary to improve anything at a dealership.

As we know, dealerships don’t have layers of management waiting for the opportunity to “show their stuff.” Most managers are multi-taskers with several responsibilities on their shoulders. There is little time for new process improvements, but technology can create the “slack in the system,” or the time necessary for ongoing improvements.

Time is Money, Don’t Waste Time
In the average dealership, management attention to monitoring and tracking all of these activities tends to be implemented as a paper-based process. In fact, you will probably find paper as the common format on which nearly all your present business processes rely. When it comes to improvements or new processes, you generate information and data on paper about a person’s activities related to their role, the dealership’s goals for sales improvement, compliance with Red Flags, Adverse Action, OFAC, or any one of a dozen sales and F&I related legal issues.

What all this paper pushing represents is managerial time spent checking off the tasks as they are completed and reporting progress of established goals back to the exec team or the dealer. But the real value of a manager is the time and experience in the trenches that can be shared with their direct reports. It is not in the time-consuming supervisory process that requires marking a sheet of paper so as to document that so-and-so in the F&I dept took the new menu course, or some other mundane task.

Available and proven technology can automate the logistics of process improvement for valuable gains in management time. By automating the basic blocking and tackling of any kind of improvement a dealership can increase sales and save a huge sum of money. When managers don’t have to waste valuable time checking to make sure their direct reports are doing what they are supposed to do, or becoming experts in legal mandates, more time can be spent selling cars.

In the present environment wasting time is a costly sin. Saving time and money improves the bottom line in more ways than one… Check out this example:
Equivalent New Car Sales Necessary to Return Same Revenue from Automated Logistics
Average Dealership Profitability (2007 NADA Data) 1.50%
Annual Savings for the “Average Dealer” Using Dealership Compliance Management System (DCMS) $ 27,281.90
Estimated Sales Necessary to Equal Savings from DCMS $ 1,818,793.33
Average Price per New Vehicle Sold (NADA Data - 2006) $ 28,500.00
Estimated # of Vehicles Sold to Equal Savings from DCMS 64

Improving sales is a worthy goal, but with the right technology in place, saving money is easier and more “profitable” than increasing the sales capability of your personnel. Let’s take a look at some the hidden areas of potential savings in a dealership.

Paper Wastes Time
Paper is money out the door. There have been dozens of research studies about the cost of paper-based document management. PriceWaterhouseCoopers research suggests the simple act of printing, copying, storing, and making a single document retrievable is $20. That is just for one piece of paper. Imagine the cost and time consumed for a single training, or a vacation request form, or a special order part request, or any process that requires a manager’s approval…I think you can see my point.
There are a lot of workflow/business processes that require not only paper but TIME; specifically, costly management time. We have clients that in a year and half have generated over 200,000 content items including documents, trainings and forms with the associated workflow and oversight …Do the math ($20 X 200k) - they cannot afford to do this with paper anymore. Their managers would revolt.

Supervising Compliance Wastes Time
The average cost of compliance related activities at a dealership, which includes communications to new hires and existing personnel, audits of all shapes and sizes, IRS 8300 forms, Incident Reports, etc, is a combination of paper and executive or even General Counsel time, which is sky high these days. This includes costly supervisor time spent tracking personnel activities, monitoring their compliance, and reporting their level of compliance. Chances are all of these exist as paper documents, which studies have shown are prone to being misfiled or even lost, and are very costly to recreate. These same studies also show that highly paid managers spend a significant amount of time looking for these documents…or worse, spending time recreating these documents because they can’t find them…Ouch!

Outside Consultants Waste Time
My research of 50 dealers with more than three rooftops shows that the average cost of onsite Environmental, Health & Safety consulting runs approximately $5,200.00 (a rooftop) on a quarterly basis. Many dealerships are avoiding this expense by bringing the Fixed Ops quarterly safety audits in-house and automating the documentation process and the timing of distribution to the right personnel, in the right department, at the right time schedule. They then fill out the appropriate forms or take the recurring trainings in advance of the scheduled safety meeting. The latest technology tracks those who have done what they are supposed to do so the manager newly tasked with running the safety meeting must only address EXCEPTIONS rather than each step of the process. This approach removes the consulting expense from your P&L and reduces the time spent coordinating the meeting and gathering the required paperwork, which is now all electronic and leaves you more compliant.

Complying with New Laws Wastes Time
When calculating the cost of Legal changes that require new compliance programs, such as Red Flags, Adverse Action, OFAC, GLBA, etc., my research suggests that for each new legal mandate an average dealership (52 employees and 1.6 rooftops – Source: NADA Data 2007) spends about $7,000.00. Each year, experience shows that dealers average two new legal compliance programs per year. 2008 saw the new Adverse Action and Red Flags. Next year expect the new ADA Amendments and new FMLA requirements…and that is in January! In short, dealerships must stop what they are doing and implement new compliance programs. This is time consuming in a number of ways:
1) Developing the legal policy necessary to comply with the new rules
a. This requires costly lawyer “golden time.”
2) Distribution, Training, Assessing, Monitoring, Tracking of Compliance
a. Management TIME
b. Personnel TIME
c. Outside/In-house Counsel TIME

Having the right technology and legal content is critical to reducing the time associated with these costly but mandated efforts every year.

Hiring People Wastes Time
When calculating the cost of New Hire Orientation and Continuing Employee Training on such areas as EH&S, F&I, Red Flags, etc., think about the thickness of the new hire paperwork and all of the storage necessary to keep that on site and available for auditing (think I-9s and ICE).

The Society of HR Management suggests the cost of such an effort averages 25% of that person’s annual salary. NADA pegs the cost of sales turnover at $25,000 per salesperson. Now multiply what you believe is a reasonable cost by your turnover rate to see the time spent doing it over and over again, and the reality of that expense to your dealership. Even if the orientation is $2500, reducing that cost by just a few hundred dollars can mean a big pop to your bottom line, not to mention getting your new people up to speed and selling, while your existing personnel are re-trained and back to work in record time.

Automating the orientation process and the ongoing compliance and role related training can significantly reduce management time and actual paper expenses. Take a look at your orientation package; how many pages can be turned into electronic documents? Or better yet, what if someone gave electronic versions to you when you bought the technology to reduce your overhead expenses? How much time and money could you save then?

Paying Hurt Workers Wastes Time
When calculating insurance cost savings you need to look at critical areas of liability. This includes your Workers Compensation program because your annual costs per person probably exceed $400.00 or more; your “Garage-keepers” and EPLI. Because the insurance business is cyclical, premiums head up and down based on the frequency and severity of your losses, as well as how well insurance companies are doing with all of that cash they need to invest. That said, and in light of recent market experience, dealers can expect a review of their premiums soon so insurers can raise them…unless you can prove to them how you are addressing the liabilities they insure you against.

Insurers find it hard to deny a premium review and eventual reduction for a dealership with the right technology and legal content built around a “good faith” compliance management system that automatically distributes, tracks, monitors, alerts and provides clear exception reporting. And on the Workers Compensation side, automating the safety trainings, “back to work” programs and monitoring progress with periodic distribution of progress report forms, helps remind people that it is better safe than sorry (and costly) and can save literally 100s of 1000s of dollars. All of which relieves managers of the time consuming burden of oversight…all they have to do to make decisions is read exception reports as to who hasn’t done what they need to do…easy.

Terminal Velocity
Implementing any new business process improvement, be it in the sales organization, the service/parts department or the body shop, requires management focus and time. There is no getting around the need for basic management supervision of employee development and oversight. But there are applications out there that can pick up the burden of supervision so managers can do what they do best, strategically manage the business for greater profitability.

Your Managers don’t have the time to both manage strategically and focus on the minutiae of new program implementation. There is technology combined with legal content out there that automates the low value activity of supervision but also provides the necessary content and logistics automation that can take daily chores off of your plate. By removing time from a variety of undocumented, yet inevitable expenses, managers control the operational destiny of their dealership and uncover the hidden money in their midst.

Time is money. Don’t waste time.

Technorati Tags: Business Process Automation, Paperless Operations, Workflow Automation

The 5 Step Method of Insurance Premium Reduction
We predict the present by looking at the past. How many insurance claims and lawsuits has the dealership experienced? What did these events cost? In addition to looking at the past to predict the future, dealership management should preach the risk management mantra, because in any type of business, all managers and supervisors must manage risk to succeed.
Much of Dealership risk stems from the lack of consistent process and management associated with meeting regulatory and manufacturer requirements. From Sales and F&I to CUV/CPO programs to Employment Practices, good dealership compliance and risk management are directly interrelated and are your best defense against liabilities and litigation.
By establishing consistent processes, a dealer minimizes the causes of accidents, claims and other occurences that impact both the frequency and severity of dealership claims. These same consistent processes can also generate huge savings in overhead, fewer wasted management hours and better, more compliant operations.
So what is “compliance?” Compliance is basically stuff you gotta do and document to build a “Good Faith” shield of protection for your dealership from those who would profit from your mistakes. By better managing your liabilities stemming from inconsistent and poorly implemented policies by poorly trained personnel, you also better manage your overall risks. In short, you become a risk manager whether you mean to or not.
The Not-so-Dangerous Liaison between Compliance and Risk Management
Risk management is a method whereby an organization examines its policies, procedures, and operations to:
1. Identify assets that may be at risk.
a. These assets include:
i. Employees
ii. Vehicles
iii. Buildings & Contents
iv. or a Dealer’s good name.
2. Determine what could go wrong with each asset.
3. Determine how you will treat the risk:
a. Avoidance: Just say no. Don’t give out demo cars or allow demos by salespeople with a bad driving history.
b. Reduction: Accidents happen. Limit their damage. You may provide employees with safety glasses, train on spills add fire extinguish in fixed ops buildings, and checking MVR’s.
c. Retention: Determine if your organization can afford to pay for the adverse event, for example, higher deductibles in exchange for lower premiums
d. Transfer: Purchase insurance or transfer the risk by requiring organizations you work with to provide certificates of insurance
4. Create a plan that makes sense for your organization.
5. Implement the plan
a. This may include purchasing insurance, renewing insurance with a new carrier, changing deductibles, or purchasing new compliance management software.
6. Monitor the results.
Compliance is performed by personnel. Personnel have a value or liability that is difficult to measure. However new internet-based compliance applications with pre-loaded legal information and trainings can now enable dealers to assess liabilities associated with personnel and individual bad acts.
These internet-based compliance applications measure the dealership’s compliance effort and provide clear metrics and compliance exception reporting. Using these tools Dealership Management can focus on problem areas readily, reducing time spent over-seeing and monitoring compliance gaps. . Ultimately, knowing what your personnel are doing and most importantly what they are NOT DOING, leads to lower liabilities, less likelihood of non-compliance and reduced frequency and severity of claims.
Risk Management and Compliance with regulatory agencies goes hand in glove. Each employee represents a “cloud of liability” that is difficult to see through and assess. Addressing these individual liabilities requires expert legal content and state of the art compliance automation technology. Once a dealership addresses these issues they can then avoid the fines claims and litigation stemming from non-compliance.
Dealerships making a half-hearted attempt at regulatory compliance will “naturally” have greater gaps in their compliance. This instills and supports a culture of non-compliance, leaving the dealer at greater risk of fines, claims and litigation. Making a whole-hearted attempt allows dealerships to prove their good loss experience is no fluke, putting the dealer in a better negotiating position with any insurer. Once such a system is in place, there is a simple approach to potential insurance savings.
The 5 Steps to Premium Reduction
1. Notify
Inform Your Insurer & All Other Insurers Providing Quotes:
• Outline the Intent & Objectives of Dealership’s Compliance Management System
2. Understand What They Need
Insurer Requirements:
• Policies & procedures manual and documents
• Claims & Loss History
3. Document Your New Risk Management Practices
Provide Dealership Compliance Management System usage via…
• …Compliance Management Content Fulfillment and User Compliance Reports
• …Management’s Dashboard Report
4. Demonstrate Better Visibility into your Dealership’s Liabilities
Good-faith Compliance Capability via
• Dealership-wide usage
• Visibility and value to insurer
5. Request
Insurer recognizes Improved Risk Profile (i.e. reduced liabilities) via:
• Reduction in frequency and severity of claims
• Positive alteration of terms & conditions

Risk management in a dealership is not strictly quantitative, especially when dealing with personnel and customers. Watching for subtle changes in your organization is the “art” of risk management. In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. By reducing your risk profile in such a manner, the frequency and severity of claims will likely decrease over time and increase your chances for major reductions in insurance premiums.

Balloons
Balloons are fun and enticing. They can be a child’s means of revelry or a GM’s means of attracting new customers. They can also be wonderful analogies…so here goes…in the past 6 weeks, the financial bourses have taken us on an untamed balloon safari. So far we have seen Bears battle Bulls, leaving much trampled and snuffed out, financial stocks in particular…nothing like boundary less lending terms coming home to roost to really let the air out of that ballooning balloon(…great word, “balloon”). This has lead inexorably to a tightening of the credit noose at the end of the pole that is around the necks of dealers, who suffer more than most big game when it comes to getting their customers financed…somebody in NYC should have thought of that…any-who, I digress aggressively.

As dealers brace their operations for the anticipated ill effects of the present economic environment, we are all engaging in priority setting, and other liability limiting activities also known as “risk management.” To stay in the balloon’s basket dealerships are being forced to consider bankruptcy, selling out, merger, and reductions in force. These options seemed far away just a couple of months ago, but even the mighty “Heard” we watched from our gondola couldn’t get past the “big volume” of red ink we saw in that particular river.

Evaluating these options requires a rethinking of estimated revenue and operating costs, including compensation and benefits. As these options are weighed, dealers need to account for the collateral effects of major restructuring, especially if reductions in force are the strategy. If you are considering restructuring as a cost-cutting measure, you must think through the risks of restructuring. One thought is to reach out to your insurance carrier who can help you scrutinize your restructuring plan prior execution. You will also want to have all of your ducks in a row, with the right performance review documentation, unemployment insurance requirements, and benefits administration in place and ready for the stampede of paperwork what is left of your team will have to deal with to avoid the risks associated with wholesale terminations.

RIFs and Risks
Laying-off staff to reduce costs is the ultimate squeeze on your financial balloon. On the one hand there will be a reduction in the costs of compensation and benefits, but reducing your workforce will increase the price tag of hanging onto good staff. Having fewer hands on deck will create a strain on the productivity of those remaining. How do you get a handle on it? Dealerships going through a downsizing should ask:
• How will we accomplish all the work previously handled by the departed?
• Are all existing business processes necessary? If so, what can we get rid of?
• What business processes are we great at, good at, and not so good at? Which of these support the core sales effort on the show floor, in service and parts and in the body shop?
• Are there DSPs who can fill in the gaps with technology?
• Are there programs or “sales solutions” that we can drop completely, without too much loss of revenue?

As Scar from the Lion King said “Be prepared…” (For litigation)
As we balloon over the landscape of wrecked P&Ls on our floating safari, we note critical employment law issues come into play with increasingly alarming implications. Dealers must ensure their decisions of who to let go are made with a documented plan that counters any plaintiff’s argument that there was discrimination in who would stay and who would go.

It is in the dealer’s best interest to have the RIF plan’s criteria and all communications to employees documented and reviewed by legal counsel. There are technologies available that can automate this effort, from the moment of the new hire’s orientation, job training and ongoing performance evaluations, incident reporting and termination. In these wild times, having the documentation means having the “good faith” legal protections in place BEFORE you need them, so this stuff becomes as easy a s shooting ducks in a barrel.

Dodging Bullets
It is a “best practice” in many termination cases for dealers offering severance pay require soon-to-be-ex-employees to sign a “release” (where the employee waives the right to sue). The releases should always be reviewed by legal counsel before use. If all has been anticipated, arbitration agreements signed when they first became employees will be reiterated as part of the departed’s separation documentation.

Heads Up!
Federal and State RIF warning requirements vary but must be adhered to so as to avoid any government intervention. At the federal level, the law only applies to employers with 100+ employees implementing RIFs. Across at least nine states (California, Connecticut, Illinois, Maine, New Hampshire, New Jersey, New York, Tennessee and Wisconsin) there are regulations requiring employers to give advance notice (60-90 days) of RIFs affecting 50+ employees, and in some cases, even those lay-offs that may impact as few as 25 employees. Lastly, several states have laws requiring the affected employer to pay for health insurance or severance pay post termination. On top of all of this, Employers must provide the required COBRA notice to departing employees or run the risk that the employer will be responsible for 100% of the employee’s health care costs post-termination. Yikes!

Hire Right & Fire Right
Automotive dealers face some of the most competitive markets imaginable, with vicious competition, commodity pricing and onerous regulations. They experience some of the highest turnover rates on the planet and still are able to maintain satisfied customers that keep coming back. But at the end of the day, when you are on the balloon ride of your life over wild terrain and the dark clouds of drastic measures are looming on the horizon, dealers are business men and women that need to earn a living. So hang on to your checkbooks by not only firing right but hiring right…make sure you document the important elements of the employee’s lifecycle with your dealership. In this way you can not only fly over and avoid the trampling, destructive feet and hooves of Bears and Bulls, but the teeth of the Sharks out there waiting to smell the blood of non-compliance in the water…you know who I mean.

Technorati Tags: Terminations & Layoffs, Wage & Hour

This white paper explains the drawbacks of manually processing employees’ time off and the substantial benefits for dealerships managers, HR and payroll departments and the rest of the dealership’s employees when an automated dealership time off tracking and monitoring system is implemented.

What Job Absence Costs Dealerships on Average
According to Commerce Clearing House’s 2005 Unscheduled Absence Survey, the average annual amount of sick days taken is 4 percent or 9.1 working days per employee (based on a working year of 228 days). The research strongly suggested that the present manual method of tracking time off, as done in most dealerships is one of the reasons for the increasing number of absences among today’s workers. To reduce absence the research showed that tightening policies for reviewing attendance is considered a major influence.

The survey shows the rate of unscheduled absenteeism has risen to a five-year high of 2.4 percent, with last minute no-shows costing organizations an average of $610 per employee per no show day. Only 38 percent of these unscheduled absences are due to illness while 62 percent are for other reasons, such as family and personal needs, stress, and entitlement mentality. To establish control over the absence rate of its employees and bring the heightening levels of employee time off to more acceptable levels, organizations clearly need to find a solution. As the Survey proves, implementing a system of effective record-keeping as well as closer supervision of employees’ time-off, is necessary to reduce costs at a dealership.

Manually Processing Employee Time Off: Time-Consuming and Inaccurate
The task is large and complex, as well as time-consuming for whatever number of people you throw at the problem. Managing employee time off entails tracking each individual employee’s time off requests, their accrued time off (vacation, sick and personal time), and the amount of time off taken.
It is complex because the employees are at different organizational levels and each has amassed a certain amount of time with the company; consequently, employees accrue different quantities of time off from one another. When you consider that employees take their time off in various amounts and at dissimilar times, you realize that each employee’s time off history is truly unique. Ensuring accuracy with every employee’s time off history requires a significant portion of the time human resources or payroll personnel devote to their tasks.

For medium and large dealerships that have workforce totals in the thousands, managing employee time off using manual, paper-based processes is impossible and tends to end up in excel spreadsheets and ultimately, for those dealerships with the money, end up in an HRIS system whose implementation can be a tremendously daunting process, but what the heck, it does 10 other things and for the money it better do them well.

But for small to mid size dealerships (3 to 15 locations), even using semi-automated tools such as spreadsheets requires considerable attention to detail. Manual record-keeping of each employee’s time off history cause headaches because human resources must maintain up-to-date records for both requests and accruals.

The constant employee time off activity and the demand to keep up on record-keeping create opportunities for errors to occur. An error in an employee’s time off record can lead to unfair circumstances for the employee and even legal disputes between the employee and/or their manager with human resources or payroll.

By using an automated system for managing employee time off, as opposed to a manual process, a dealership can maintain and increase efficiency, save significant time, and diminish the complex nature of employee time off management. Human resources and payroll personnel can ensure accurate record-keeping and eliminate the issues that can arise from using a manual system, most notably avoiding errors that can create problems for employees, dealership management and human resources.

Managing Employee Time Off: The Importance of Getting It Right
Ensuring Workplace Effectiveness
One important aspect of employee management is precisely tracking when individuals are in and out of the office. By automating time-off management, companies can simplify complex tasks and provide capabilities to employees that were previously unavailable. For management and co-workers, service techs especially, having the ability to track a particular employee’s time off helps with determining whether they are in the office at that moment and whether they will be in or out on a specific day in the near future. For human resources personnel, as well as the employees themselves, time off tracking helps with determining how much time off an employee has requested, accrued and used. The time savings and reduced frustration that result boosts overall employee performance and morale.

Downside of Manual Time Off Management
An employee time off management system that employs manual, paper-based processes or even semi-automated tools such as spreadsheets do not easily provide the human resources department, employees or managers with the capabilities they would hope to have through such a system. For example:
• Human resources is unable to precisely track the amount of time off requested, accrued and used
• Employees are unable to make time off requests or request changes, or view time off history;
• Coordinating time off requests among employees in their department challenges Managers.

Errors occur when time off requested, used or accrued is not recorded correctly. Errors adversely affect employees, who may be receiving more or less than the amount of time off they have earned.
Inaccurate records reduce profitability by lost man hours and associated dollars. The importance of accurate employee time off records requires dealerships automate employee time off management. It will save time, overhead and give visibility into the scheduling that is critical to service, parts and body shop profitability…which is something on every dealer’s mind these days.

Technorati Tags: CSI enhancement, Dealership Performance, dealership profitability, Time-off management

“The difficulty lies, not in the new ideas, but in escaping the old ones,
which ramify…into every corner of our minds.”
- John Maynard Keynes, Dismal Scientist (aka economist)

Caveat Emptor
Good will, competitive intangible assets, brand, reputation… each suggests that some kind of process was followed consistently over time and was outwardly visible to dealership personnel and clients, who unknowingly colluded to support the vision these sometimes inscrutable measures represent. Yet these elements can in some cases represent the greatest portion of the value proposition of a given dealership. Interesting, but how are these assets valued for a dealership? I paraphrase Wikipedia for effect:

“In finance, valuation is the process of estimating the market value of a financial asset or liability. Valuations can be done on assets such as … business enterprises, or intangible assets … Valuations are required in many contexts including … merger and acquisition transactions … and in litigation.”

Not much talk about your dealership’s brand or reputation in this definition as far as I can see…oh wait, the “litigation” part… can’t forget litigation and the irreparable harm to a dealer’s “intangible assets.”

Dealership valuations tend to include rules of thumb that rely on financial transactions generally remote from the deal at hand. There are rules codified by the IRS that compare other financial transactions remotely related to the deal at hand. Your dealership valuation consultant relies on these guidelines to build an argument for a specific financial figure that at the end of the day must be believed in by the acquiring dealer. The financials help, but ultimately, dealers have got to sell the intangible value of their dealership. Ya gotta believe! Can I hear an “Amen!”?

So what sells a dealership? According to Wikipedia it’s usually the “discount or capitalization rate used to determine the net present value of the expected returns of a business… Generally speaking, the discount rate may be defined as the yield [ROI] necessary to attract investors to a particular investment, given the risks associated with that investment…

The discount rate is composed of two elements:
(1) the risk-free rate, which is the return that an investor would expect from a secure, practically risk-free investment, such as a government bond; plus
(2) a risk premium that compensates an investor for the relative level of risk associated with a particular investment in excess of the risk-free rate.” In short, buy a government bond or buy a dealership where undisclosed liabilities are theoretically accounted for in the discount (risk) rate.

But selling a dealership to someone else that has been in the business requires more than just the traditional value position that relies primarily on the financials. The acquiring dealer needs that acquisition to craft a “story” that grows on the mind of the acquirer as having more potential than the seller may see in that particular dealership, with those particular characteristics. The story of the intangible is what really sells the dealership. Otherwise valuation would be easy.

What if you could build that mind share, that passion, that “story,” clearly, quickly and with little effort? Interested yet? You might want to read more…

Periculum, Ausus, Alea aka Risk
Dealer risk stems from lack of process and oversight associated with meeting regulatory requirements in nearly every procedure and practice implemented at a dealership. From sales and F&I to OEM CPO programs to internal employment practices, good dealership compliance and risk management are directly interrelated and represent the bulwarks of protection from liabilities and moments of litigation. “But how does this relate to the value of a dealership?” You may ask…let’s find out.

Risk management is a method whereby an organization examines its policies, procedures, and operations to:

1. Identify assets that may be at risk. These assets include employees, vehicles, buildings or a business’ good name.
2. Determine what could go wrong with each asset.
3. Determine how you will treat the risk… Avoidance, Reduction, Retention or Transfer.
4. Create a plan that makes sense for your organization.
5. Implement the plan.
6. Monitor the results.

Risk to assets assumes that those assets have a value that if lost would adversely affect the dealership’s operations, hence the importance and direct relationship to the valuation of a dealership.
Of particular importance and a main character in the “story” is the risk represented by the asset: personnel.

Cars, showrooms and your dealership’s good name cannot cover up individual bad acts. Nor can they deny the understanding that those bad acts are not tolerated, e.g. “I didn’t know that was harassment.” In short, the “financials” are easy to measure, the value AND liabilities represented by personnel aren’t.

Asset class: Personnel have a value or liability that is difficult to measure, especially if you don’t bother trying. In the past, this was par for the course. However new content distribution technologies with built-in legal information and trainings can now enable dealers to assess such an asset class instead of hoping they don’t have to… in a moment of litigation after the close.

These new technologies can directly measure the nature of the dealership’s compliance effort with clear metrics and exception reports that facilitate clear ROIs that show clear value proposition. Is that clear? Ultimately, knowing what your personnel are doing and most importantly what they are NOT DOING, leads to higher valuations. It’s a clear and sunny day at last!

Obsequens aka Compliance
Compliance is difficult. There are small armies of lawyers who live to prosecute those dealerships that don’t get it right. With all the new regulations and requirements emerging, the vast majority of dealers have inconsistent and costly manual compliance efforts that are a particular source of liability and represent “blood in the water” for these hungry lawyers.

When was the last time you reviewed your dealerships’ valuation or even the method used to get the figure? Did it include how well (e.g. a metric) your entire dealership complied with the laws of the land? I doubt it.

“Caveat emptor is Latin for “Let the buyer beware.” Generally caveat emptor is the property law doctrine that controls the sale of real property after the date of closing.” – Wikipedia.
Of course, by the close of the deal the parties are sharing the warming glow of the glowing warmth of the closed deal, when nobody wants to think of the potential consequences lying in wait, undiscovered by traditional due diligence. The buyer simply puts the liabilities that could damage/risk their reputation out of their mind. However, with disturbing rapidity and regularity, these liabilities raise their ugly heads at later dates quite inconveniently and always in front of the media.

Pendo, Pretium aka Valuation
Q: What do dealership valuation methodologies and their “rules of thumb” lack?
A: “Good Faith” Compliance Measurement

Dealerships making a half-hearted attempt at regulatory compliance will “naturally” have greater gaps in their compliance, which instills and supports a culture of non-compliance and therefore represent a greater risk of fines, claims and litigation.

In short, for acquisitive dealerships, caveat emptor…let the buyer beware… be diligent when you “do the due” on the financials and the “Rules of Thumb.” Uncover the liability-causing behaviors of personnel and make sure their actions are altered and monitored to better comply with your policies and procedures so carefully laid out by your lawyers.

To see what I mean, check this out:

Before

: Thursday, January 11 2007
Gee expands to West Side, buys dealership in Seattle
By: Emily Brandler
Publication: Seattle Journal of Business

Liberty Lake-based Gee Automotive Group says it has expanded to Western Washington through the purchase last week of the assets of the Huling Bros. Auto Center dealership in West Seattle. It may double the company’s annual revenues, although they declined to disclose revenue figures. “We’ve been looking over here for quite awhile,” says CEO Ryan Gee. “This is a big market with a lot of growth opportunity, and the breadth of franchises they carry and the relative size of their operations were attractive to us…”

After

: Thursday, September 27, 2007
Dealerships closing after Huling Bros. scandal
By Jonathan Martin and Christina Siderius
Seattle Times staff reporters
The lingering taint of the fraud scandal at the former Huling Brothers auto dealerships in West Seattle has forced the new owner to close their doors, according to the dealerships’ CEO. Ryan Gee, president of Gee Auto, said the dealerships never recovered from a scandal involving fraud and theft that surfaced two weeks after he bought the dealerships from Steven Huling last January…

What a difference a week of compliance due diligence can make. You have to wonder who did the DD…and just how they did it.

The “He said, He said…” Continues
Gee said Huling was required to disclose anything that could affect the value of the $5.3 million sale. But Gee said he first learned of the pending arrests on Jan. 18 in a “vague” voicemail left by Huling, and only learned of the full details from news accounts. “As you can imagine, I’m extraordinarily frustrated by the lack of disclosure,” said Gee in an interview from Spokane. “We know for certain he knew.” Huling said today that the lack of disclosure was due to a lack of information. “This was never brought to my attention until after the sale,” he said.

Oct 5, 2007 – KOMO Report – Gee said, “He [Huling] never told us of the events or that he knew his employees were likely to be arrested, because he recognized there would be a potentially devastating public relations effect. He wanted the business sold before we learned about it because he knew it would have significantly impacted the sale (e.g. the valuation).”

Costs of Incomplete Due Diligence
Gee said business at the West Seattle dealerships is down 50 percent from a year ago, at a loss of about $300,000 a month. The contract required Huling to disclose any pending liabilities that could devalue the company. Oct 5, 2007 – KOMO Report

Author’s Note: They are now deep in costly, multi-million dollar litigation. PLACE “An ounce of prevention” ANALOGY HERE…anyway.

Diligentia, Industria aka Due Diligence
The due diligence process should disclose and uncover items that have a material impact on the valuation of the dealership. Initial “Rules of Thumb” probably got the ball rolling and when thoughts of doubling revenues hit the fan, assurances and the “story” were all that was needed to close the deal. In this case, according to the report, Huling basically indicated all was well with his dealership…so what else could Gee have done?

The example above suggests that uncovering liabilities should run hand in glove with the dealership valuation process…unless of course they were only using a “rule of thumb.” But the dealer valuation consultants I researched indicated they have the secret sauce to make the “rules of thumb” rock.
But how does an acquiring dealer evaluate the causes of liabilities that can adversely affect the acquired dealership? How indeed…

Traditional due diligence is about reviewing the books, assessing the local market attributes, following IRS Revenue Ruling 59-60, using the “comps” in the local market as well as reviewing the fun and unique OEM franchise requirements of a dealership. But you are also buying the processes and people who make up the culture, good or bad, that helped that dealership make money over the years. How do you gauge the type and extent and importance of internal processes that build value for the dealership in question?

Comprehensive due diligence is also about knowing the culture you are buying. Is the dealership a stickler for compliance details? Are the people and processes in place to protect your investment from hungry lawyers and misguided clients? If you and your valuation consultant did the right things and you find something “not quite right,” it is obvious the risks are higher than those assessed when you could smell the new revenue stream based off the “Rules of Thumb” your consultant relied upon to get you here. So you offer a lower price that reflects not only the generally accurate “Rules of Thumb” but also those personnel based policies and procedures that can land you in a closed room with lawyers mumbling secret nothings in their client’s ears. Ultimately, those personnel-related risks you uncover will impact not only what is paid for a dealership, but how well you can expect the dealership to perform after the acquisition.

Hitch-hikers“
A rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation. It is an easily learned and easily applied procedure for approximately calculating some value, or for making some determination.” - Wikipedia

Road weary hitch-hikers tend to enjoy free rides, no matter where they end up. Their weathered thumbs stick out, coldly calculating the wait for a ride, any ride. As long as it is on their way, they hunker down and enjoy the trip.

The research suggests the nature of a valuation model “Rule of Thumb” varies with the consultant you speak with and the various “approaches” and “methodologies” used that keep their lights on. Generally, when it comes to dealership valuation, you are a nail and they have a hammer. Don’t get me wrong, it’s a good hammer and yours is a nail they have experience with and have dealt effectively with others like it before. In short, you buy their story that their “rules of thumb” are better than other “rules of thumb” on the road…so you pick them up and take them where you want to go.

History aka History
Remember Republic Industries? They got the valuation ball rolling by buying up dealerships, setting up two chains of used-car superstores: Autonation for recent models and Valu Stop for older models. They began the consolidation strategy using NYSE play money also known as stock to buys hundreds of millions worth of dealerships beginning in 1997…and the rest is history or as they say in Latin, “ceterus est history.“

Since 1998 valuations for dealerships have been on a tear…until about the middle of 2007, which was right around the time Ford announced that they were able to close more points in 2006 than they anticipated. Good for them!

Today the consolidation wave is breaking on the rocks of reality, the US’s banking system is awash in red ink, few mortgage bankers are willing to stick their neck out on loans to anyone without platinum credit, and the drying up of the sub-prime collateralized bond market have all helped to steer the vehicle sales market straight into a ditch for 2009. Not quite the destination your hitch hikers were betting on when they thumbed a ride and got in…

Etcetera aka Etcetera
Other impacts on the valuation of dealerships come from the folks who brought you the largest SUVs ever just in time for the highest gas prices ever…

“GM tackles glut of dealerships - Even after eliminating hundreds of U.S. dealerships in the last few years, GM CEO Rick Wagoner said the automaker will look to step up dealer consolidations… The Detroit News reports. “This is a frontier where we plan to increase our efforts,” Wagoner said during a presentation this week to Wall Street analysts. “It’s time to do that and the payoff is significant.” GM cut its dealers by about 7 percent between 2005 and 2007, to 14,118 from 15,094 franchises…” from the 1/22/2008 - eNewsletter@Dealer-magazine.com

This came along with all the other high pitched media squeals about how private-equity firm Cerberus Capital Management LP this past summer culminating in folks like the WSJ writing…

”Trimming the product line could help Chrysler accelerate its efforts to cull underperforming dealers. With fewer models to sell, owners of some single-brand stores may be more willing to merge with other dealers or close altogether. In recent months, Chrysler has upped the pressure on poorly performing dealers to sell their franchises or close their doors. In Las Vegas, Mr. Press told dealers that Chrysler is determined to consolidate its retail network….”

Given the legal consequences of inaccurate valuations, IRS “comps” requirements, proprietary methods of building a “value” argument and all of the market turmoil, dealership valuation must be reexamined and “rules of thumb” more deeply assessed. In short, dealership valuation ain’t easy anymore.

“Good Faith” aka Bonus Fides
What would have happened during the due diligence process if the dealer negotiating the Huling acquisition asked about the sales and F&I compliance processes at Huling Brothers? He probably did, but the assurances kept Gee at bay long enough to be parted from his money. Now what would have happened had a requisite Dealership Compliance Management System been put in place at the dealership at Gee’s request as part of the pre-close DD?

First off, the right questions about Sales and F&I would have been asked not only of the seller but also 100% of the dealership’s personnel, which could have been done in a week or two, using the latest technology. The content would have been distributed to the correct set of employees tasked with the responsibility of complying with OFAC, FCRA, FACT, etc, the required alphabet soup of compliance. Those folks who didn’t follow through the legal policies and procedures and trainings would immediately raise red flags via the exception reporting. In short, you would know the answers to the following questions:
- Do you have a policy on packing (or some other form of obfuscating the illegalities of your personnel’s sales process), when was it last updated and by whom?
- Which employees received the policy, how did you document they reviewed and understood it and how often do you send it out for review? Annually, if at all?
- How do you train your people, document their understand and prove they took the training?
- What can you show me that documents the effectiveness of your compliance programs?

“You seem all of a sudden quiet, Mr. Dealership Seller. Cat got your tongue?”

The outcome starkly outlined in the above dealer acquisition gone wrong may have been decidedly different had these questions been addressed. Let us walk a bit…

Caveat Venditor
According to Wikipedia, Caveat Venditor is Latin for “let the seller beware.” When was the last time you heard that? I think probably never, because it surprised me too. But with the right technology helping you assess the valuation of a target dealership you have a shield of protection that automatically uncovers liabilities and lays the foundation for near instant understanding/knowledge amongst the acquired dealership personnel that there is a new way of doing business, where all compliance is monitored and exceptions dealt with in real time.

By incorporating comprehensive due diligence that measures the compliance of the personnel you plan on working with and incorporate into your acquisition’s operational strategy, dealers can minimize the downside risk of post close liabilities that can come back to haunt the traditional dealership acquirer. By doing so, you earn the upper hand in negotiations and perhaps place a less than stellar dealership under your control for less money, or better yet, under your thumb.

James E. Lawrence has extensive experience in building cutting edge dealership software in the fixed operations and front end of dealerships and is involved in managing the compliance software development at Compli. He has an MBA from Case Western Reserve University in Cleveland. For more information on this article or any other compliance management software needs, visit www.compli.com or e-mail Jim at jim@compli.com.

Technorati Tags: Dealership Operations, dealership valuations, Internal Dealership Practices

Dealers: Avoid Conspiracies to Commit Fraud in a Down Economy

The Trilateral Omission – The Plot Unfolds

According to Bernard Boule, who has developed products for auto retail for 20 years and holds numerous patents, trademarks, and copyrights:
• Theft costs $9/employee/day. This amounts to $280,000 a year for dealers with 100 employees.
• Dealerships most vulnerable to this type of theft are those with fewer than 100 employees.
• 50% of all dealers experienced theft during a 5-year period during the 90’s, growing at 5% annually.
• The majority of dealers can expect to be victimized by theft of some type every year.
• Reports show in the last 5 years 80% of employees have been involved in theft from their dealership.
Longitudinal crime statistics in the U.S., Canada and UK show that when the economy slows, increasing numbers of employees look for ways to maintain their standard of living at a clear cost to their employer. This can range from outright theft to increased Workers Compensation claims to padding timecards.
In short, NOW IS THE TIME TO PREVENT FRAUD IN YOUR DEALERSHIP…It ain’t getting better out there.

The 3-legged Stool of Deception

If an active dealership has few checks and balances associated with the circulation of money and assets, thefts will occur that normally would not be considered. According to the Association of Certified Fraud Examiners asset misappropriation accounts for more than 80% of offenses and in addition, most fraud is uncovered only as a result of tips and complaints from other employees. Even worse: if these actions go undetected or unaddressed, the continuing fraud will become larger and more costly.
According to Dr. Donald Cressey, a noted criminologist and researcher of embezzlers, there are 3 factors that cause employees to commit fraud. These factors must be present at the same time in order for an ordinary person to commit fraud. The three factors include:
• Pressure
• Opportunity
• Rationalization

Pressure

Cressey called the first leg of the fraud triangle “pressure” which is a perceived “non-shareable” financial need. Generally there is some financial problem that is insoluble through legal earnings. Examples of pressures that commonly lead to fraud include:
• Inability to pay one’s bills
• Drug or gambling addiction
• Desire for status symbols such as a bigger house, nicer car, etc.
Non-shareable problems all involve some sort of embarrassment, shame, or disgrace. More importantly, they all threaten the fraudster’s status as a person who is trusted by others.

Opportunity

The person must perceive a low risk opportunity where they can use their position of trust to solve their financial problem in secret, in such a way that the crime itself will not be detected. For example, if an employee has access to blank checks and also reconciles the company’s bank statement there is an opportunity to forge a company check. When the bank statement arrives they can destroy the fraudulent check and force the balance on the reconciliation.

Rationalization

People who commit fraud are generally first-time offenders who do not view themselves as criminals. They tend to perceive themselves as honest people caught in a dire situation. They rationalize fraud to make it a justifiable act. Examples of rationalizations include:
• I was only borrowing the money
• I was underpaid/my employer had cheated me
• My employer is dishonest to others and deserved to be fleeced
While the perpetrator rationalizes the crime prior to the incident, after the act the rationalization is often discarded.

Unraveling the Mystery

The takeaway from the fraud triangle is that all three factors must be present for fraud to occur. If any of the three elements is missing, fraud will generally not occur. The dealers’ job then is to make sure that at least one leg of the 3 legged stool of deception is broken.
Since the fraud triangle provides an outline for deterring fraud, Dealerships need to institute prevention programs that address the problem areas employees look hard at when considering theft. Effective deterrence will target the three elements of the fraud triangle.
1. Reduce pressures on employee that might push them into committing fraud.
2. Reduce perceived opportunities to commit fraud.
3. Dispel rationalizations for engaging in fraudulent conduct.
You do this by applying a process-based approach to fraud prevention.

The Fraud Prevention Process

By properly applying this process to fraud prevention you garner the following benefits:
• Deter and detect fraud by establishing fraud reporting processes
• Reduce risk of mishandling reports of fraud
• Raise awareness about how to detect fraud
• Reduce cost of employee fraud through awareness and prevention
o Example of a complete Fraud Prevention Program Elements
Policies
• All employee anti fraud and reporting policy
• All employee expense reimbursement policy
Guidelines
• Supervisor guideline re: spotting occupational fraud and abuse
• Guideline re: investigating reports of fraud
Trainings
• Recognizing Fraud for all employees
Forms
• Suspected Misconduct Report Form
Reports
• Number of Suspected Misconduct Report Forms filed
1) in time frame
2) by location
3) by supervisor
• Employees who have failed training
• Employees who have not taken training
• Supervisors with most employees who have not taken training
• Employees who have not acknowledged policy
1) by group
2) by location
3) by supervisor
• Supervisors with employees who have not acknowledged policy

While we think the best of our employees, be savvy in handling money and protecting assets. If you don’t have proper controls, you’re inviting trouble. An automated fraud/theft prevention program that includes policies, procedures, incident report forms, anonymous reporting and a system for tracking who has or hasn’t signed off, with clear exception reports so dealers can address theft directly, will help reduce such incidents and provide protection from individual “bad acts” that end up in the press.

You’ve probably read those stories about employee theft and thought, “How could they not have known their employee was stealing money from them?” Unfortunately, situations like this happen all too often, and generally, the crime is committed by someone you’d never suspect, e.g. Mr. Long Time Parts Manager, committed fraud in the service bays, with his computer. So be prepared and have a proper fraud prevention program in place to protect your dealership.

Technorati Tags: Fraud Prevention, Internal Dealership Practices, Protecting Profits, top-performing dealerships

Hiring Well

The Importance of Hiring Well

The single biggest controllable indicator of a successful (CSI) and profitable dealership is Read the rest of this entry »

Technorati Tags: employee hiring, Internal Dealership Practices, top-performing dealerships