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Since the automotive industry’s inception, manufacturers (commonly known as OEMs, which is an acronym for original equipment manufacturer) have focused on vehicle design, manufacturing, and brand promotion. Consistent with that business plan and recognizing that the sale of vehicles generates demand for corollary services such as leasing, financing, and repairs, retail distribution is done through a network of independent dealers (or, more specifically, dealership operating companies). Dealers receive exclusive franchises for specific trade areas and act as representatives of the manufacturer to the car-buying public.
The trade area that the franchisee has exclusive rights to varies by state, but it is typically a radius of about 10 miles. Manufacturers grant franchises to dealers, at no charge, and the manufacturers and dealers are in effect partners in the process of marketing automobiles. When a dealer change occurs, the parties involved negotiate a buy-sell agreement for the dealership operating company. However, the franchises are not transferable , so the buyer must simultaneously apply for approval to become a franchisee of the manufacturer.
As a matter of practice, informal approval of the buyer becoming a franchisee is usually an early step in the process. Many dealerships market more than one brand.There were a total of 31,440 franchises, or brands awarded to dealers, that could be marketed from the nation’s 17,838 dealerships at the close of 2013.When multiple brands are marketed, the prospective purchaser of the dealership operating company submits applications for franchises to each manufacturer, and approval is typically subject to the buyer demonstrating sufficient experience in the industry and having strong financial backing. If the real estate is owned by the dealer, then a sale of the property often accompanies the dealer change. Another fairly common scenario is for the new franchisee to lease the property back from the former operator; this arrangement can be particularly beneficial to a new operator that has limited capital.