Two Car Guys

Auto Industry Statistics

noreply@blogger.com (The Car Guys) — Tue, 23 Apr 2013 12:45:00 +0000

Recently Dave has talked a lot about the state of the automotive industry in Toronto and Ontario, specifically through the lense of the auto clients we work with, which gave me the idea of using today’s post to look at the big picture of what’s going on with the auto industry across Canada. The following are some interesting facts* about the industry:

Canada is the world’s sixth-largest exporter of road vehicles.
We account for 16% of North America’s vehicle production.
There are 1,300 auto companies in Canada with revenues totaling over 70 billion dollars.
Annual exports total over 50 billion dollars.
There are over 111,000 Canadian autoworkers skilled in engineering, machining, welding, metalwork, manufacturing systems and services, robotics, tool-and-die making, etc.
Ontario alone has over 300 parts manufacturers and 88,000 skilled workers.
In the 10 year period leading up to 2011, more than 3 billion dollars in annual capital investment and more than $450 million in annual R&D spending was invested in Canada’s automotive industry.

That shows a lot of vehicles being built in Canada, and a number of sales to be broken out over the various dealerships located throughout Ontario. If you own a dealership or are a controller at a dealership, there are a number of tax planning strategies you should be taking advantage of. To list a few: holding companies, family trusts, purifying your dealership of its redundant assets, creditor proofing your dealership, share for share exchanges and planning considerations for business sale and/or succession.

Leave a comment below for more information or if you have a question, or check out this page for additional information on tax planning.

*Facts are taken from the Canadian Government’s “Invest in Canada” website.

- Jeff

Suzuki Canada Follows American Suzuki Automotive Shut Down

noreply@blogger.com (The Car Guys) — Mon, 08 Apr 2013 16:07:00 +0000

In spite of protests that Suzuki Canada was going to remain in the automotive industry after their US counterpart American Suzuki restructured to focus on motorcycles and ATVs, I had suspicions that the Canadian branch would soon follow suit. I was unfortunately right.

Suzuki Canada has now officially announced the end of their auto division. The will be discontinuing auto sales after their 2014 model to refocus, like the US, on motorcycles, ATVs, and their marine branches. This could give dealerships anywhere from 12 months to the end of 2014 to either shut down or sell Suzuki’s other products.

While Suzuki Canada sold over 13,000 cars just 5 years ago, they sold only 5,500 last year, and American Suzuki ended last year with 25,350 cars sold – a definite year-over-year decline for both.

Suzuki made this statement a few months ago in response to concerns that Suzuki Canada would follow American Suzuki’s lead: “Suzuki Canada Inc. is a completely separate entity than American Suzuki Motor Corporation. We are completely independent of one another, and you will not see a rollback in dealerships for Canada.”

This latest quote shows Suzuki Canada’s reasoning behind their decision to in fact shut down their auto division: “[We have] been monitoring market conditions carefully and, after reviewing the long-term viability of automotive production for Canada, [we] concluded that it was no longer feasible to produce automobiles for distribution and sale in the Canadian market.”

Suzuki is by no means the only automotive manufacturer having troubles in this economy, but they seem to be struggling especially hard as Suzuki Motor Spain also closed its motorcycle plant in Spain as of March 2013. Suzuki sold more than 10,000 motorcycles and marine vehicles in Canada last year, but this development in Spain signal the imminent end of Suzuki motorcycles and Suzuki as a whole? Only time will tell.

Watch Out for the Taxman and Restrictive Covenants

noreply@blogger.com (The Car Guys) — Fri, 08 Feb 2013 15:00:00 +0000

What do you get when you use an elephant gun to kill a mosquito? You get the Canada Revenue Agency attempting to close what they perceive as a loophole and catching a lot of other innocent taxpayers.

Let’s bring some context to my statement. A number of years ago, 2003 to be precise, tax legislation was proposed to close the perceived abuse that might transpire as a result of the Fortino and Manrell cases.

The Fortino case involved the sale of Fortinos Supermarket Ltd. to a competing grocery store chain. The transaction involved the sale of shares and a non-competition agreement. An amount was allocated to the share sale as well as the non-competition agreement. The non-competition agreement stipulated that the vendors would not compete with the purchaser for a certain number of years.

The taxpayers reported the share sale in their respective tax returns but did not report the proceeds from the non-competition agreement. They argued the amount received represented personal goodwill, not income from a source, and constituted a windfall. The Minister of National Revenue disagreed and first reallocated the non-competition as additional proceeds on the sale of shares then later as just income. The Fortinos objected and won their case at the Federal Court of Appeal.

To close this loophole, the CRA recently drafted legislation that states the taxation of amounts received pursuant to non-competition agreements are taxed as income, not capital, and stipulates that an election must be filed to recharacterize the amounts as proceeds from the sale if certain conditions are met.

The draft legislation is extremely complex and burdensome. Needless to say, if you are contemplating selling your dealership in the near future, you should contact a tax advisor to ensure you don’t fall into any tax traps as a result of this proposed legislation.

-- Jeff Carbell

The Vanishing Margins

noreply@blogger.com (The Car Guys) — Thu, 31 Jan 2013 15:00:00 +0000

I wish I had the all the answers, but I unfortunately don’t. The automotive industry is going through a tough time right now and after speaking with a number of my automotive clients, I decided to write an industry overview this week.

Auto dealers, much like other franchisees, are being put in a difficult position as the large brands are charging dealers more to purchase their vehicles, yet dealers can’t charge the same amount more to customers as many people are earning less than they did 5 or 10 years ago. It’s reminiscent of the aviation industry where fuel prices rose and rose and the airlines had to fight with consumers and the media to justify their increased surcharges.

Furthermore, while only a few airlines fly to certain cities, there are currently a vast amount of choices available to consumers when it comes to choosing a vehicle to purchase. The result has been that each auto dealer is fighting even more than before for a small percentage of the dwindling consumer purse.

Let’s look at a few of the major issues facing automotive dealerships and the solutions some sharp dealers have come up with.

· Market share is driven in large part by vehicle quality and corporate marketing, but there are a number of external factors that can’t be controlled by dealer owners, such as consumer taste and the economy. This can make it feel like dealers have few options available to them when trying to maintain market share, profitability and sustained growth.

· To complicate matters further in this scrambling market, manufacturers have a number of programs that dealers have no say in but have a direct impact on dealers.

· Many dealers have combatted this trend by acquiring numerous dealership points as a way to spread overhead amongst the different dealerships. The end result is similar margins, lower overheads and thereby same or higher net income. This is a strong model and likely sustainable for the short term. However, this too will eventually become ‘old news’ and dealers will have to become even more creative.

· Other standalone dealers have explored the idea of offering additional services at their dealership such as a collision center, used car department, stronger F&I department, etc. The additional services offered at the dealership allow for diversification of risk in times when new car sales are not as strong.

· The government also has a number of programs that can help dealerships – corporate tax rates have been coming down consistently, apprentice tax credits have increased, HST harmonization has improved cash flow

· Auto dealers can also take advantage of various tax planning arrangements in order to maximize their corporate and personal after tax returns, for example the family trust (a formal discretionary family trust governed by a trust agreement drafted by a lawyer, not to be confused with an “in trust” account provided by your bank).

If my overview leans toward the dreary side, let me know what you think – will margins increase again in the future? Will the cost to produce automobiles stop increasing or decrease?

- Dave Hertzog

Holding Company vs. Trust

noreply@blogger.com (The Car Guys) — Mon, 07 Jan 2013 19:00:00 +0000

I am often asked by my automobile dealer clients whether it makes sense to introduce a holding company or family trust into the corporate ownership structure for creditor proofing and/or estate planning purposes. When a person decides to start a new business and incorporates, there is often a level of uncertainty as to whether the new venture will be successful, thus cost control is often paramount.

Most people opt to keep their corporate structure simple (meaning they don’t want to spend money on lawyers and accountants to set-up holding companies and trusts), which is understandable. However, if you have the resources upon incorporation, you should consider having a family trust own the shares of the private corporation from the outset rather than directly owning the shares.

Two reasons to consider this corporate structure are as follows:

A holding company can provide similar benefits to a direct holding company but with less risk.
A family trust provides the ultimate in tax planning flexibility.

Assuming your corporation is an active company, not an investment company, there are several benefits to having a family trust as a shareholder of your private company.

Multiply the Lifetime Capital Gains Exemption

If the company is eventually sold, a family trust potentially provides for the multiplication of the $750,000 lifetime capital gains exemption on a sale of qualifying small business corporation shares. That is, it may be possible to allocate the capital gain upon sale to, your spouse, children, yourself or other beneficiaries, which means substantial income tax savings. For example: where there are four individual beneficiaries of a family trust, the family unit may be able to save as much as $700,000 in income tax if a corporation is sold for $3,000,000 or more.

Family Trust Can Receive Dividends

In addition, where your children are 18 years of age or over, the family trust can receive dividends from the family business and allocate some or all of the dividends to the children. The dividends must be reported in the tax return of the child, but in many cases, the dividends are subject to little or no tax (if a child has no other income, you can allocate almost $40,000 in dividends income tax-free).

Creditor Proof Earnings

Finally, where you have surplus earnings in a corporation and wish to creditor proof them but don’t want to allocate the funds to your spouse or your children, you may be able to allocate those funds tax-free to the holding company if it is a beneficiary of the trust. This allows for an income tax deferral of personal taxes until the holding company pays a dividend to its shareholders.

Why would I ever not choose a family trust? Some of the reasons are as follows:

The initial accounting and legal costs may be as high as $7,000 - $10,000.
You may not have children or, if you do have children, they are young and you cannot allocate them dividends without the dividends being subject to the “Kiddie Tax” (a punitive income tax applied when minors receive dividends of private companies directly or through a trust).
You are not comfortable with allocating to your children any capital gains from a sale of the business and/or any dividends since legally that money would belong to them.
If the business fails, it may be problematic to claim an Allowable Business Investment Loss (a loss that can be deducted against any source of income) that would otherwise be available if the shares of the company were held directly by an individual.
There are some income tax traps beyond the scope of this blog post when a holding company is a beneficiary.

As discussed in the opening paragraph, once a business is established and has become successful, a holding company can still easily be introduced as a shareholder and the transaction can take place on a tax-free basis. A holding company is also often problematic, as the level of cash the holding company holds can put it offside of the rules for claiming the $750,000 lifetime capital gains exemption if the business is sold in the future. Thus, you may wish to consider utilizing a family trust, unless you do not have children or do not anticipate being able to sell the corporation.

If one waits until the business is successful to introduce a family trust, as opposed to introducing one as an original shareholder when the business is first incorporated, the value of the business as at the date of the reorganization must first be attributed to the original owner(s) utilizing special shares (typically referred to as an estate freeze). The costs of introducing a family trust with a holding company beneficiary as part of an estate freeze could be as high as $15,000 -$20,000 as a business valuation is often required.

The Takeaways

This issue is very complex. The key takeaway should be that having a holding company as a direct shareholder of an operating company may not always be the most tax efficient decision. A family trust with a holding company beneficiary may be a more appropriate choice depending on your circumstances.

In any event, you should definitely consult a professional advisor before undertaking such planning in order to understand the issues related to your specific situation and ensure that you are not breaching any hidden income tax traps.

-- Jeff Carbell

Financial Statements for Dummies

noreply@blogger.com (The Car Guys) — Fri, 13 Jan 2012 22:35:00 +0000

Financial Statements for Dummies

As a Chartered Accountant in public practice, I have provided assurance on approximately 500 sets of financial statements over the last 10 years. In the process, I have analyzed statements to assess the ongoing viability of different businesses and I have seen what happens when companies fail to act on what their statements are telling them. I will try to sum up the most valuable points of financial statement analysis in this “Financial Statements for Dummies” blog.

Financial statements are typically prepared for a 12 month period. They provide a record of all the transactions that occur during that period, including the payment of related income taxes. There are adjustments to reflect transactions that occur with no cash transacted.

First Step – level of work:

The first thing you should do when you look at a set of financial statements is check if the company in question was audited or reviewed. This information should be clearly stated on the report that accompanies the statements. If there is no report with the statements, you can assume the statements were not audited or reviewed and therefore, there is no objective party providing assurance that the statements accurately reflect the company’s operations.

When accountants conduct a review engagement, they assess the ‘plausibility’ of the financial statements through analysis , inquiry and discussion. An audit includes the same analysis, inquiry and discussion, plus additional substantive work and review of controls to assess the ‘reasonability’ of the financial statements. An audit provides a higher level of comfort that the financial statements fairly represent the company’s operations and it is the standard for public companies , whereas a review provides a lower level of assurance.

Take a close look at the review or audit report to make sure the company has an unqualified opinion, meaning that the external accountant performed their work and the statements are not materially misstated.

Second Step – accounting standard:

The next item I would review is the basis of accounting meaning what accounting standard is the company following. In Canada, private companies will typically be using Accounting Standards for Private Entities (ASPE) for December 31, 2011 year-ends going forward and public companies will be using International Financial Reporting Standards (IFRS). The basis of accounting is important because if you are comparing two sets of financial statements, you want to ensure the accounting policies are the similar.

Also pay close attention to the financial statement notes. Look for issues such as Going Concern, Risks and Contingencies as any one of these can allude to significant issues in the company.

Third Step –analysis:

I have learnt over the years that users look at financial statements for different reasons and therefore different parts of the financial statements are important to each of us. Financial statements are generally prepared for general use to allow for different user requirements. As a result, in preparing this article, I will touch upon some of the more common areas of financial statement analysis.

Comparative analysis
This is an amazing tool if used correctly. Comparing sales, expenses or other balance sheet items year over year can identify many critical issues. Be careful to look at the year over year dollar change as well as percentage change. The dollar change may look small, but percentage-wise it can be significant. For example, if your gross profit (revenue less cost of sales) decreases from 12% to 10% the following year, it may seem like an insignificant 2% change year over year. In reality, the gross profit has decreased by 17% (2%/12%) year over year. This seemingly small change can be indicative of significant issues such as fraud, rising input costs that are not being passed on the customer, downward pressure on prices which is shrinking your revenue or a host of other issues.

Ratio analysis
Financial statement ratio analysis can be used to evaluate a company’s liquidity, efficiency, long-term solvency, profitability and more.

Liquidity ratios look at a company’s ability to meet its short-term obligations. The current ratio looks at current assets : current liabilities. A current ratio below 1 means that the current liabilities exceed the current assets. Clearly this is not good and it could indicate that the company will have trouble meeting its liabilities.

Inventory turnover is used to assess a company’s efficiency. It can tell you how many times inventory is turning over and how long inventory is sitting on the shelves. The longer inventory sits, the longer it takes for the company to make money. The same goes for accounts receivable (AR) turnover, if AR turns over twice per year, it essentially means it takes about half a year to collect AR.

Ratios can be compared year over year or compared to some industry standard. If the ratios are drastically different from one year to the next, or if they are different than the norm for the industry, you need to find an explanation.

Net worth
The net worth of a company is the assets minus the liabilities and it represents what is left for the owner once all assets are liquidated and liabilities are settled. This is an area that is commonly looked at in a purchase and financing arrangements.

Cash flow statement
The cash flow statement provides details as to where cash was used and received throughout the year, and if analysed correctly, can uncover significant matters. For example when reviewing the cash flow, you may see large non-cash items received throughout the year. In this situation the income may look great, but if much of the income was non-cash, it may have no real benefit to the company.

Fourth Step –Intangibles:
The financial statements may include items that are considered intangible, i.e. goodwill, leasehold improvements or intangible assets. Often times these assets are ignored by the banks and outside investors because they carry no tangible value, are not readily saleable and are typically part of an overall valuation of the company.

In conclusion, financial statements can be very useful if you know what you are looking for. If your objectives are simple, then the review of the financial statements can be as quick as just looking at the net income and moving on, but if your objectives are more involved, then following the process above would be appropriate.

-- David Hertzog

Choosing the right advisor

noreply@blogger.com (The Car Guys) — Thu, 08 Dec 2011 14:18:00 +0000

Auto dealerships and major sports franchises have at least one thing in common: for both, building the right team is essential to success. When everyone in your dealership is on the same page the business runs smoothly, opportunities are identified and exploited and you achieve optimal business performance. Internally most dealerships are structured with managers of individual departments reporting to a general manager who then reports to the president/owner, but team work goes far beyond the internal structure. There are outside advisors who are part of your extended team, such as your banker, lawyer and accountant. This extended team works on your behalf with your best interest in mind.

So how do you choose the right advisors? A good place to start is referrals from contacts who share your values and operate in a similar business environment. The advisors for your best friend’s online cupcake shop may not be well-versed in the world of car dealerships. Once you have some relevant recommendations, the next step is to schedule a meeting with the prospective advisor. Think of the initial meeting as a job interview; you are interviewing the potential advisor as much as he or she is interviewing you. Key elements that you should evaluate in an advisor are: your degree of comfort with the advisor, the advisor’s knowledge, and size of the advisor’s practice.

How do I relate to this advisor?

When you are meeting a potential advisor, be it a banker, lawyer or accountant; think about whether you could see yourself in a long term relationship with them. You are embarking on a marriage of sorts and divorce is tedious and painful. The more time you spend getting to know your advisor, the less likely it is that you will need to change advisors later. The two most important questions you need to ask when considering how you relate to a potential advisor are:

Would I be comfortable communicating anything to this person?
Would I trust them to tell me the truth?

Your advisors have specialized knowledge, but they cannot provide effective advice without knowing the entirety of your situation. Would you be comfortable telling your advisor about business failures? A rough spot in your marriage? Sticky situations with your employees or children? Your relationships with your family and employees can play a role in your succession plan and other planning strategies and, in order to take full advantage of your advisor’s knowledge and expertise, you must be able to talk about them. Through face to face meetings, you can quickly get a sense of how genuine the advisor is and if your personalities sync.

Your advisor shouldn’t be the person you turn to for flattery. While your advisor may pay you a compliment from time to time, it is important that he or she is honest and straight forward. You want someone who will tell it to you like it is, take time to explain your options and consequences, and provide an opinion. You also want someone who is available to answer any questions you may have throughout the year. You shouldn’t be scared that your advisor will charge you for simple questions. Your advisor is a member of your team.

Does this advisor understand my business?

Your advisor should be knowledgeable and passionate about dealerships and the auto industry as well as all the laws, standards and regulations that affect your industry. Knowledge of business is key in providing the best service and opinions to clients.

During your interview with a prospective advisor you may want to ask them how many auto dealership clients they currently work with, how long they’ve been working with dealership owners and ask them how they feel about a recent industry development. An advisor who is passionate about dealerships would be more than happy to talk shop with you and you would quickly learn how well they know your business.

Does size really matter?

We all know that fit matters more than size, and it is no different with advisors. In the professional world there are small, medium, and large firms and each has advantages and disadvantages. Many people gravitate towards larger firms as they are familiar with the brand which creates a degree of comfort, however brand names typically come with premium price tags.

Consider the size of your business compared to the firms you are considering. If you will be a relatively small fish in that firm’s pond of bigger clients, you may experience better service with a firm that caters to businesses of your size. Mid-size firms may offer a different customer service experience because your business fits their niche. You may even find yourself in the fortunate circumstance of being a big fish in a mid-sized firm’s portfolio which can lead to better customer service and a greater investment in your business.

Auto dealership owners have a niche business, and there are firms that specialize in your industry. They can provide a competitive advantage over other practices as they are more knowledgeable about your business and can therefore offer more useful advice due to their experience.

Running a dealership is complicated; having advisors who understand your business is essential for making critical decisions.

-- Bryan Redinger

Service department let down!

noreply@blogger.com (The Car Guys) — Mon, 24 Oct 2011 17:43:00 +0000

I am going to talk about poor service I have both witnessed personally and heard about from family and friends to make recommendations that can help dealers be more competitive and successful. Many dealerships offer excellent service, so the recommendations below will not apply to everyone.

I have been a car owner for over 33 years and I have had a lot of experience dealing with auto dealership service departments. Years ago there were lots of options for car repairs, but the small auto repair shops located at local gas stations have been disappearing for the past decade and now dealerships are the most common choice for repair work. This is a fortunate circumstance for dealerships because the service department usually provides significant margins, but given the level of service I’ve seen lately, I wonder if some dealers aren’t taking this shift for granted.

Over the past 15 years or so I have switched from purchasing cars to leasing them, and consequently I moved my repairs from a local garage to the automobile dealership. I’m not your average Joe at a dealership waiting for repairs. I’ve been working with dealers for many years and I know what drives their bottom line, and I can tell you that service departments deserve more attention at some dealerships.

Recommendation 1 – Get customers in and out as efficiently as possible.

Service is a volume business meaning that a dealership needs to service a lot of customers to see good returns. Dealerships need to be prepared for high volume, and usually they are. I never just show up at a dealership for repair work. I call the day before, secure a time that works and make sure that I am not late for the appointment. And still, sometimes I have to wait a long time before anyone greets me and starts the service appointment. In a volume business, every customer counts. And, in the auto service business, which is a necessary evil to most people, making a customer wait is painful. They don’t want to be there and even though there is coffee and newspapers, they generally have something better to do. Your service department will take care of servicing cars, but you also need to make sure someone is servicing the customer. If your customer is going to wait for their car to be serviced, be sure to keep them informed if your promised delivery time changes. Have a dedicated employee greet and acknowledge incoming customers. Take their keys and let them go as soon as possible.

Recommendation 2 – Don’t make promises you can’t keep.

On countless occasions I have been promised that my car would be ready in an hour only to be let down when it wasn’t ready for 90 minutes. I understand that things can get hectic in the service bays, and there are unexpected situations and a million reasons for a service delay, but your customer doesn’t care. So, in all circumstances, recommend that they take advantage of your shuttle service or take a loaner and leave their car with you. It will take some stress off the service department because they will have more time with the car and it will avoid a situation where you are likely to upset the customer.

Recommendation 3 – Go the extra mile.

I can’t tell you how many times I have heard of people having to wait for their car because they were out of bounds for the service shuttle. This isn’t a pizza delivery service – these customers are paying you hundreds of dollars for a painful, mandatory service that offers them little personal value. Go the extra mile, literally, and do your customers a favour. They’re paying you for it and they’ll continue to pay you for it in loyalty and recommendations to their friends and family.

Recommendation 4 – Hire the right people and train and reward them.

Service staff can have attitude because they are rude or overworked and dealing with the customer takes them away from the long line of cars demanding their attention. You certainly don’t receive this type of service when you enter the sales area of the auto dealership. I know that the service department is a key profit center for the auto dealership, so why is there such disparity in the service provided in the service department? Your service department needs to service the customer as well as the car. Attention to customer service should be considered during the hiring process; is this person technically proficient and well-mannered? Would I want to introduce this person to my most valued customers? Once you’ve hired the right people, have you told them what you expect and trained them on how to deal with a long line? A frustrated customer? Have you rewarded them when you witnessed good behavior? You need to tell your employees what you want and reinforce it with monitoring and rewards.

Recommendation 5 – Walk the floor.

I believe the problem with service really rests at the top. Auto dealer owners are not spending enough time training, educating, rewarding and monitoring their service employees. When is the last time you walked the floor? Did you notice the bored customers flipping through the newspaper in the service department? Did you ask them about their experience? Did you watch your service department interact with your customers? Your attention to service will communicate volumes to your staff.

So, while dealerships are in the glory days of service with less competition from mom and pop shops, don’t be lulled into complacency. Chains of aftermarket service shops offer “Warranty Approved” services that threaten the dealership’s hold over the leased car maintenance market. In addition to threats from aftermarket shops, you can lose customers to the next dealership over when they start to shuttle to and from your area, promptly greet customers as they walk in and generally make service as painless as possible. The profits your dealership gains from service are far too precious to take a back seat.

-- Jeff Carbell

Capitalizing my business?

noreply@blogger.com (The Car Guys) — Wed, 05 Oct 2011 12:49:00 +0000

Outside of tax planning and operational issues, how to better capitalize is one of the most common discussions I have with my auto dealer clients. Clearly one of the better ways to capitalize your business is by way of retaining internal cash flow in the business, but often this is not possible and as a result the owner must entertain offers for external financing. I have found that obtaining new financing and re-financing existing credit facilities is much more challenging as a result of the recent economic downturn as banks are more risk averse, especially in the auto retail business.

It is still possible to obtain financing in today’s market, but a well-structured plan is in order. The plan should consist of a strategic message to the bank as to why the financing is required and how the funds will be used. If the financing is simply to fund current and prior year losses, it is more likely than not that the bank will decline. However, if the funds are used to purchase additional inventory, pay off previous management or acquire new equipment, the bank is more apt to provide financing.

Business owners are sometimes so surprised that the bank is willing to provide financing, and so focused on the interest rate and loan-to-value ratio of capital property, that they forget to read the fine print on their credit facility agreement. Often there are significant terms in the credit facility that are overlooked by the business owner until it is too late. Commonly overlooked terms address personal guarantees, postponements, financial covenants, audited financial statements, and significant security.

Personal guarantees come into play when a business can no longer continue to operate and the bank calls the loan. If you have an agreement with a personal guarantee and there is not enough cash to repay the bank loan, the bank can seize your personal assets (i.e. your house!) as repayment.

Postponements require that the company postpone repayment of debts in favour of repaying bank debt. This term can be detrimental if your business runs into trouble and you have personally put significant funds into the business.

Financial covenants also pose a risk in that sometimes they can be impossible to meet and 1-3 years after the facility agreement is signed, the covenants may be breached and the bank can call the loan.

The terms may indicate that you will be required to provide the bank with audited financial statements within a specific period following your company’s year end. Audits can be costly, and you may be able to negotiate to submit reviewed financial statement (lower assurance than audited statements) which can save your company some money in accounting fees.

Another problem I see is business owners who don’t explicitly ‘shop’ around to different banks and compare terms. It is important to create a chart to compare the terms offered by different banks because more often than not facility agreements, especially for auto dealers, have a significant number of terms that are not easy to compare in your head. I suggest you write out the differences and compare all the options to make a decision based on the facts. Some points of comparison may be qualitative in nature, such as the reputation of the bank or relationship with the banking representative.

This is just a taste of what I have dealt with over the last several years with regards to capitalizing your business and I plan to write further blogs on this topic.

-- David Hertzog

The first scratch is the hardest

noreply@blogger.com (The Car Guys) — Fri, 23 Sep 2011 18:52:00 +0000

In late 2004 I purchased my first new car, a 2004 Honda Civic SI sedan. My girlfriend was living in Montreal and I was in Toronto. She came to Toronto shortly after I picked up the car and I drove up to her parents’ house to show her my prized possession. On the way I decided to stop at an automatic car wash to make sure the car looked its best. I paid my money and drove into the bay. I will spare you the gory details as I am still sensitive about the incident, but let’s just say I paid for a touchless car wash and in the end I did not receive what I paid for. Even though the owner took responsibility, I still had to choose how I would get the damage fixed. Should I go to an independent body shop or take it back to the dealer?

I am lucky to have family in the business so I can get honest advice whenever I need it, but what is an average consumer to do? When I went through driving school they did not teach us what to do if an accident occurs. What documentation do I need? Where should I get the car towed to? How do I order a tow truck? Should I call the police? These are serious questions that many of us do not have the answers to.

The Toronto Automotive Dealers Association has addressed this problem with Renewit. Renewit can be offered to customers as a service they can use in case of a collision and it includes a mobile app that provides collision reporting templates, safety tips and traffic information. Bob Redinger, Co-Committee Chair Person at Renewit Inc., explains that if a customer is in an accident, they can contact Renewit and Renewit will assist the customer in bringing the car to the dealership of their choice for repair. Renewit can organize a tow truck to pick up the car, contact the dealer to let them know the car is coming in for repair and it can also help put the customer in touch with the right sources to get answers about insurance claims and repair coverage. In addition, the application allows dealers to contact their customers to inform them of specials, etc. This program is completely free to customers.

For dealers, the program is seen as a customer retention tool that provides customers with peace of mind that if they are ever in an accident they will have support from a knowledgeable and trustworthy source. Dealerships pay a monthly fee to be listed as a Renewit-approved dealer and the service can be offered to customers when they are purchasing a new or used vehicle or servicing a car through the dealership. In order for the dealership to get the full benefits of this program, employees should assist customers in installing the mobile application and setting up their personal profile.

It is a challenge to gain a competitive advantage in any industry, and this program allows dealerships to offer ongoing service to customers as well as providing an opportunity to get referrals through being listed as a preferred Renewit dealership.

Go to www.renewitnow.com for more information.

-- Bryan Redinger

Getting a new car? Should you lease or buy?

noreply@blogger.com (The Car Guys) — Tue, 30 Aug 2011 18:53:00 +0000

The discussion of lease vs. buy has been discussed in various publications over the years and I am not going to bore you with the basics of a lease vs. buy analysis. I just want to write a little bit about my experiences with buying a new vehicle and hopefully some of my readers can relate and provide some feedback.

I will attest that the starting point of acquiring any new vehicle should be based solely on choosing the car you want to drive for the next 4 years or so, not based on manufacturer rebates, cash incentives, 0% finance rates and so on. Making a decision on that basis will undoubtedly ‘get’ you into a car that you will likely regret 1-3 months after acquiring it. Focus on the car you want and then look for every possible avenue to acquire this vehicle, whether it’s new, used or certified.

From a purely financial point of view, it is easy to prove that purchasing a vehicle is more cost effective than consecutive leases if you plan to drive the car long-term and you do not encounter serious maintenance issues. However, I, along with many other buyers, look at variables that have nothing to do with finance when buying cars. There is also value in the option of driving a new vehicle every 3-4 years, not having to worry about paying for service costs and so on.

To provide a very simple example, I will compare the cost of leasing versus buying if you:

lease a vehicle that has a $20,000 MSRP for 3 consecutive terms of 4 years each, with a 50% residual at a 0% lease rate; or
purchase the same vehicle and drive it for 12 years.

Under a lease you will pay $30,000 to drive the car for 12 years, and under a 0% finance arrangement you will pay $20,000 to drive the car for 12 years. I have not built in maintenance costs or fair market value (FMV) of the used vehicle after 12 years, but holding these factors equal, you have saved $10,000 in this example.

Clearly if you are looking to buy a car and drive it for 12 years you need to ensure you do some homework and buy a car with low maintenance costs and high reliability. If you are leasing a vehicle, these factors are not relevant because most likely all maintenance costs, with the exception of wear and tear will be covered by warranty in the lease period. Once you start to cloud the formula with interest rates, expected maintenance and so on, you may end up with a different answer.

Over the last 20 years or so I have owned approximately 10 different vehicles. When I add up the cost of what I paid for those 10 vehicles, it’s about 5 times higher than if I had driven each car for 10 years. It’s not uncommon to see cars on the road that are 10 plus years old and, if they are well-maintained, they can look almost brand new. Each time I leased or purchased a vehicle I knew that I was only going to drive it for 2-3 years before I got bored and wanted something new.

This is where the advantage of a short-term lease comes in. If you don’t plan on driving the car for more than 3 years, a lease is your most cost effective option because it allows you to walk away after 3 years versus having to sell the car to the dealer. The lease arrangement builds in a residual value that should approximate the FMV of the vehicle after 3 years, but based on my experience the residual is typically higher than the actual FMV and therefore you will pay less in the end than you would have if you bought the vehicle and sold it after 3 years.

To further complicate the matter, several manufacturers have discontinued the practice of leasing vehicles and are pushing customers into a strong finance arrangement. This comes back to my discussion earlier on with regards to first starting with the car you want and then looking at how to structure the deal. If you are adamant that you want to lease a car and the manufacturer does not offer a lease, there is always the option of leasing from a third party leasing company. This option will cost more, but it will give you the option of moving out of your car earlier.

-- David Hertzog

Car Shows and Marketing Opportunities for Dealerships

noreply@blogger.com (The Car Guys) — Wed, 03 Aug 2011 15:20:00 +0000

It is Summer, finally, which means it’s car show season. Last Monday I attended the Thornhill Cruisers Car Club’s weekly Monday night meet. I was very impressed with the turnout of both classic 50’s, 60’s, and 70’s cars as well as some 80’s and 90’s vehicles from my era,. Although these cars are mostly “drivers” they are still cool to look at to see how car styling and car sizes have changed over the years. I was very happy to see that a local car dealer had sponsored the event. I thought to myself, what a great marketing opportunity for the dealer.

This particular dealer is getting exposure every week, with very little effort on their part. Car shows are a great marketing tool to attract car enthusiasts into your dealership to see all the new models that you have to offer. They are also a great opportunity to give back to the community by raising money for charity. In today’s increasingly competitive environment, stretching marketing dollars and increasing your dealership’s reach is vital.

The birth and acceptance of the internet has changed business forever. Consumers are more knowledgeable and are able to compare competing brands as well as competing dealers among the same brand, at the click of a mouse. Competition between different brands is natural; however competition among dealers of the same brand is not. How does a dealer differentiate itself from a competing dealer of the same brand? Dealers must analyze what their competition is doing and determine how they can do it better. Exceeding customer expectations is a great way to get customers to talk about your dealership and the incredible experience they had with you. This increases word of mouth advertising and promotes positive feelings for your existing customers (securing future revenue) and increases the likelihood of referrals which will generate new business for your dealership.

Managing your online reputation is increasingly important as more customers flock to the internet to research everything from their doctor to their dealership. Is your dealership monitoring online comments and conducting regular searches to make sure any issues or complaints in online reviews are addressed? As of yesterday, there were 24 results when I searched for Toronto dealerships reviewed on yelp.com, including a review that opens with “Recommendation: Do not buy a car here!” Many customers will go to a less convenient dealership to purchase and service their car based on negative reviews.

In addition to focusing on customer service, community presence is also very important, by way of sponsoring community events. The goal of both of these initiatives is to create positive buzz about your dealership that will generate referrals. In addition to marketing via events and exceeding customer expectations, individual dealerships need to have online presence through social networking tools such as Facebook and Twitter and through active involvement in brand specific online car communities, or forums such as RX8club.com and the 8thcivic.com. These sites provide a great marketing opportunity to a captive audience who is enthusiastic about your brand.

Having your existing customers “Like” your dealership’s Facebook page will allow you to easily communicate with your customers by updating your corporate page as your updates will appear in the newsfeed for anyone who “Likes” your page. In addition, your page will be on your customer’s profile as a page they “Like” and all their contacts and friends will be able to see that they like you. This invites discussion and the “Like” begins to function as a recommendation of your dealership. Twitter functions in much the same way with your customers being able to follow you and gain access to your dealership updates. You may want to let customers know when new models come in, if there is a promotion on service or vehicles, if you are holding an event or anything else.

When marketing your dealership against dealerships of the same brand you need to think outside the box.

-- Bryan Redinger

Succession Planning

noreply@blogger.com (The Car Guys) — Tue, 19 Jul 2011 13:37:00 +0000

Why do automobile dealer owners find it so hard to sit down and plan for their succession?

According to a survey conducted by a national accounting firm, only one-third of family owned businesses survive the transition to the second generation. And of these businesses, only one-third survive to the third generation. Pretty poor odds for your grandchildren taking over the family business.

There are three basic reasons why succession planning fails.

Procrastination
Like many business owners, automobile dealer owners are often too busy, too tired, too whatever excuse to sit down and plan for the transfer of the family business. In fact, it is my experience that most automobile dealer owners wait too long resulting in either a fire sale at the last minute or selling to an unintended third party. Or worse, chaos ensues due to illness or even death with no succession plan in place.

Lack of Successors

The second reason for unsuccessful succession transitions is the lack of qualified successors. Automobile dealer owners are notorious hoarders when it comes to delegating and hence grooming a successor. The reins are kept so tight that no one is identified early on and therefore nobody is ready to take over, or worse, the most qualified people leave the business due to frustration.

Poor Planning

The third reason for unsuccessful business transitions is due either to the failure of the business or poor planning. Just ask one of the unfortunate General Motors automobile dealers what they would have done differently if they could do it all over again. Their answers would by unanimous. Much better and earlier planning!

Creating a Successful Plan

The key to a successful transition plan is taking the time to sit down and plan for succession. What should be my succession plan? Should I sell to my general manager or my children? Maybe my plan will be to run the dealership as long as I am physically able to do so and then sell. There are no hard and fast correct answers, but clearly the plan that involves leaving all planning to the end may result in insufficient or unexpected results when the dealership is sold. Planning early on for succession that involves either family members or qualified employees could achieve a better financial result.

First identify if there is a suitable candidate within your organization. Are any family members interested? If so, are they suitable and or qualified? If they need more time and experience, are you providing the leadership and opportunity for your children to succeed?

If no family members are interested you should review the talent you have within your organization. The best candidates are not always the ones that are constantly knocking on your door and driving you crazy for a “piece of the pie.” Consider hiring a human resource consultant to assist you in evaluating the potential of the candidates that you have selected.

Buying into the plan is the next important step down the road of successful business succession. Letting go is the hardest thing that a business owner faces when considering succession. I often hear clients say things like “I’m only 45 years old and not ready to retire yet and if I bring someone into the business that will certainly hasten my retirement.” No plan is perfect and your plan may need periodic tweaking to ensure that it meets or fulfills all of your succession objectives.

There are no rules as to when or at what age a succession plan should be considered and planned. My personal experience is that when automobile owners approach the age of 55 they appear to be ready to consider succession. Every individual’s situation is different and the succession plan must be customized to each owner’s unique needs.

Establishing a timetable for the succession process is very important. Critical dates to consider are:

When you are considering retiring,
Timing of selling the share ownership of the business.

There are many planning techniques that could provide you with control over the dealership after you have sold your equity interest.

The next blog, to be posted the week of August 29th, will deal with the income tax considerations when contemplating a succession plan.

-- Jeff Carbell

Are you paying attention to your financials?

noreply@blogger.com (The Car Guys) — Tue, 05 Jul 2011 20:05:00 +0000

With over 15 years of experience preparing, reviewing and analyzing financial statements for owner-managed clients, I can tell you unequivocally that 90% of the time, financial statements are not reviewed effectively.

Reviewing financial statements is like getting a physical at the doctor – it can point out ‘issues’ that you may not have been aware of so that you can address them before they get worse. To continue the analogy, just as a doctor assesses one system at a time looking for anything out of the ordinary, when reviewing your statements, it is important that you know what normal should be so you can identify and follow up on irregularities.

As part of the year-end audit for one of my auto dealership clients, I met the owner for a morning coffee meeting and we reviewed the dealership’s interim financial statements. After looking at the financial statements, I noticed that the margins on used vehicles were up significantly year-over-year. When I questioned the owner about this he said the used car manager must have been doing his job, however it appeared irregular to me, and after a little investigation I found that there were some accounting irregularities and the profits on used vehicles were not at all what the owner had thought.

As part of the month-end review of the financial statements, there should be a set checklist that you go through so that you know what you are looking for. Staring at the numbers and stating that everything is in line with expectations is just not enough. Comparing to prior month, prior month last year and budget are only some of the overall checklist items that should be investigated, but this is a good starting point because this review of fluctuations can raise some ‘red flags.’

The financial statement review is not just meant to find accounting irregularities. Much like an investor reviewing an initial public company offering or a banker reviewing annual compliance; financial statements can uncover so much more. It can help identify liquidity issues, operational issues and potentially fraud.

Don’t rely on others to do your dirty work, pay attention to your financial statements because they tell the story of how your business is performing. If you find something that seems out of the ordinary, keeping digging until you are satisfied.

I will be focusing on specific financial statement line items and ratios in upcoming blogs.

A car for every lifestyle

noreply@blogger.com (The Car Guys) — Tue, 21 Jun 2011 13:33:00 +0000

As we go through different stages in our lives our car needs change. In my early twenties my needs were very simple. It was me, myself and I living a lifestyle that allowed, even encouraged, driving two door coupes. I worked my way through a number of coupes, such as an 88 Shelby Daytona, 91 Honda Civic SI Hatchback, 89 Toyota Celica GT, and 2006 Honda Civic SI to name a few. My philosophy was: I sit in the front, so what do I care about how much room is in the back seat? I will never be sitting there.

Now, in my early thirties, thoughts of family are on my brain, and again I find myself reassessing my car needs. I am still driving coupes, alternating between a 2009 Honda Civic SI and a 2004 Mazda RX8, although technically my RX8 is considered a four door, but I am starting to fear the impending change. In a desperate attempt to hold on to my youth I try to convince myself that I can make the coupe work with a family. This dream was recently shattered when I had to take my nephew, with car seat, out for the day. After this trip, I realized making it work was just a dream and once the family comes, I will not only be adding a couple of little ones, I will also be adding two extra car doors.

Car companies realize that people’s needs change early on, thus the invention of offering different models by the same manufacturer. The core idea is that within the same brand, a buyer is able to move up to different models depending on needs.

Buyers must also realize, as I have done, albeit reluctantly, that your vehicle needs change over time and these evolving needs need to be taken into consideration before making any purchases.

Based on my calculations, it will be 20+ years before it will be practical for me to own another coupe, but I am a car guy and often not very practical.

Diversify your investments

noreply@blogger.com (The Car Guys) — Tue, 07 Jun 2011 19:33:00 +0000

It takes so much capital to start, maintain and expand an auto dealership that there usually isn’t much cash left for other investments. I have heard many auto dealership owners tell me their retirement will be funded by the ultimate sale of their dealership business and property. “I make the best return on my money through my dealership business; therefore why invest in anything else?” While I like the passion and confidence these dealers express, I must admit that I am worried for their futures.

In light of the changes in the auto industry over the last ten years, I would recommend that every dealership owner have some of their money held outside their business. Many of the dealers that had their dealerships cancelled or retired over the past couple of years lost their current source of income and the nest egg they had been banking on for many, many years. Just as you wouldn’t put all your extra cash in a single stock, you shouldn’t have all your cash tied up in a single business venture.

It doesn’t take much to have a diversified portfolio. Contributing to your Registered Retirement Savings Plan as well as the Tax Free Savings Account and investing in stocks, bonds, mutual funds or other securities that are unrelated to the auto industry will give you a degree of diversification and lower risk in your investments.

With maximum annual RRSP contributions capped at $22,000 for 2011 and $5,000 per year for the TFSA’s you can easily see that your investments in these types of vehicles can grow substantially over time. Make the commitment to fund these types of investments annually, and more importantly work with someone who understands your concerns and risk tolerance so you’ll feel comfortable with the investing process.

Lessons Learned and Forgotten

noreply@blogger.com (The Car Guys) — Wed, 02 Feb 2011 14:15:00 +0000

It has been over a year since GM Canada began notifying many dealerships that they would be required to close their doors. Several of the dealers who lost their dealerships have experienced financial distress and may never recover. What is very sad to the outside observer is that many dealers saw, or should have seen, the writing on the wall years earlier, but were so ‘emotionally attached’ to their dealership that they were not able to react appropriately. Many kept throwing good money after bad until it was too late. Granted, the ‘dethroning’ of the largest auto manufacturer in the world may never happen again, but the lessons that could have been learned from this seem to have fallen on deaf ears.

Businesses, and more specifically auto dealers, continue to be emotionally attached to their product preventing them from operating objectively. The auto industry is becoming ever more saturated and individual dealers are seeing more and more risk in managing cash flow and liquidity. There are a vast number of dealers out there who feel that as long as they weather the tough economic climate, they will eventually prevail. Are they taking on too much risk for themselves and their families?

As an accountant, I profess that I have a conservative bent while dealers tend to be entrepreneurial risk takers. I agree that it takes risk to make money, but the risk needs to be controlled. Strong business plans and financial forecasts help entrepreneurs make informed decisions about the level of risk they are assuming, and strong creditor proofing can mitigate the amount of capital being put at risk, however often times little to none of this preliminary work is done. Usually it’s, “Let’s make a deal and then worry about the legal and accounting aspects.” I have found that the preparation of even a simple financial forecast can significantly change the decision making process and as a result I recommend my clients do this when budgeting for the following year or consider acquiring a business.

The demand for vehicles varies each month and fluctuates by manufacturer. Honda may be the hot product for 2011, but Hyundai could be the front-runner for 2012. Many dealers structure their businesses on the premise that they will attain certain sales numbers per month, however when those sales numbers don’t materialize, what is the back-up plan? Usually there isn’t one. I tell all my dealership contacts to ensure they have diversified their product lines so that when one hurts, the others can take over. A strong body shop, used car dept, leasing, parts and so on can help take over if new car sales drop.

Another way to weather the storm is to run a lean and mean operation. Too often I see dealers reacting to low volume in sales by suddenly cutting 10-30% of their overhead. Why is this only done when times are dire? If the dealership could survive on less, why would they maintain such excess? I guess GM set the tone by running ‘FAT’ for many years, and then, when sales volume plummeted, GM reacted just like the dealers by cutting costs and running lean. With increased competition, I hope that running lean will be the new norm rather than a cyclical short-term fix.

In conclusion, it is not only important to set aside money in the boon years, but it is also vitally important to critically review your dealership (with an outside advisor) to ensure you do not have tunnel vision and your rose colored glasses are not the wrong shade. In a later blog I will discuss some of the ‘savings’ options for your company.

What are you doing about fraud?

noreply@blogger.com (The Car Guys) — Tue, 11 Jan 2011 20:39:00 +0000

Eh, we’re Canadians aren’t we? We are an honest and polite country; so there is no way fraud is occurring at your auto dealership, right? Well, think again. I would suggest there is strong evidence that fraud is in fact occurring at your auto dealership. A study conducted by a major accounting firm and reported in the Financial Post suggests Canadian companies make great targets for fraud. In their latest global economic crime survey, Canada was the fourth most fraudulent nation in the world; behind Russia, South Africa and Kenya.

So what should you do and how can you best insulate your company to minimize the fraud risk?

Well, the first thing you need to do is recognize that fraud is a problem and accept that your auto-dealership is susceptible. This isn’t a case of admitting that you are paranoid, over reacting and in need of medical attention. It is a case of being prudent and honest with yourself and, most importantly, being vigilant in your oversight of the auto-dealership operations.

The next thing you need to do is identify the areas of your business that you think may be vulnerable to fraud and designing or tinkering with your current corporate organization structure to better insulate you and your company from fraud.

As an accountant I have witnessed various schemes and frauds in auto dealerships over the past 30 years. From relatively simple theft in the parts inventory and bogus warranty claims perpetrated by the service staff to the fraudulent refinancing of used cars and elaborate cheque washing schemes. It would appear that fraud is becoming more prevalent and more sophisticated. Know where your areas of risk are.

If you consider your parts inventory at risk, then make sure the stock room is in immaculate order and the perpetual accounting records tie into your general ledger. Initiating surprise physical counts a couple of times of year would not hurt and make your presence noted in the stock area; walk around talk to staff and consider installing surveillance cameras. However, I must warn you that installing elaborate surveillance systems is not always the answer. I believe when you resort to these measures you are admitting defeat. You may be better served by making a better effort at hiring and training your staff in the first place.

Consider requesting that all new staff provide you with permission to conduct a personal check; which would include a police criminal check. As well, make sure you set a good example and don’t blindly take parts inventory or any other item from the show and stock room without paying for it. I have heard many guilty employees comment, “If the owner takes stuff from the company, I guess it’s ok if I do it too!”

And lastly, make sure that you properly segregate the accounting duties of your employees. What does that mean? You should not permit one employee to make the daily deposits, prepare cheques, and access the company’s books and records. Don’t provide your employees easy access to perpetrate a fraud. Review the monthly bank reconciliations and at least review the sequential order of your bank return cheques to enable you to spot check the vendors and ensure the authenticity of the cheque signers. The steps are certainly no guarantee that you will be able to prevent fraud from occurring in your company but letting your employees know that you're constantly checking their work is a first step in preventing it in the first place. Also have a discussion with your bank manager about fraud. Most banks have programs that assist you in your fraud review.

The bottom line is that fraud is a fact of business life in Canada. Properly planning and consistently executing a plan to minimize the risks will not only bring peace of mind to you when you are sleeping at night or away on vacation, but it will also increase or maintain your company's profitability.