California Auto Dealer: BUY SELL BASICS – PART I

March 2016

CALIFORNIA AUTO DEALER — Over 30 Years’ Experience Handling Buy/Sells And Automotive Law

BUY SELL BASICS – PART 1

If you are thinking of buying or selling a dealership, and are reading through the myriad of articles on the subject, you may be wondering “where do I begin?” Getting back to the basics is the best way to answer that question. 

There are three different ways to buy or sell a dealership.  They are: 1) asset transfer, 2)  stock transfer, or 3) stock issuance. 

This article is the first in a series of five articles, and it will briefly describe each type of transfer and the circumstances under which each type of transfer is typically used.  Subsequent articles will go in to more detail about the basics of each of the three types of transfers and a final article will describe how the dealership’s real estate figures into each transaction.

Asset transfers are the most common way auto dealerships are bought and sold.  In an asset transfer, the buyer enters into an agreement to buy substantially all of the assets.  The assets that are purchased typically include fixed assets (furniture, fixtures and equipment), parts and accessories inventory, new vehicle inventory, used vehicle inventory, work-in-process, some select vendor contracts and goodwill.  Sometimes leasehold improvements are also included. 

Also included are resources to help the buyer keep in touch with customers, such as phone numbers, e-mail addresses, websites, social media accounts, customer lists and customer records.  Excluded are things like cash, accounts receivable and payable, and liabilities, except for specific liabilities a buyer may agree to assume, like certain equipment leases.  This form of transfer is most preferred by buyers, as it limits the buyer’s exposure to obligations incurred by seller.  The seller is responsible after closing for paying all the dealership’s obligations and for closing its books.  A buyer will sometimes agree to buy capital stock instead of assets when they want to sweeten the pot for the seller, or when the cost of selling assets would be too high for the seller.

This can happen as a result of a variety of issues.  For example, very high LIFO or contingent liabilities that vest upon sale of assets – like unfunded pension plan liability —  can result in taxes or other obligations that can be costly after an asset sale.  It might be impossible for a seller to sell without having to pay out a lot of money unless the seller can find a buyer who is willing to buy stock and take over the exposure.  Why would a buyer do this?  Because the liability can often be deferred and reduced over time. 

A partial transfer is almost as common as an asset sale and typically involves a transfer of some, but not all, of the capital stock of the corporation over time.  This is common when a seller wants to sell an interest to a general manager or other employee, or to a child. A dealer might also need cash, and so might find a partner willing to pay for some stock ownership,  which will infuse cash into the dealership. 

Whenever a buyer is buying 100% of the capital stock, they are buying the entire dealership, which includes ALL assets and liabilities of the  entity.  This includes, but is not limited to, all accounts payable and receivable, all employee obligations and claims, all lawsuit liability, and all environmental liability owned, to name a few, which is why asset purchases are generally preferred by buyers.  A purchase of some of the capital stock is likewise a purchase of some of the exposure.

Due diligence, warranties and representations and indemnity agreements are important in any purchase, but they are especially  important in a partial or complete stock purchase because the buyer is exposed to all of the seller’s liabilities.  The buyer will need to know that the corporation was maintained properly so that shareholders are not liable for corporate obligations, because now the buyer will be the shareholder.  If the corporation is an S corporation, the buyer will need to know if the S election could be lost; if that happens, the corporation is treated as if it were a C corporation.  If it is a C corporation, the buyer could be responsible for unpaid income taxes and penalties.  If the corporation owes sales or employment taxes or compensation it should have paid but didn’t, or if has been sued, the buyer will be responsible for this and more.

For more information on buy/sell basics, join us for our free webinar series beginning on March 9th at 11 am.

Please Note
These articles are necessarily general in nature and do not substitute for legal advice with respect to any particular case. Readers should 
consult
 with an attorney before taking any action affecting their interests.

California Auto Dealer is a registered trademark.
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(818) 907-4071
 

March 2016

etenner@grayduffylaw.com

FREE WEBINAR!
FREE WEBINAR!
FREE WEBINAR!


Join me on March 9 at 11 AM for a series of free webinars on Buy/Sell Basics.

Learn:

1.
 
The three main ways that auto dealerships are transferred;
2.
 
The pros and cons of each type of transfer; and
3.
 
When each way of transfer is best.

LISTEN TO WHAT PEOPLE ARE SAYING ABOUT ERIN

“Erin represented me when I bought my Mercedes, BMW, GM, Volvo and Subaru dealership.  It was great having someone on our team who has handled hundreds of auto dealership transfers.  She was able to help us coordinate all the manufacturers, landlords and lenders and deal with several road bumps we encountered along the way.  I highly recommend her to anyone buying or selling a dealership!”
 
-Jerry Pajouh,
Courtesy
Automotive Group

 
“Erin helped me when I decided to sell my auto dealership.  We had several bumps in the road, but none that became obstacles thanks to Erin’s knowledge, experience and ability to navigate difficult situations.  I am very happy with the deal we put together.   I don’t know if we would have gotten it done without her.” 
 
-George McCall,
Toyota Central

“Erin represented me when I bought my Buick GMC dealership.  Her knowledge and experience literally saved me tens of thousands of dollars.  She was able to explain complex concepts in a way that made them easy to understand so that I could make informed decisions about how I wanted to proceed.   I highly recommend Erin to anyone buying a dealership and I will use her again if I purchase another!”

-Terry Gilmore,
Paradise Buick GMC

Please Note: This article is necessarily general in nature and is not a substitute for legal advice with respect to any particular case. Readers should consult with an attorney before taking any action affecting their interests.