Pub. 5 2016-2017 Issue 1

Spring 2016 19 Each department has different operations, profit drivers, and potential landmines. What this means in a transaction is that looking at a dealership’s performance as one unit isn’t a great measure of its value or its earning potential. Further, the sale of a dealership involves a wide range of assets, including real estate, fixed assets, inventory, corporate goodwill, and personal goodwill. Each of these has its own value to both buyer and seller, who ultimately need to come to an agreement for a sale to be successful. How pricing is allocated between these asset types can also have a substantial tax impact. (Note that a valuation calculated for purposes of generally accepted accounting principles, or GAAP, may differ from the valuation calculated for tax purposes.) Manufacturer's Right of Refusal Automanufacturers can intervene in a potential transaction involving the franchise. Amanufac- turer might do so, for example, if it isn’t happy with a potential buyer, has a different buyer in mind, or is concerned with concentrations of ownership in a geographic market. In these cases, the manufacturer may elect to exercise its first right of refusal and buy back the fran- chise. Buyers are typically looking for multiple franchises, and some brands are more desirable than others. Having the desirable brand pulled by themanufacturer oftenmakes the transaction unviable for the buyer. Proper planning around these scenarios is important. Costs, Timing, and Taxes The costs of a transaction are significant once you add in brokerage fees, accounting services, and legal fees—not to mention tax on the transaction. Further, transactions often trigger tax liabilities many dealerships don’t realize they’re carrying. Accounting methods specific to the dealer- ship inventory, including last in, first out (LIFO) inventory management and the lower-of-cost- or-market method for used vehicle inventory, are some examples of great tax planning that can complicate the financial picture during a transaction. Timing too is often a sore spot for dealers: Given the level of complexity involved in a dealership transaction, deals typically take around six months from start to finish. The longer the transaction takes, the more opportunities there are for a decline in dealership performance, brand-related events (such as the Volkswagen diesel scandal), and employee fallout. Buyers are typically looking for multiple franchises, and some brands are more desirable than others. Having the desirable brand pulled by the manufacturer often makes the transaction unviable for the buyer. Proper planning around these scenarios is important. Confidentiality Last, confidentiality is a significant factor in any deal, and sellers are often surprised by how quickly it can be lost, despite their best efforts to keep a deal private.The dealership business is, after all, a fairly close-knit community, and once the manufacturer, broker, and potential buyers learn a dealership may be for sale, information tends to spread quickly to themarketplace. This can result in a workforce issue as the dealership’s employees scramble to plan for the situation. As a result, it’s critical that a dealership has all its contingency plans in place and is well prepared for the sale leaking to the marketplace. Tips for a Smooth Transaction Knowing what surprises and complications you may encounter is a large part of making any potential transaction go smoothly. To get ahead, perform sell-side due diligence early—even before you’re ready to initiate a transaction. This not only helps you anticipate questions but also illuminates opportunities for your dealership to increase its potential value. Further, make sure you work with professionals who know the automotive industry. From your tax accountant to your legal advisor to your valuations expert, each one needs to understand the nuances of the accounting methods, tax provisions (especially deferrals), and entity structuring arrangements that are relevant to your business. To learn more about any of these topics or how you can prepare your dealership for a transaction, contact your Moss Adams professional. – Sid Tobiason, Partner, has practiced public accounting since 1978. He advises clients on federal income tax, estate tax, entity structure, the purchase and sale of businesses, ownership transition, and succession planning. He can be reached at (858) 627-1448 or sid.tobiason@mos- sadams.com Amy Stillwell, Tax Senior Manager, works with dealership owners on federal income and estate planning. You can reach her at (858) 627-1410 or amy.stillwell@mossadams.com. Dan Cheyney, partner, has practiced public accounting since 1996, working exclusively with dealerships. He currently serves as the Firm’s National Practice Leader, Automotive & Dealer Services Practice. He can be reached at (425) 303- 3188 or dan.cheyney@mossadams.com .