Pub. 5 2016-2017 Issue 4

Issue 2 2017 17 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 Auto manufacturers can intervene in a potential transaction involving the franchise. A manufacturer 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 franchise. 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. Costs, Timing, and Taxes The costs of a transaction are significant once you add in brokerage fees, accounting services, and legal fees—not tomention tax on the transaction. Further, transactions often trigger tax liabilities many dealerships don’t realize they’re carrying. Accounting methods specific to the dealership 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 sixmonths from start to finish. The longer the transaction takes, the more opportu- nities there are for a decline in dealership performance, brand-related events (such as the Volkswagen diesel scandal), and employee fallout. 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 the marketplace. 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 illu- minates opportunities for your dealership to increase its potential value. Further, make sure youwork with professionals who know the automotive industry. Fromyour 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. DanCheyney has practiced public accounting since 1996, working exclusively withdealerships. Before joiningMoss Adams, he served as the internal auditor of a dealership group, and he has authored numerous articles in industry publications and presented at national and state association conventions. He can be reached at (425) 303-3188 or dan.cheyney@mossadams.com . Sid Tobiason 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 successionplanning. He canbe reached at (858) 627-1448 or sid.tobiason@mossadams.com . Amy Stillwell works exclusively with dealership owners and closely held busi- nesses on federal and state income tax and estate planning for businesses and owners. Amy alsomanages largedealership transactions including structuring the transaction and managing the purchase and sale nancial process. She can be reached at (858) 627-1410 or amy.stillwell@mossadams.com . During the recession, when consumers put new vehicle purchases on hold, auto dealers demonstrated sustainability by putting more emphasis on used vehicles, parts, and service. The investor community took note of the elasticity of the franchised dealer. Now that the economy has recovered, the auto industry is picking up steam (and profit) quickly.