Factory “image programs” are structured in various ways, but they often tie significant economic consequences to compliance. Dealers must evaluate these programs not only as capital expenditure decisions, but also as strategic and legal commitments.

Incentive-Based Facility Requirements

Some manufacturers’ incentive programs condition margin or bonus payments on participation in and progress toward facility renovations. These payments, which may be tied to performance metrics such as sales effectiveness, customer satisfaction or brand standards compliance, are often critical to a dealership’s bottom line. In many cases, however, the most heavily weighted or even gatekeeping KPI is the dealer’s compliance with the brand’s image requirements, including completion of a renovation of the facility program. Dealers who do not enroll or who fall behind schedule risk losing substantial incentive payments. In some cases, manufacturers have sought to charge back funds previously paid based on facility-related commitments.

Assistance and Planning Programs

Some manufacturers offer assistance with renovation costs. These programs vary significantly in scope and structure. At one end of the spectrum are cost-sharing models with fixed-dollar contributions; at the other are programs that reimburse based on some fixed amount per vehicle retailed, up to a cap. Some OEMs have financing offers that also help induce dealers to take the plunge. Most programs assign consultants or approved architects to conduct site evaluations, develop image-compliant plans and oversee execution, with multi-phase approval processes and strict oversight. 

Manufacturer Demands and Enforcement Practices

Beyond programs based on the “carrot,” dealers may face the “stick” in the form of demands from manufacturers. These can include pressure to enroll in a facility program, show progress on an existing commitment or complete renovations by a specified date. The consequences for non-compliance vary. In some instances, manufacturers suspend or reduce incentive payments. In more aggressive scenarios, they may threaten termination of the franchise agreement based on alleged facility non-compliance.

Franchise Laws

When it comes to facility demands, franchise statutes in California and many other states impose clear limits on aggressive manufacturer (“stick”) conduct. The law regulating dealer franchise termination prohibits terminations absent good cause, even if the facility condition is below the standard. Several California statutes limit what facility requirements can be imposed and necessitate that the requirement is reasonable. A “grandfathering law” bars manufacturers from requiring renovations more frequently than a set interval. The laws are less clear on the incentive side of the issue. This is understandable given the difficulty of regulating the right of both sides to freely bargain with one another. However, there are several laws, including the grandfathering law, that apply even where the incentive programs are involved.

Strategic Considerations

Before committing to any facility image initiative, dealers should evaluate:

• The net economic impact of incentive payments versus renovation costs.
• The enforceability of program commitments under applicable state franchise laws.
• The manufacturer’s track record of program administration and flexibility.
• Whether proposed renovations align with long-term dealership strategy, ownership tenure or exit plans.

In some situations, participation in a facility program may make strategic sense, particularly if the incentive structure offers short-term ROI or positions the dealer favorably in the event of a future sale — many facility programs offer hefty boosts to allocation. In other cases, dealers may choose to resist or renegotiate program terms, particularly where the manufacturer’s demands are overreaching or inconsistent with statutory protections.

Conclusion

Facility upgrade demands are central to the manufacturer-dealer relationship. Dealers must approach these programs with a clear understanding of the financial impact, legal constraints and long-term business consequences. Failure to do so can result in significant lost revenue, or worse, exposure to enforcement actions under the franchise agreement. Early legal and financial analysis is essential before making any facility-related commitment.