Ten Steps to Effective Succession Planning Step Four: Review Options for Funding the Transfer

There are a lot of bases to cover in developing an effective and comprehensive succession plan. To help you address all important considerations and contingencies, the HBK Dealership Industry Group developed, “Ten Steps to Effective Succession Planning.” This article addresses the fourth step in an effective succession plan, reviewing options for funding the transfer in light of the retirement funds you have identified as needed.

It is not surprising that one of the most difficult aspects of transferring dealership ownership is the ability of the successor to provide the required funds. In the ideal scenario, the buyer writes a check for the full amount. But that is often not the case. And in fact, the availability of funds often limits funding options to ongoing payments in such forms as deferred compensation and payments on assets retained by the retiring dealer, like the dealership real estate.

In addition to crafting the succession plan agreement, we often assist the buyers and sellers in obtaining funding from such sources as:

  1. The dealership. How much can the dealership afford to provide in ongoing payments? We prepare financial projections to determine how using cash flow to fund the purchase will impact operations, currently and over time.
  2. The retiring owner. This involves quantifying the owner’s ability to finance at least a portion of the transfer. If seller financing is used, you as outgoing owner need to secure the note and consider how interest on the note will be paid or subordinated. The use of seller financing might need to include a personal guarantee from the buyer.
  3. Insurance. If insurance is part of the funding mechanism, there are different types of policies to consider. We conduct such comparisons as the use of term versus various permanent life insurance and second-to-die policies. Determinations must be made relating to who owns the policies and how the premiums are paid.
  4. Commercial financing. We often help successors obtain commercial financing by locating potential lenders and preparing proposal packages.
  5. Equity. Consider offering equity in the company, such as to a private equity group. If private equity is an option, detailed preparations and documents will be required prior to any offering.

Where there is value in a dealership there will be numerous options for funding a sale or transfer. Depending on the successor’s finances, the option could be a combination of funding vehicles. Choosing the right one or ones will require the support of a professional familiar with the dealership industry and the particular business being sold or transferred and experienced in constructing funding packages.

Rex Collins is a Principal at HBK CPAs and Consultants. He directs HBK’s National Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at rcollins@hbkcpa.com; or by phone at 317-504-7900.

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About the Author(s)
Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA. This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies. Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.