Sale of car dealerships to public companies: effect of framework agreements
A framework agreement provides the basis for the business relationship between a factory and a public company (Public). It includes the terms and standards for the acquisition and ownership of new car dealerships by a public. Each factory has its own restrictions on the ability of a public to acquire and operate its dealers.
Most framework agreements are, on their own terms, confidential. However, if one is anticipating the sale of a dealership to a public, it would be wise to become familiar with its framework agreement and how it might affect a potential sale.
When I was negotiating the Stevens Creek Lexus sale, an audience indicated that they wanted to buy the dealership, but they already owned 4 Lexus stores (the maximum allowed nationally at the time). The public told the factory that they would sell one if I entered into a sale with my dealer; however, the factory told them they had to sell one prior to put together a deal.
The relationship between Public and factories has been an interesting metamorphosis to observe. When Publics first appeared on the scene, factories kicked and screamed. Lawsuits were filed and manufacturers vigorously opposed the concept of public ownership of car dealers.
Later, the confrontational attitude gave way and factories adopted the Publics as a way to replace certain merchants and as a means to build new facilities. The brilliance came from relationships when several of the Audiences did not perform the way the factory wanted: poor CSI, broken promises, poor sales performance.
For the factories and the Public, the writing of the original framework agreements was like composing prenuptial agreements without having been married or divorced. As factories learned from experience, agreements were tweaked and tweaked.
Several years ago, while helping to obtain the first factory approval for an Indian nation to become a distributor, a generic Sales and Service Agreement was not adequate to cover the uniqueness of the tribes and modifications had to be made.
The factory knew how to deal with large groups of dealers, both public and private, but how do you do business with a sovereign nation (a tribe of Native Americans) that has immunity from lawsuits and does not have to pay taxes? These were some of the issues that had to be addressed (with the factory, the state dealer association, and the selling dealer). In hindsight, similar to Publics framework agreements, some of the anticipated problems were imaginary and some were overlooked.
On a daily basis, the public is evaluated according to the market value of their shares, whose value, when they began to buy dealerships, was dramatically affected by increasing the volume of sales of companies through the acquisition of new dealers.
Distributors, on the other hand, are rated by how things turn out when the game is over and they sell their stores. Consequently, while it might be good for a public to sell a hypothetical dealership property to a REIT (Real Estate Investment Trust), it may or may not be prudent for a private dealership to sell that same property even if they are given the same. terms, or vice versa.
Private and public have different rules and different reasons, and in my opinion, until recently, some publics did not think they had to act as distributors. However, with their acquisitions slowing, audiences have had to act more like distributors and get the most out of each store. As most dealerships would agree, the task of successfully operating a car dealership is substantially more difficult than buying one with someone else’s money.
In the long run, I think framework agreements are good because they prevent the Public from controlling too large a percentage of manufacturers’ distribution channels, while forcing them to operate more like car dealerships.
Although framework agreements are sometimes redefined, at one point or another the following factories had the following requirements:
TOYOTA / LEXUS
1. Had a limit on the number of Toyota and Lexus dealerships that a Public can own: (a) nationwide; (b) in each geographic region or area of ​​distribution defined by Toyota; and (c) in each metropolitan market defined by Toyota or Lexus.
2. The ownership of contiguous concessionaires in the same market is prohibited.
3. Nationally, the limitations placed on owned dealerships were for specific time periods and were based on certain percentages of Toyota’s total unit sales in the United States.
4. In geographic regions or dealer areas, limitations on Publics owned dealerships were specified by Toyota’s regional limitations policy or then current dealer policy.
5. In metropolitan markets, Publics-owned dealer limitations were based on Toyota’s metropolitan markets limitation policy then in effect, which provided a limitation based on the total number of Toyota dealers in the particular market.
With respect to Lexus, a public could own no more than one Lexus dealer in any metropolitan market defined by Lexus and no more than five Lexus dealerships nationwide.
SLING
1. Honda limited the number of Honda and Acura dealerships that a public could own (a) nationwide; (b) in each geographic area defined by Honda and Acura; and (c) in each metropolitan market defined by Honda.
2. Nationally, Publics-owned Honda dealership limitations were based on specified percentages of total Honda unit sales in the United States.
3. In Honda-defined geographic areas, Publics-owned Honda dealer limitations were based on specified percentages of total Honda unit sales in each of the 10 Honda-defined geographic areas.
4. In the metropolitan markets defined by Honda, the limitations of Publics-owned Honda dealers were specific numbers of dealers in each market, the numerical limits of which varied primarily based on the total number of Honda dealers in a particular market.
5. With respect to Acura, Publics could not own more than (a) two Acura dealers in a metropolitan market defined by Honda, (b) three Acura dealers in any of the six geographic areas defined by Honda, and (c) five Acura dealerships nationally.
6. Honda also prohibited the ownership of contiguous dealerships.
Mercedes Benz
Mercedes restricted any company from owning Mercedes dealerships with sales of more than 3% of total Mercedes vehicle sales in the US during the previous calendar year.
FORD ENGINE COMPANY
1. 80% of Ford’s public dealers had to meet Ford’s performance criteria.
2. An acquisition could not be made that would result in ownership of Ford or Lincoln Mercury dealerships with sales greater than 5% of Ford or Lincoln Mercury’s total retail sales of new vehicles in the United States during the previous calendar year.
3. You may not acquire additional Ford or Lincoln Mercury dealers in a particular state if such acquisition would result in the public company owning Ford or Lincoln Mercury dealerships with sales exceeding 5% of total Ford or Lincoln retail sales. Mercury of new vehicles in that state for the previous calendar year.
4. You may not acquire additional Ford dealers in a Ford-defined market area if such acquisition would result in the public owning more than one Ford dealership in a market that has a total of three or fewer Ford dealers or owns more than 25% of Ford Dealers in a market with a total of four or more Ford Dealers. An identical market area restriction applies to Lincoln Mercury dealers.
5. The factory may impose conditions, such as requiring improvements to the facilities of the acquired dealer.
GENERAL ENGINES
General Motors limited the maximum number of General Motors dealerships that a public could acquire to 50% of General Motors dealers, by brand line, in a General Motors-defined geographic market area that has multiple General Motors dealers.
SUBARU
Subaru limited Publics to (a) no more than two Subaru dealerships within certain designated market areas; (b) four Subaru dealerships within its Mid-America region; and (c) 12 dealerships within Subaru’s entire range.
BMW
BMW prohibited publicly traded companies from owning BMW dealerships that represent (a) more than 10% of all BMW sales in the US OR (b) more than 50% of BMW dealerships in a given metropolitan market .
Other manufacturers may impose different restrictions and conditions that may or may not be more stringent.
As a condition of consenting to purchases, several manufacturers required additional restrictions or conditions, such as prohibiting:
1. Substantial changes in the Public, or extraordinary corporate transactions such as a merger, sale of a significant amount of assets or changes in the Public’s board of directors or management that could have a material adverse effect on the image or reputation of the manufacturer or could be materially incompatible with the interests of the manufacturer.
2. The removal of a general manager from the dealership without the consent of the manufacturer.
3. Duplicate with another brand without the consent of the factory.
If a buyer cannot comply with the restrictions of their master agreement with the factory, they will not be approved. Consequently, if one intends to sell a concessionaire to a Public, it would be prudent to know the requirements of its master agreement before investing a substantial amount of time and energy in negotiating with the Public.