AN ERUPTION AHEAD? PENT UP DEALERSHIP BUY-SELL ACTIVITY IN A POST COVID-19 FUTURE
Making the 2021 annual list of the National Association of Dealer Counsel’s (NADC) top legal trends for automobile dealers is again buy-sell activity. As reported by dealers and brokers, after the chaotic business climate of 2020— a steady upswing of dealership buy-sell activity in the latter half of 2021 is expected. Pent-up buy-sell transactional activity appears to be a further fallout of the COVID-19 pandemic with experts speculating that valuations will reach record highs for nearly all brands. If your business is considering a buy-sell transaction, either as a buyer or as a seller, will you be adequately prepared?
There are numerous considerations for a proposed buyer or seller to think about before entering a buy-sell transaction. The best time to enlist the assistance of competent automotive counsel and any other advisors is at this consideration stage, well before the implementation stage and prior to any negotiations. Important legal, tax and planning considerations exist which can impact the unique structure of each transaction differently.
Parties aspiring to put together a buy-sell will often eagerly engage in discussions, reach preliminary understanding of material terms and only after key terms are set, consider engaging lawyers to prepare required contracts and memorialize the parties’ intentions. Too often, early stage negotiations impact material and financially consequential terms of the deal and can compromise the parties’ rights. If the parties do not involve counsel until the point when binding agreements are drawn up, they should be wary of potential problems they may create for themselves, and at a minimum, be mindful of a few points during this initial phase.
First, discussions should be documented. Prospective parties to a transaction commonly get together, in-person or over the telephone to talk about their desired deal, which might include price terms and other aspects of the proposed transaction. It is prudent to take thorough, contemporaneous notes of these conversations. These notes should include the dates of the conversations, participants, and as much detail as possible. These notes should be placed in a separate easily accessible file. Be organized. This may be helpful should the need arise down the road for clarification or in the event of a disagreement. These notes will often become the framework for a letter of intent (LOI), and while a LOI is not a substitute for the formal buy-sell agreement nor can a LOI satisfy manufacturer approval requirements, a LOI can serve as a most useful roadmap to completion of the buy-sell agreement. Naturally, it is advisable to consult with an attorney before executing a LOI.
Second, the importance of collecting necessary information and documents cannot be overstated. This might include franchise agreements and all addenda, lists of inventories, customer records, existing environmental reports, appraisals, records of pending litigation and the like. A seller should compile this information before any negotiations occur. Relegating this important aspect to the end often causes undue delay, misunderstandings between the parties and can even jeopardize a closing.
Third, most dealerships have executory contracts, existing agreements, leases, and even non-cancelable contracts with vendors and third parties (e.g., computer equipment/software maintenance contracts, agreements for uniforms, advertising, etc.). It is important that these agreements be identified and reviewed early on in the buy-sell process to allow the parties to determine if they are being assumed by the buyer and to determine any assignment requirements. Failure to identify and address these obligations can prove costly and adversely impact the buy-sell closing.
Fourth, the parties should evaluate how to address any due diligence inspections of the business, records, assets and any real estate and improvements, including who will bear inspection costs and the consequence of inspection findings that are not satisfactory. Early determination of these issues could facilitate avoidance of delay, keep the deal together, or allow a party to determine whether to proceed to closing.
Fifth, the structure of the selling dealership is often a corporation or other legal entity. Though the buyer may have been dealing with the seller’s majority owner all along, minority shareholders may have rights under the law and the corporation’s governing documents which can impact the buy-sell process. Determine early in the process the rights, if any, of minority shareholders to avoid unnecessary delay and secure required approvals.
Given the prospect of an uptick of buy-sell activity, dealers considering either buying or selling should retain competent legal counsel as early as possible prior to commencing this process. Before principals participate in discussions about a prospective deal with interested parties or take other affirmative steps, consideration of the above five points, consultation with counsel and other advisors to address specific circumstances will serve to avoid pitfalls that could adversely result in the undoing of the coveted deal, prove costly to the parties, or impact the parties’ legal rights and protections.