The wisdom of the words of Benjamin Franklin still holds true today: “[b]y failing to prepare, you are preparing to fail.” Too many times dealers who are eager to sell their stores or acquire additional franchises wait too long in the process before seeking the guidance of competent legal counsel and other professional advisors. Instead, they might attempt to negotiate terms on their own or through key dealership personnel, but without the benefit of counsel, and may end up compromising their interests. In some cases, sellers leave money on the table, or buyers pay too much for what they’re getting. In other instances, the transaction may not succeed. If the parties wait until the point when binding contracts are to be drawn up, they should be wary of potential problems they may create for themselves. The following considerations, among others, have proven insightful.
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. A party should take thorough, contemporaneous notes of these conversations. These notes should include the dates of the conversations, who participated, and as much detail as possible and be placed in a separate file that can be easily accessed. This may be helpful should the need arise down the road for clarification or in the event of a disagreement.
Additionally, it is important to collect all necessary information and required documents at the beginning. This might include lists of inventories, existing environmental reports, property appraisals, copies of executory contracts to be assigned and assumed, lists of any claims, pending litigation and other pertinent documentation. This information should be accessible in the early stages, ideally before negotiations occur. Relegating this important aspect to sometime afterwards could cause undue delay and misunderstanding between the parties, or jeopardize a successful closing.
Also, most dealerships have existing agreements, leases and even non-cancelable contracts with vendors and third parties, such as computer equipment and software maintenance contracts, agreements for uniforms, advertising contracts, etc. It is important for these agreements to be reviewed by counsel and identified early on so the parties can determine how they are to be handled, whether they will be assumed by the buyer, and what third party consents are required for them to be assigned.
In some instances, there are certain reasons why the parties might use a letter of intent. While ordinarily, the letter of intent is not a substitute for the formal buy-sell agreement required by the manufacturer to start the approval process, the letter of intent itself might give rise to an argument that it is a binding contract, creating legal obligations of the parties. The best course in the circumstance of a letter of intent, as with any written document, is to first consult with an attorney before it is signed.
The parties should also evaluate the necessity of and perform any and all due diligence, including inspections of the business and assets and any real estate and improvements, as well as who will bear inspection performance costs and the consequences of inspection findings that are not satisfactory. Early determination of these issues could facilitate avoidance of delay, maximize the potential for manufacturer approval, keep the transaction intact, and allow a party to determine whether to proceed to closing. In a related way, it is also important to keep counsel informed throughout the process. Parties who attempt to handle certain aspects of a proposed transaction themselves, including the manufacturer application process, without the benefit of counsel’s prior review of proposed submissions can create potential problems for themselves.
Furthermore, 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. It is important to determine early in the process the rights, if any, of minority shareholders to avoid unnecessary delay and secure required approvals.
The time for bringing in competent automotive counsel is at the very beginning – before considering the sale or purchase of a dealership – because there are legal, tax, planning, and other considerations that go into structuring the transaction in order to protect the parties’ interests. Prospective sellers and buyers alike should engage in buy-sell negotiations with the benefit of counsel to avoid pitfalls that could adversely result in the undoing of the transaction or otherwise adversely impact the parties.