Selling Automobile Dealerships to Public Companies - Effect of Framework Agreements

John Pico
 


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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 a Public’s acquisition and ownership of new car automobile dealerships. Each factory has its own restrictions on a Public’s ability to acquire and operate its dealerships.

Most framework agreements are, by their own terms confidential. However, if one is anticipating selling 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 sale Lexus of Stevens Creek, a Public indicated it wanted to purchase the dealership, but it already owned 4 Lexus stores (the maximum allowed nationwide at the time). The Public told the factory it would sell one if it entered into a buy-sell with my dealer; however, the factory told them it had to sell one before it put a deal together.

The relationship between Publics and factories has been an interesting metamorphosis to observe. When Publics first came on the scene the factories kicked and screamed. Lawsuits were filed and the concept of public ownership of automobile dealerships was vigorously opposed by the manufacturers.

Later, the confrontational attitude subsided and the factories embraced the Publics as a way to replace certain dealers and as a means to have new facilities built. The glow came off the relationships when a number of the Publics did not perform the way the factory wanted: poor CSI, broken promises, poor sales performance.

For the factories and the Publics, the drafting of the original framework agreements was like composing pre-nuptial agreements without ever having been married or divorced. As the factories learned from experience, the agreements were massaged and modified.

Several years ago while helping obtain the first factory approval for an Indian Nation to become a dealer, 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 dealership groups, both public and private, but how does one transact business with a Sovereign Nation (a Native American tribe) 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 the Publics’ framework agreements, some of the anticipated problems were imaginary and some were missed.

Publics are rated daily according to the market value of their stock, which value, when they first began buying dealerships, was affected dramatically by increasing the sales volume of the companies through the acquisition of new dealerships.

Dealers, 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 wise for a private dealer to sell that same property even if given the same terms, or vice-versa.

Privates and Publics have different rules and different motives and, in my opinion, until recently, some Publics did not think they had to act very much like dealers. With the slow-down in their acquisitions, however, Publics have had to act more like dealers and get the most out of each store. As most dealers would agree, the task of successfully operating an automobile dealership is substantially more difficult than buying one with someone else’s money.

In the long-run I believe framework agreements are good because they keep the Publics from controlling too great a percentage of the distribution channels of manufacturers, while simultaneously forcing them to operate more like car dealers.

Although framework agreements are redefined at times, at one time 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 may own: (a) on a national level; (b) in each Toyota-defined geographic region or distributor area; and (c) in each Toyota or Lexus-defined metropolitan market.
2. Prohibited ownership of contiguous dealerships in the same market.
3. Nationally, the limitations on dealerships owned were for specific time periods and based on certain percentages of total Toyota unit sales in the United States.
4. In geographic regions or distributor areas, the limitations on dealerships owned by Publics were specified by the applicable Toyota regional limitations policy or distributor's policy in effect at such time.
5. In metropolitan markets, the limitations on dealerships owned by Publics were based on Toyota's metro markets limitation policy then in effect, which provided a limitation based on the total number of Toyota dealerships in the particular market.

With respect to Lexus, a Public could own no more than one Lexus dealership in any one Lexus-defined metropolitan market and no more than five Lexus dealerships nationally.

HONDA

1. Honda limited the number of Honda and Acura dealerships a Public could own (a) on a national level; (b) in each Honda and Acura-defined geographic zone; and (c) in each Honda-defined metropolitan market.
2. Nationally, the limitations on Honda dealerships owned by Publics were based on specified percentages of total Honda unit sales in the United States.
3. In Honda-defined geographic zones, the limitations on Honda dealerships owned by Publics were based on specified percentages of total Honda unit sales in each of 10 Honda-defined geographic zones.
4. In Honda-defined metropolitan markets, the limitations on Honda dealerships owned by Publics were specified numbers of dealerships in each market, which numerical limits varied based mainly on the total number of Honda dealerships in a particular market.
5. With respect to Acura, Publics could own no more than (a) two Acura dealerships in a Honda-defined metropolitan market, (b) three Acura dealerships in any one of six Honda-defined geographic zones and (c) five Acura dealerships nationally.
6. Honda also prohibited ownership of contiguous dealerships.

MERCEDES-BENZ

Mercedes restricted any company from owning Mercedes dealerships with sales of more than 3% of total sales of Mercedes vehicles in the U. S. during the previous calendar year.

FORD MOTOR COMPANY

1. 80% of the Public’s Ford dealerships had to meet Ford's performance criteria.
2. Could not make an acquisition that would result in owning Ford or Lincoln Mercury dealerships with sales exceeding 5% of the total Ford or total Lincoln Mercury retail sales of new vehicles in the United States for the preceding calendar year.
3. Could not acquire additional Ford or Lincoln Mercury dealerships in a particular state if such an acquisition would result in the public company owning Ford or Lincoln Mercury dealerships with sales exceeding 5% of the total Ford or total Lincoln Mercury retail sales of new vehicles in that state for the preceding calendar year.
4. Could not acquire additional Ford dealerships in a Ford-defined market area if such an acquisition would result in the Public owning more than one Ford dealership in a market having a total of three or less Ford dealerships or owning more than 25% of the Ford dealerships in a market having a total of four or more Ford dealerships. An identical market area restriction applies for Lincoln Mercury dealerships.
5. The factory could impose conditions, such as requiring facilities improvements at the acquired dealership.

GENERAL MOTORS

General Motors limited the maximum number of General Motors dealerships that a Public could acquire to 50% of the General Motors dealerships, by brand line, in a General Motors-defined geographic market area having 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 area of distribution.

BMW

BMW prohibited publicly held companies from owning BMW dealerships representing (a) more than 10% of all BMW sales in the U. S. or (b) more than 50% of BMW dealerships in a given metropolitan market.

Other manufacturers may impose different restrictions and conditions which may or may not be more stringent.

As a condition to granting their consent to acquisitions, a number of manufacturers required additional restrictions or conditions, such as prohibiting:

1. Material changes in the Public, or extraordinary corporate transactions such as a merger, sale of a material amount of assets or change in the Public’s board of directors or management that could have a material adverse effect on the manufacturer's image or reputation or could be materially incompatible with the manufacturer's interests.
2. The removal of a dealership general manager without the consent of the manufacturer.
3. Dualing with another brand without the factory’s consent.

If a buyer cannot comply with the restrictions of its framework agreement with the factory, it will not be approved. Consequently, if one intends to sell a dealership to a Public it would be wise to know the requirements to of its framework agreement before investing a substantial amount of time and energy into negotiating with the Public.

John Pico is the Managing Partner of Advising Automobile Dealers LLC. Mr. Pico served as a court appointed “Consultant to Debtor" in bankruptcy cases, a “Court Appointed Mediator" in automotive disputes, the “Court Appointed Arbitrator / Appraiser" in partnership disputes, a “Court Approved Consultant to Receiver" in a check-kiting case, as a “Superior Court Mediator" in dealership/lender litigation and has been recognized as an expert witness on both State and Federal levels.

He has consulted on upside-down positions of over $50 Million, out of trust position of over $4 Million and a bank overdraft of $30 Million. Since 1972, Mr. Pico has completed over 1,000 automobile dealership transactions, whose combined values exceed One Billion Dollars.

In 1986, he authored and National Legal Publishing Company published the nation's first book on Buying and Selling Automobile Dealerships. You can view his biography at http://www.advisingdealers.com

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