26 September 2012

The recent increase in new car registrations this year is welcome news but it came against the backdrop of a continued squeeze on the rates of overhead absorption and return on sales being achieved by UK car dealerships.

As the demands made by manufacturers show no signs of letting up, some are beginning to question the sustainability of the UK dealership model, especially for dealers not supplying the prestige marques. UK retailers are resilient and some prosper despite these challenging conditions.

But for those who are thinking that, in due course, a trade sale of their business would be the right move, there are some pointers to keep in mind.

At an early stage, it is worth thinking about who is likely to want and be able to buy your dealership.

If the strategic ‘fit’ between the buyer and your business is sweet, then you are likely to get a higher price. Given time, it may be possible to design your business to make it a more attractive target for a particular buyer.

Another early stage step is to speak to your tax advisers to set things up for the best tax result, although this shouldn’t be the only driver. There are two main ways to sell a business: via a sale by the shareholders of their shares in the company, or through a sale by the company of its business and assets. More often than not, a share sale achieves better tax results for the owners – ideally a flat 10% tax on any capital gain (if entrepreneurs’ relief is available). What’s more, in legal terms, a share sale is generally simpler than an assets sale. For example, unlike share deals, asset sales require consultation with staff and obtaining consents from suppliers. But sometimes it has to be an asset sale – either because the buyer demands it or, for example, because the target franchise is only one of a number of franchises owned by a single company. For that reason, its sometimes better to put particular franchises into separate companies.

If your company has a number of shareholders, then obviously all of these must be happy to sell when you want. Company law does allow the majority to force a holder of 10% or less of the company’s shares to sell out. But this is a time consuming procedure. Larger shareholders cannot be forced to sell, unless they have entered into a shareholders’ agreement giving the majority this right.
The purpose of reviewing and tightening up aspects of your business is to make it as impressive as possible. Not only should this maximise the price, but also make the ultimate sale process much quicker. From experience, a review of the following areas often pays dividends.

Staff

Key staff should have written contracts containing suitable notice periods and non-compete clauses. Arrangements with contractors such as valeters should be checked to ensure that the law doesn’t regard them as employees. Many long established car dealership businesses have burdensome final salary pension schemes. In some cases, it is possible to apply to the Pensions Regulator to have a scheme wound-up.

Websites

Customer retention and online presence are essential aspects of successful dealerships. And the law has more and more to say about these areas.
Customer databases must be kept up to date and not used for undisclosed purposes. In a recent case, the buying company in an asset sale was not permitted to use the target business database without first writing to all the persons on that database. This situation could have been avoided if the target had made certain statements to customers when their details were originally collected.

The URLs for the business websites should be registered in the company’s name – and perhaps additional URLs similar to the existing business name or for areas into which the business might move in the future. Facebook and Twitter registrations should be in place. The new law on cookie notices is now in force. For little outlay, a registered trade mark provides a robust tool to stop abusive uses of your business name – particularly relevant on the internet.

Property

If the business occupies property owned by the shareholders or a pension scheme, a formal lease, with appropriate rent review provisions and break clauses, should be in place. Or, if the freehold is in the company and the owner doesn’t want to sell it with the business, consider stripping it out of the company.

Financials

Businesses where turnover, net profits and overhead absorption are on an upward trend attract better prices. This isn’t easy – especially where manufacturers’ demands make businesses focus on hitting monthly registration figures.

Advance planning to link staff bonuses to slightly different targets might be worthwhile. What other investment now might be rewarded by a higher sale price later?

The current tax environment means it is usually better for the company not to pay significant dividends ahead of sale. But certainly, if the company has contingent cash assets – such as VAT or other tax refund claims – then these should be recovered as soon as possible.

Clearly your manufacturers will have a major say in the achievement of your plans. Achieving anything in the current market for motor dealerships requires commitment and judgment.

Don’t underestimate the amount of time needed for the sale process, including the preparatory work. This is a challenging juggling act, but preparation and planning should lead to ultimate success. This could and should be your crowning achievement as a business owner.

* Author Matthew Searle is a partner at Adams & Remers solicitors
 

Tags: business sale