Auto Dealer Monthly, Q4 2020

No one is ever truly prepared for the loss of a parent Unfortunately for us that was true in more ways than one Dad had no estate plan He didnt even have the right type of insurance We had to borrow money from banks and drain the dealerships operating cash to pay his estate taxes Our group survived Dads passing and would grow to 10 stores and 14 brands by the time I sold it in 1998 Shortly thereafter I embarked on my second career in dealer consulting And if I have learned anything in my 48 years in the car business its that transfer of ownership is always fraught with challenges You need a succession plan everyone knows that But too few dealers realize how critical it is to fund that plan with pre or efficient tax dollars Thats where reinsurance comes in If you dont own at least one reinsurance company then you dont have an efficient succession plan Here are three reasons 1 DEALERSHIPS COST MONEY The single most important component of succession planning is ownership It takes real wealth to be approved as a dealer buy a dealership and own it outright Im talking working capital as well as net worth If you plan to get there with after tax dollars its going to take a long long time to get that done And you may not have enough time to accomplish it successfully When you own a reinsurance company two things happen You can become your own lender Most reinsurance providers allow you to take loans out from your reinsurance companies earned premiums with no tax consequences and a few providers allow you to do the same with unearned premiums And rather than pay interest to a bank again depending on the provider your own reinsurance company can earn the interest You can take dividends You may also choose to take dividends from your reinsurance company and its still a good decision You will be taxed at long term capital gains or qualified dividend tax rates which are normally half of ordinary income tax rates As a result stock purchases in the dealership and succession planning can happen a lot faster 2 REINSURANCE KEEPS FAMILY AND TALENT CLOSE Reinsurance companies are not for the dealers benefit alone We very commonly help dealers start additional reinsurance companies for their family members and key dealership managers If you want your children to stay in the business reinsurance is a way to give them an ownership stake early in their careers while you maintain full ownership of the dealership itself The same goes for your most valued employees Turnover is a concern at every level Giving your talented and productive GM and other key managers ownership in a reinsurance company will make them far less likely to listen to other offers They will be too busy watching their personal wealth grow along with their paychecks The effect can be felt throughout the dealership The rank and file feel confident knowing the dealer is smart enough to take their destiny in their own hands and the business is much more secure 3 REINSURANCE IS A LASTING GIFT When we are talking to dealers about succession and retirement planning we ask three questions What is your long term vision for the business Whom do you want to succeed you How much time do we have to work with Thats really all we need to know Unfortunately there is no way to plan for a dealers untimely death I have seen it happen too many times and it is always devastating But those dealers who leave behind reinsurance companies have essentially handed their surviving family members a priceless gift a financial asset separate from the dealership they can use to pay all kinds of expenses including estate taxes and to stay in business Very rarely is the family surprised to learn the dealer owned a reinsurance company But over and over again I find they are shocked at how easy it is to get their hands on that money and go about the business of settling the dealers estate and moving on with the dealerships and with their lives I would have given anything to have that type of security when my father passed I feel fortunate to have played a key role in the successful transfer of ownership and succession plans for so many of my dealer clients over the past two decades I hope you will take my advice to heart and give this matter your attention 20 auto dealer today Q4 2020 Dealer Ops Graye Wolfe is senior managing director for the Western U S for Portfolio a national provider of reinsurance programs and F I products the founder of Performance Improvement Concepts and a graduate of Northwood University and the NADA Dealer Candidate Academy If I have learned anything in my 48 years in the car business its that transfer of ownership is always fraught with challenges