What to Consider When Buying or Selling a Dealership

When selling or buying a dealership, it is always about the contract! A dealership, including stock, can easily cost several millions of dollars, and with your larger dealers, upwards of $20M. Further, there are always funny words used in the contract such as cyber cars, adjustments on compliance date, rego dates, OS Contracts, no redating parts stock etc. A solicitor that only “dabbles” in this area isn’t going to understand any of these terms.

Therefore, you need to engage a solicitor and accountant that specialises in automotive law.

Condition Precedents

A condition precedent, in its simplest meaning, is an event or condition that must either occur or be met prior to settlement or completion of the transaction. Naturally, as a purchaser, you want as many condition precedents listed in your contract as possible. Therefore, if you or the vendor does not meet a condition precedent, for example, obtaining a floor plan financier, then the contract will come to an end.

Conversely, as the vendor, you want as few condition precedents in a contract as possible. This way as soon as the contract is signed, the purchaser must perform the obligations under the contract, which generally means they must buy.

Having said the above, a common list of condition precedents are:

1. Obtaining board approval to sell or buy;
2. Manufacturer/franchisor consenting to grant a franchise agreement;
3. LMCT licence from BLA Victoria;
4. Floor plan finance for bailment of vehicles, unless you intend to fund the whole of stock of the vehicles by cash; and
5. Grant of new lease or assignment of lease.

This, of course, is a non-exhaustive list and condition precedents will depend on the parties’ circumstances.

Settlement and Adjustments

This is where many people go wrong. In turn, it could mean that the purchaser or vendor loses out on thousands or tens of thousands and in some circumstances, hundreds of thousands of dollars. Things like employment entitlements, holdback values and margin retentions, the age of Vehicles and Part stock often play a large part in the adjustments. However, what is often missed are the dealership warranties and other allowances that vendors provide for vehicle purchasers such as used car statutory warranty obligations, owner support contracts, dealership warranties and even things such as fuel vouchers! As a vendor, you want to keep your bonus entitlements after settlement too!

Common adjustments are:

1. Plant and equipment;
2. New vehicle stock based on age of stock and damage, if any;
3. Holdback, margin retentions or other manufacturer bonuses;
4. Demonstrator vehicles based on age of stock, mileage of stock and damage, if any;
5. Used vehicles based on a case by case basis;
6. Employment entitlements;
7. Lease adjustments;
8. Petroleum, oils and lubricants;
9. Parts stock based on age;
10. Work in progress;
11. Warranties and other allowances; and
12. Any other prepayments.

As seen above, purchasing a dealership can be a complicated transaction. Our automotive lawyers are able to simplify the process for you so that you can be best protected when selling or buying a dealership.

Whether you are buying or selling a dealership, TNS Lawyers have specialised knowledge in automotive law to assist in all aspects of the transaction. Please call us on +613 9052 3214 or email us at info@tnslawyers.com.au.