Automotive Buy Sell Report
June 15, 2016
By Joseph S. Aboyoun
Parts and accessories is an area that is often overlooked during a buy-sell transaction. While this may be considered a minor component of the deal, there is no reason to leave money on the table. A careful and comprehensive approach can avoid this result.
As with most areas of a buy-sell, the manner in which parts inventory should be approached depends on your side of the transaction. From the seller’s perspective, the desired result is to include as much of the inventory as possible in the deal and to obtain the optimum price.
There is little, if any, value in parts and accessories left behind. I have seen transactions where the seller has lost upwards of $40,000 to $50,000 on the parts inventory because of poor planning and drafting. This amount becomes exponentially higher if there are multiple dealerships involved in the deal. In many instances, the unpurchased parts are just given away to the buyer in the end.
On the buyer’s side, the goal is to acquire only the inventory necessary to satisfy the franchise requirements and to adequately stock for the ensuing operations of the store. For one reason or other, the seller may have excess inventory or a poor mix of inventory, including an exorbitant amount of slow moving parts. This can cost the buyer dearly if not address properly.
Factory Parts & Accessories
Notwithstanding the seller’s desire to include everything, in the case of factory parts and accessories, it is widely recognized that these should be limited to items that can be returned to the franchisor for full value. If, for any reason, the particular item is not "returnable", there is little or no appetite on the part of the buyer to purchase it, no matter whether the item has value or not.
The determination of what is returnable is based upon the criteria stated in the particular franchisor’s parts manual or policy. The most efficient approach in this regard is to utilize a qualified parts inventory company knowledgeable in the factory’s return requirements and its software.
The sales activity level of a particular item (even if returnable) can be a factor. The purchaser would prefer to limit the parts and accessories to fast-moving items. It is for this reason that an activity quantifier is many times included in the buy-sell agreement — e.g. only parts reflecting activity within the 12 month period prior to closing are eligible for purchase. This usually creates some push-back from the seller. In the end, a fair and equitable solution should be reached. It is not unusual for this item to be a trade-off for some other issues in the negotiations.
There are other eligibility aspects to be considered. These include the following:
- That the parts and accessories remain unopened, except in the case of multiple packaging;
- That the item is undamaged or unmarked (this could render an otherwise returnable item nonreturnable);
- That chemical-related items (e.g. batteries) might be excluded;
- That body parts might be excluded; and
- That used cores’ might be excluded.
Finally, it is not unusual for a parts provision to include a dollar limit on or, at least, an estimate of the factory parts and accessories to be included. This is particularly important if the selling dealer has been engaged in the wholesale parts business.
Outside Vendor Parts & Accessories
The inventory extends beyond items purchased from the franchisor. All parts and accessories departments include items purchased from other sources, including those approved by the franchisor and those not approved. Unapproved items can include special accessories, after-sale products, tires, rims and a variety of items that may prove necessary or profitable for that particular dealer.
While a buyer may be willing to purchase such items in the buy-sell, there are usually limitations, including the requirement that the item is merchantable and, perhaps, returnable to its supplier. Also, it is advisable for the buyer to establish a dollar limit. This could range typically from $5,000.00 to $25,000.00.
The price customarily paid for factory parts and accessories is the so-called "current catalog price" based upon the franchisor’s most recent parts and accessories catalog. Parts and accessories can also be priced based upon cost, but this becomes somewhat onerous to determine and, from the seller’s perspective, denies the seller any appreciation in the value of its parts and accessories. Cost, however, is the common price point for outside vendor parts and accessories.
Sometimes the issue of discounts comes into play in the parts and accessories negotiations. For example, if the seller acquired factory parts and accessories at a discount, the buyer may request a credit in that amount.
It is customary in a buy-sell for the parties to either designate a parts inventory company to handle the inventory of the parts and accessories, calculate the pricing, and issue a report. The company is either designated in the buy-sell agreement or mutually selected prior to closing. Customarily, the cost of said inventory is split equally by the parties.
Assignment of Return Rights
Since the buyer is acquiring the seller’s returnable parts and accessories, it is customary for the buy-sell agreement to include an assignment of the seller’s parts return right to the buyer. Most manufacturers will honor this assignment or have assignment rights.
Sometimes a buy-sell agreement will provide an escrow arrangement for the parts and accessories. Under this approach, it is contemplated that the inventory of the parts and accessories may not be completed by the closing date. The arrangement would typically provide for a percentage of the estimated parts and accessories (e.g. — 80%) to be paid at closing and the balance to be paid into escrow until the inventory report is issued.
In most cases, there is no reason why the inventory cannot be completed prior to closing, which should obviate the escrow. The escrow arrangement can create a post-closing dispute between the parties and should be avoided, where possible.