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Six Ways to Maximize the Market Value of Your Pre-Owned Inventory

Posted by Admin Posted on May 11 2017

By Leigh Ann Merwin, CPA

Vawter, Gammon, Norris & Company, PC

Dealerships that underestimate their pre-owned inventory often miss out on an opportunity with tremendous potential.  US personal consumption expenditures on used cars are forecasted to grow at an annual compounded rate of 4 percent between 2017 and 2021.  Whether loved or hated, used cars can generate profit and have an impact on every department.  Dealerships hoping to maximize the market value of their pre-owned inventory should concentrate on implementing or improving the following six processes.

1.  Effcient transition from trade line to front line.

The amount of time it takes to get a vehicle from the trade line to the front line is vital considering the used-car market is constantly declining.  The sooner you get the vehicle to the front line the higher market value you will receive.  A slow transition from trade line to front line could cost you hundreds or even thousands of dollars per unit.  All the departments should be motivated and work together to get the vehicles on the lot quickly.  Any departments who are holding up the process must be held accountable.

2.  Implement training programs.

Your sales and service team need proper training to effectively sell used vehicles, especially as technology advances make cars and trucks more complex.  Since used cars are unique, your sales team must have a grasp on your inventory and knowledge in selling used inventory.  Implementing training programs will set your salespeople up for success that will trickle through the entire dealership.  To motivate staff, consider offering incentives to complete training programs.

3.  Appoint a dedicated manager.

A used-car manager must know their inventory inside and out.  Without hesitation, they should know details about each unit such as where its parked, its color, whether it will start and have gas.  A desk-manager will not suffce.  Always prepared, a used-car manager is in the cars constantly rather than behind a desk.

4.  Leverage the web.

When shopping for a used-car, it is becoming increasingly common for shoppers to use the internet to do research and even purchase cars.  It is essential that your online used-car inventory

is stocked with high-quality photos and accurate descriptions.

5.  Use your best judgement.

There are many tools available to dealerships for used-cars. While these tools can be used to your advantage, they can also be counterproductive.  Use your best judgement to price and market the vehicle accordingly.

6.  Correct mistakes fast.

There will inevitably be bumps in the road.  When you make a mistake, correct it fast.  The more time that goes by, the harder it will be to sell the unit.  Today, dealerships are under pressure by increased competition, transparent pricing models and rising operational costs to sell more cars in less time in order to maintain profitability.

The professionals in our offce can help you maximize the market value of your pre-owned inventory.  Call us today.

Make Cybersecurity a Top Initiative in 2017

Posted by Admin Posted on Mar 28 2017

By Bishop Norris, Principal, CPA

Vawter, Gammon, Norris & Company, PC

One only needs to read the daily news to realize that hackers are getting better and

cybersecurity is more important than ever for dealerships.  Potential threats include theft of dealership property, customer service privacy, dealership reputation damage, financial penalties and lost customer trust.  Your cash and customer information are desirable targets from a cyber attacker’s perspective.  Even small or medium-sized dealerships who outsource their IT functions are targets for cyber fraud or external hacking.

Dealerships are vulnerable to both ransomware attacks and hijacking.  The FBI indicated there was over a 300% increase in ransomware attacks between 2015 and 2016.  Dealerships can no longer afford to overlook cybersecurity.  To protect yourself, it is essential to be proactive with cybersecurity measures. This article will explore how dealers can strengthen their cybersecurity initiatives.

Did you know?

  • According to the Graham Leach-Bliley Act (GLBA), dealerships are considered financial institutions when they collect and store consumer financial information in their databases. Therefore, dealers must follow the legislation’s requirements for securing client data.
  • When dealers provide financing services, personally identifiable financial information is collected from customers.  Under the Payment Card Industry’s Data Security Standard (PCI DSS), they are responsible for protecting cardholder data.
  • Under individual state breach notification laws, dealerships must notify government agencies and consumers when their data is compromised.

 

In July of 2016, the auto industry issued its first set of cybersecurity best practices. The Automotive Information Sharing and Analysis Center (AUTO-ISAC) identified seven key areas on which dealers should narrow their focus.

1. Governance

Consider aligning your cybersecurity program with the dealership’s broader mission and objectives of the dealership.  This strategic alliance can help adopt a culture of cybersecurity. Establishing processes to ensure compliance with regulations, internal policies, and external commitments is just one-way strong governance can help.

2. Risk Management

Identifying, categorizing and prioritizing potential cybersecurity threats can help protect critical assets.  Risk management can also help develop proactive measures for protecting these assets. Dealerships can implement risk management by having an offcial process for reporting risk to the appropriate person.

3. Security by Design

Integrating cybersecurity features, such as testing hardware and software vulnerability, during the product development process is another best practice.  The enterprise selling the car is accountable for design security rather than the dealership.

4. Threat Detection and Protection

Having processes in place for early detection empowers dealerships to decrease risk. Threat detection processes include raising awareness of suspicious activity and enabling preparedness and recovery.  Dealerships can detect threats using a defined process that aligns with their overall risk management procedures.

5. Incident Response

Dealerships should have a plan in place that clearly defines the protocol for responding to and recovering from a cybersecurity incident.  One aspect of your plan should be to identify an incident response team.  They would be responsible for coordinating the response.  Performing incident simulations periodically can be beneficial in measuring your response team’s preparedness.

6. Awareness and Training

Through training and awareness programs, dealerships can strengthen an employee’s understanding of cybersecurity.  Providing education to internal stakeholders on security awareness, roles and responsibilities is just one way to accomplish this.

7. Information Sharing and Collaboration

Engaging and collaborating with third parties such as peer organizations, suppliers, cybersecurity researchers, government agencies, and the Auto-ISAC can enhance cyber threat awareness within your dealership.

This article may serve as a reality check for many of you. Cybersecurity should not be overlooked, there is an established, well-organized and well-funded underground economy for cybercrimes.  While 100% protection is not possible, there are steps you can take now to prepare.

  • Identify what exactly you are protecting: customer database, personally identifiable information, employee records, financial information.
  • Implement security practices: Complex passwords, firewall, anti-malware, back up data, limit administrator rights.
  • Offer security training.
  • Perform security assessment.
  • Develop a response program.
  • Review (or get) cybersecurity insurance!

 

The professionals in our offce understand the threat cyber fraud poses to your dealership. Call us today to discuss how we can help you strengthen your cybersecurity initiatives.

n examination, call us today; we are ready to help.

Lessons Learned from Recent IRS Audits

Posted by Admin Posted on Feb 21 2017

By Robert Vawter, Principal, CPA

Vawter, Gammon, Norris & Company, PC

For the past few years, the media has been giving us a false sense of security as it relates to IRS audits.  You have likely heard about the cutbacks, lack of funding and expanding workload. You have likely also heard from friends and colleagues who’ve experienced audits about the inept agents that showed up at their doors.  It appears those days are behind us.  This article will examine the good and the bad based on recent IRS audits.

The Good: Agents are better trained.

They also are focused on larger dollar items. Rather than focusing on the timing of a deduction, agents are looking at real adjustments. They are under pressure to complete the audit as quickly as possible. If you give them reasonable support and back-up, they will likely clear the issue and move ahead.

The Bad: Agents are better trained.

Giving them insuffcient support, or no support, will result in a proposed adjustment that is not in your favor.  Their patience quickly deteriorates if you are slow to respond and their willingness to work with you decreases.

Three Areas to Which Auto Dealers Should Pay Attention

1.  Travel and Entertainment Expenses

Decreased audit activity has resulted in relaxed documentation practices especially regarding travel and entertainment expenses.  The agents want to see the business purpose of the expense. If you have decent documentation, a notation on the credit card statement may suffce.  Airline flights to Las Vegas or Florida will require more documentation. 

A receipt must confirm who, what, why and when.  If you are lucky, agents will accept the credit card statements with explanations of the expenses unless they suspect you to be abusive.  If you do not have the proper documentation, they have the authority to deny the deduction.

2.  Related Companies

Related companies are coming under more scrutiny.  Both auto dealerships and transactions are being questioned.  Recent abuses have the IRS looking closer at these entities.  Ensure that your related company ownership structure and business purpose are clearly defined and legitimate. Please do not put “avoiding income tax” on or in any corporate documents.  Avoiding income tax IS NOT a legitimate business purpose.

3.  Facility Upgrades

Facility upgrades and factory image programs are also on the target list.  Most, if not all, factory

reimbursements are taxable when earned.  While you may receive a hall pass for waiting until receipt of the funds, the money is taxable. 

Under personal property regulations finalized by the IRS last year, you have the ability to expense demolition costs and certain personal property additions to help generate a significant deduction or at least offset the reimbursement income. 

Don’t Forget...The IRS does not call.  If you receive an unexpected call from someone identifying themselves as an IRS agent, it is a scam.  All examinations or inquiries are communicated through the postal service.  When you receive a notice, handle it with priority. 

Ensure your 941’s reconcile to the W-2’s and W-3 each year.  Failure to do so creates issues with both the Social Security Administration and the IRS.  Keep detailed records for the 1099’s you issue.  If you receive a notification that federal identification numbers do not match 1099 information, be prepared to immediately withhold taxes from these vendors. 

Do not forget the Form 8300 for cash in excess of $10,000.  If examined, the agent will also ask to see your Form 8300 file.

An audit by the IRS can be a stressful, unpleasant experience.  Never go into the examination without tax advisor representation.  If you need help with an examination in progress or help preparing for an examination, call us today; we are ready to help.

Eight Trends Dealerships Must Not Ignore in 2017

Posted by Admin Posted on Jan 26 2017

By Bishop Norris, Principal, CPA

Vawter, Gammon, Norris & Company, PC

Last year, dealers experienced steady sales and profitability.  Solid economic growth, low interest rates, affordable gasoline, an improved job market and better incentives from auto manufacturers and dealers all contributed to 2016 numbers. 2017 is expected to bring similar or slightly lower sales volume.  This article will pinpoint which trends dealerships should be focused on in 2017.

1.  Consolidation

The dealer market is continuing to see consolidation.  Smaller groups and single point dealers are getting swallowed up by larger dealer groups and public chains that have the capital and resources to deal with the continual facility upgrade requirements by manufacturers.  Larger dealer groups have additional resources in the areas of internet sales and Business Development Centers.  These dealer groups have purchasing powers that allow their expense structure to be lower than smaller dealers.

Nontraditional dealership investors, such as hedge funds, family offces, and Buffet type entities will continue their acquisition activity.  These groups have enjoyed the returns generated from their dealership portfolios.

2. Internet Sales

The advent of new technology in the automotive industry will change traditional commission structures.  For instance, the role of a salesperson is evolving.  Business development centers are now doing the heavy lifting, often negotiating deals with customers before they even arrive to the dealership.  Many customers no longer test drive the vehicle.  Sales leads generated from the web will continue to grow and dealers that are not proficient in closing these leads can expect sales declines.  Competency in this area will be critical to the long-term viability of smaller stores.

3.  Finance and Insurance

The F & I Department is the key to achieving any profitability in the new vehicle department.  It is also a critical element of the used vehicle department.  Dealers that are not proficient in this area will struggle to survive.

4.  Stair-step Program Incentives

With a projected decline for 2017 sales, stair-step programs will continue to grow.  A survey by the National Automobile Dealers Association (NADA) found that 64 percent of dealers who responded dislike stair-step incentives.  Motivated by an attractive volume based bonus, large dealers will generously slash prices in an effort to meet tiered sales goals that progressively get higher.  Small market dealers cannot compete with these programs; these programs are disastrous for local retail markets.

5.  Aging Workforce

With more baby boomers staying in the workforce longer, employers are facing challenges in dealing with a generational divide.  By 2019, over 40% of Americans aged 55+ will be employed, making up over 25% of the U.S. labor force.  Understanding technology is critical to the success of workers in dealerships, and older employees are lacking in this area.  Dealers will need to have a balance of experienced workers and younger employees with superior technology skills.  Technology is ever evolving in this industry and employees will need continual training in this area.  Employees that do not adapt to technology advances will no longer be productive.

6.  Body Shops

The service department in the automotive industry is often overlooked in terms of profitability. At some point, vehicle sales will slow and a strong back end of the store will carry a dealership in times of lower vehicle sales.  In the evolving marketplace, consumers are turning to ealerships not only for the initial purchase of a vehicle, but also for routine maintenance throughout its life cycle.  Thus, it is important that growing the service department becomes part of every dealership’s business development plan.  With more vehicles crowding roadways, the demand for repair and replacement services is expected to rise, which is why many dealerships are finding body shops an attractive and profitable addition to their service offerings.  If you have suitable space and manpower you may consider participating in this 50-billion-dollar business.

Opening a body shop is also a great way to retain customers through building stronger connections.  It is important to remember – it is not only about selling cars; it is also about retaining business and this can certainly be done through the service department.  Dealers with their own body shop have a significant advantage in reconditioning their used vehicle inventories.

7.  Succession

With more than 10,000 people a day turning 65 and consolidation happening in the marketplace, having a proactive plan for your dealership’s succession plan is critical.  It is important to have a formal and documented plan in place whether you plan to transition ownership internally or externally.  Auto dealers have unique considerations for succession planning, therefore it is important to understand all the factors and plan.

8.  Cyber Security

One only needs to read the daily news to realize that hackers are getting better and cybersecurity is more important than ever for dealerships.  Potential threats include theft of dealership property, customer privacy and dealership reputation.  Your cash and customer information are desirable targets from a cyber-attacker’s perspective.  To protect yourself, it is essential to be proactive with cybersecurity measures.  Dealers should be looking at their general IT environment, training employees on cyber threats, how they use online banking and more.

Regardless of the state of the economy, dealerships that produce consistent results are those that manage their dealerships effectively and actively seek out opportunities for growth.

The professionals at Vawter, Gammon, Norris and Company, P.C. can answer any questions you may have about the trends covered in this article and how they will impact your business.  Call us today.

Vawter Gammon Norris & Company, P.C. is a founding member of The National Alliance of Auto Dealer Advisors, a nationwide network of 11 of the most recognized and trusted accounting and business consulting firms who have pooled their resources to provide their dealership clients with the local, national and international perspective needed to prosper. Each of our member firms specialize in providing professional services to dealerships. Collectively our members service more than 1,000 dealers and related entities across the nation.

Preparing Your Business for New Filing Deadlines

Posted by Admin Posted on Dec 29 2016

By Von Gammon, Principal, CPA

Vawter, Gammon, Norris & Company, PC

A reminder to employers and small businesses of the new January 31 filing deadline for Form W-2.

A new federal law, aimed at making it easier for the IRS to detect and prevent refund fraud, will

accelerate by a month the W-2 filing deadline for employers from February 28 to January 31.

The Protecting Americans from Tax Hikes (PATH) Act, enacted last December, includes a new requirement for employers.  They are now required to file their copies of Form W-2, submitted to the Social Security Administration, by January 31.  The new January 31 filing deadline also applies to certain Forms 1099-MISC reporting nonemployee compensation such as payments to independent contractors.  As it relates to Form 1099-MISC, the new filing deadline will only impact filers that report nonemployee compensation payments in box 7.

In the past, employers typically had until the end of February, if filing on paper, or the end of March, if filing electronically, to submit their copies of these forms. Also, there are changes in requesting an extension to file the Form W-2.  Only one 30-day extension to file Form W-2 is available, and this extension is not automatic.  If an extension is needed, a Form 8809 Application for Extension of Time to File Information Returns must be completed as soon as you know an extension is necessary but no later than by January 31.

The new accelerated deadline is intended to help the IRS improve its efforts to spot errors on taxpayer filed returns.  Receiving W-2s and 1099s earlier will make it easier for the IRS to verify the legitimacy of tax returns and properly issue refunds to taxpayers eligible to receive them. According to the IRS, it will make it easier to release tax refunds more quickly.

The January 31 deadline remains unchanged and has long applied to employers furnishing copies of these forms to their employees.

We anticipate the new deadline will increase your businesses workload.  To minimize stress, we recommend the following steps:

  • Verify your employee filing status and confirm their mailing addresses before December 31, 2016.
  • Verify form W-9 information (for your 1099-Misc contractors) is completely up to date and accurate.
  • Collect all the necessary information to ensure your forms are “good-to-go” on or about Monday, January 2, 2017.

The professionals at Vawter, Gammon, Norris and Company, P.C. can answer any questions you may have about the new filing deadlines and how they will impact your business.  Call us today.

Proposed Regulations to Limit Valuation Discount

Posted by Admin Posted on Nov 29 2016

By Von Gammon, Principal, CPA

Vawter, Gammon, Norris & Company, PC

New regulations proposed by the IRS would significantly impact estate planning for family controlled entities.  The proposed regulations would significantly impact families who

often utilize valuation discounts to minimize estate and gift tax burdens.  If passed, the new regulations would make it diffcult for business owners to avoid paying gift and estate taxes when transferring assets to successors.

Under the current tax rules, it is typical for a family member to transfer a minority interest in a private family business and to receive a combined discount of up to 20% – 35% on the value of the business.  These discounts are typically as follows:

Lack of Marketability – This discount reflects the fact that an owner of a privately held business cannot sell their interest easily. If you own General Electric common stock, you can sell the shares easily through a brokerage account. If you own 5% of a family-owned automobile dealership, there are significantly fewer potential buyers; and the process will take months, at a minimum, as such a discount is warranted.  Usually the lack of marketability discount is in the 10-25% range.

Minority Interest Discount – This discount is due to having less than 50% ownership in the company and lacking control.  Usually the minority interest discount is in the 10-20% range.

Under the proposed regulations, the IRS would curtail significantly the use of valuation discounts when the “family” remains in control.  A family includes ancestors, descendants, brothers, sisters and spouses.  If the family retains at least 50% ownership of the entity, valuation discounts will be limited.

Next Steps

As of now, these new regulations are in proposed format.  However, the IRS has indicated that this is a high priority item for them; and they are looking to finalize the regulations by early 2017.  The proposed regulations will not go into effect until the IRS publishes its final regulations.  Public comments were due by November 2, 2016.  These

comments will be reviewed before the public hearing scheduled for December 1, 2016.  If passed, we anticipate the changes to take effect in early 2017.

If you are considering making gifts or transfers, we suggest making the transfers quickly before the proposed regulations are finalized.  Call us today to discuss the steps that need to be taken before the end of the year.  We will continue to monitor the status of these regulations and keep you apprised.

Contact any member of the team at Vawter, Gammon, Norris and Company, P.C. for more information on making gifts or transfers.

2016 Path Act Delivers Significant Tax Savings for Dealerships

Posted by Admin Posted on Oct 27 2016

By Von Gammon, Principal, CPA

Vawter, Gammon, Norris & Company, PC

If you are a real property owner, lessor, or lessee, or an advisor to such, you know that there are a myriad of property classifications which offer varying tax depreciation benefits that could create significant tax savings.  The PATH Act of 2015 added another property classification which has the potential for significant depreciation benefits.  However, before we get to this new category, let’s review the steps in analyzing how to depreciate improvements to a building.

  1. Determine who the tax owner of the property is with regard to leased property. Only the tax owner can claim depreciation deductions.
  2. Review the nature of the improvements to determine if some or all would be eligible for expensing under the Repair Regulations.
  3. Consider a cost segregation study to break out any Section 1245 assets eligible for shorter depreciation lives, generally five and seven years.  Furthermore, a cost segregation study will also determine the amount of improvements eligible for the various real property categories discussed below.
  4. Determine which capitalized real property improvements are eligible for the categories offering 15-year life, bonus depreciation and/or Section 179 expensing opportunities. (i.e. Qualified Property)

The qualified improvement categories that were available prior to 2016 included:

  • Qualified Leasehold Improvement Property,
  • Qualified Retail Improvement Property, or
  • Qualified Restaurant Property.

Each of these has unique eligibility criteria and depreciation provisions, which were made permanent by the PATH Act, and should be analyzed carefully.

The new category for 2016 is simply known as Qualified Improvement Property (QIP).  It is defined as any improvement to an interior portion of a building that is nonresidential real property. A QIP includes a variety of changes or upgrades including improvements to electrical, plumbing or lighting, new drop ceiling or tile flooring to name just a few.  This improvement must be placed in service after the date such building was first placed in service.  It should be noted that, unlike the definition of Qualified Leasehold Improvement Property, QIP is not subject to a lease between nonrelated parties and there is no requirement that the building be greater than three years old.  However, similar to Qualified Leasehold Improvement Property, QIP excludes the enlargement of the building, elevators, escalators and internal structural framework.

QIP is a newly-defined category that is eligible for bonus depreciation.  However, it retains a 39-year recovery period.  Therefore, generally it will still be more advantageous to first classify qualifying property as Qualified Leasehold Improvement Property, Qualified Retail Improvement Property, or Qualified Restaurant Property.  Then remaining QIP that doesn’t “fit” anywhere else, will have a 39-year recovery period but be eligible for bonus depreciation. Below is an example of the potential tax benefit:

A business decides to undergo a renovation project of its facilities which are completed on June 30, 2016.  After going through the four steps above, it is determined that $100,000 of the improvements are identified as QIP that are not classified as any other type of QualifiedProperty.  Therefore, this property would be eligible for 50% bonus depreciation of $50,000 and 39-year MACRS depreciation of $700 on the remaining basis after bonus, for a total first year depreciation deduction of $50,700.  In contrast, without this new classification of Qualified Property, all $100,000 would be subject to 39-year MACRS for a deduction of $1,400.  At an effective tax rate of 40%, the additional first year deduction of $49,300 yields a tax savings of almost $20,000.

Therefore, any significant improvements in 2016 and beyond should be analyzed to determine if they are eligible for the new QIP classification. 

Is your dealership planning to make any improvements?  Contact any member of the team at Vawter, Gammon, Norris and Company, P.C. to see if your dealership qualifies for the new QIP classification.

TAX CONSIDERATIONS FOR BUYING OR SELLING A DEALERSHIP
Considerations for an Outright Sale
(Part 3 of 3)

Posted by Admin Posted on Sept 29 2016

By Robert Vawter, Principal, CPA

Vawter, Gammon, Norris & Company, PC

In the third and final installment of our series on Tax Considerations for Buying or Selling a

Dealership, we will focus on the seller.  The basics are the same whether you are selling to a current employee, a family member or a white knight coming to save the day.  We will first address the tax considerations and then expand to more general considerations.

Regardless how you choose to sell your dealership, the biggest obstacle to overcome is the mental challenge you will be facing.  As the Chief, the Big Cheese, the Top Dog, or the Queen Bee, you will now be sharing the spotlight or fading into the sunset.  A successful sale requires that you start preparing now for this change.

There are two ways to sell your store.  You can sell over time or sell it all now.  Selling over time presents its own particular situations, a subject which we plan to address in the near future.  In this article, we will focus on the outright sale.  Below are 9 considerations that should be top of mind in an outright sale of your dealership.

  1. Focus on net, after tax dollars. Oftentimes, sellers spend too much time focused on the structure or sale price and end up losing money. Focusing on structure, stock sale or asset sale alone may not produce the most money. For example, in a stock sale, the buyer will want to protect themselves and record liabilities for vacation, future chargebacks or future obligations. These liabilities reduce the net worth of the company and reduce your proceeds. Instead, you should focus on the net, after tax dollars, that will be in your pocket.
  2. Long-term capital gains are usually better than ordinary income. In most cases having proceeds that generate long-term capital gains (LTCG) is better than having proceeds that generate ordinary income. LTCG can be generated from the sale of stock, the sale of goodwill/blue sky, the sale of personal goodwill or the sale of real estate.
  3. Be mindful of the structure for additional income. Proceeds categorized as consulting fees will subject you not only to ordinary income but also to self-employment taxes. Non-compete fees are not subject to self-employment tax but they are taxable as ordinary income.
  4. How you finance the sale dictates how the proceeds will be taxed. If you finance part of the proceeds, the amounts received are taxable when cash is received and are based on the asset sold. If the goodwill is financed, the future proceeds will be LTCGs. If a non-compete is paid over a period of time, the future proceeds are ordinary income.
  5. When to liquidate the company in a sale. In many cases the liquidation of the company before the end of the taxable year may yield a significant tax benefit. Depending on your basis in the company, you may be able to offset part of your LTCG. If you acquired ownership through an equity purchase, pay particular attention to this item.
  6. Goodwill you acquired can offset taxable income. Do not forget that goodwill you acquired can be used to reduce the gain on the goodwill you sell. Remember, you have amortized your goodwill so there may be a difference between the “book” gain and the taxable gain.
  7. Consider terminating your LIFO election. LIFO will be recaptured when you sell your inventory. These recaptured reserves will be taxed as ordinary income. If you are seriously considering selling your store, it may be a good time to terminate your LIFO election and spread the tax on the reserves over a period of years.
  8. Consider when to take trade discounts. rade Discounts (interest credits, advertising credits and similar factory programs) are used to offset the difference between the flooring amount and the price paid by the buyer. If you have not elected this deferral, you will have a significant deduction when you sell your inventory. But why not take that deduction now?
  9. Considerations for real estate. If you own real estate, you need to decide if you want to be a landlord, to exchange for another property or cash out. Exchanging, commonly referred to as a 1031 exchange, offers the possibility of deferring taxable gains to a future sale. Carefully following the requirements for this structure is paramount. Being a landlord has both advantages and disadvantages. Cashing out probably will result in three different tax structures. Part will be long-term capital gains, part will be ordinary income and part will be a hybrid rate.& We will save the in-depth discussion on real estate taxation for a future article.

  10. Depending on your individual situation and family structure, there may be other alternatives to be considered that generate ways to reduce income taxes.  These are too numerous and individualized to detail in this short newsletter.

    Other Items to Consider

    Beyond tax considerations, it is important you understand why you are entering this transaction. Deals often fall apart because the seller hasn’t thought through some of these things. Here are some of the most common items we believe a seller should be thinking about.

    1316 Hardwood Trail Cordova, TN 38016

    • How will your family feel?  Have you addressed your family members that will not have the opportunity to be owners?  Ensure these conversations happen before you progress too far with a buyer.
    • Obtain factory approval.  Before getting too involved in the deal with a potential buyer, do a little investigative work.  Can the buyer be approved by the factory?  Do they have the financial ability to pay for the purchase?  You do not want to spend time and money negotiating with someone who is unable to complete the transaction.
    • Plan for transition expenses and time.  Just because the store has sold, you will need to plan for months of activity to wind-down the company.  Receivables need to be collected, vendors need to be paid, final sales and payroll tax returns need to be filed, W-2s will need to be prepared at year end and on and on.  It is best that you maintain the DMS computer and hire your controller to handle ongoing activity.  Also, it is typical for the sale agreement to have a mutual assistance clause; and thirty to ninety days will not be enough time to liquidate the company.
    • How will employees be transitioned?  How do I protect my key employees?  This will be a major transition for many of your employees also.  Long-term employees may have a diffcult time adapting to a new owner.  Is this of concern to you or do you want to pay them a bonus as a thank you and let them be on their own?
    • Adjust your personal living budgets.  Prepare for an increase in your monthly living costs. Gas, car insurance, health insurance and such will no longer be provided by the dealership. Acquaint yourself with titling and registration requirements.  Most of you will be surprised with the requirements to renew your car tags.
    • Plan for your new normal.  What are your hobbies?  You will need something to occupy your time. So many people you encounter on a daily basis who are considered friends will no longer be part of your daily routine.  You will lose contact with many and your circle of influence will shrink. 

     

    When entering into your sale, try to treat this as just another negotiation.  Everything is on the table and you need to look for ways to make this as simple and easy as possible for you. 

    Selling your store will be a major life change.  Knowing why you are entering this process is key to a smoother transition.  Making preparations before the closing date will also aid in a smoother transition for you and your family.  We hope this article series will provoke thoughts and questions as you begin the process of acquiring a dealership.  Our professionals are available to assist you. Please contact our offce for more information.

TAX CONSIDERATIONS FOR BUYING OR SELLING A DEALERSHIP
5 Commonly Asked Questions About Buying-In to a Dealership
(Part 2 of 3)

Posted by Admin Posted on Aug 25 2016

By Robert Vawter, Principal, CPA

Vawter, Gammon, Norris & Company, PC

Many dealers are considering buy-ins as part of their exit strategy.  For anyone considering a buy-in, we are continuing our buy/sell series with the 5 most frequently asked questions about buying into a dealership.  We will first address the tax considerations and ten expand to more general considerations.

Tax Considerations

Q:  Who pays the income tax?

A:  A C corporation pays tax on its taxable income.  For S corporations, partnerships and, typically, LLCs (flow through entities), income tax is paid by the equity owner. Even if the company makes a distribution from a flow through entity, the equity owner is responsible for income taxes. K-1 forms are a tax form that communicates how individuals report the entity’s information on their income tax returns. 

Depending on the entity type (partnerships and LLCs), you cease to be an employee for tax purpose. You will be required to make estimated payments and incur self-employment taxes.

Q:  What is LIFO?

A:  For simplicity, we will leave this discussion to a simple statement: it is a deferral of taxable income.  However, there will probably be a future income tax liability on the accumulated reserves that exist at the date of your buy-in and on the annual changes after the buy-in.

Q:  Why is there a difference between a book income and taxable income?

A:  Be prepared for a difference between operating income and taxable income. Accelerated depreciation on equipment, furniture, LIFO, changes in estimated reserves and meals limitations are just some of the items that create the differences between the dealer statement and the tax returns.

Q:  How are distributions taxed?

A:  C Corporation distributions are taxable to the shareholder when paid. Flow-through entity distributions are typically not taxable.

Q:  Are you purchasing equity or is it part of your compensation?

A:  If you are paid/given ownership as a reward for improving a store, for a percentage of the profits or such, the fair market value of the equity is taxable income in the year received. It is also subject to self-employment (FICA and Medicare) tax.

General Considerations

Do not let the excitement of becoming an owner overshadow sound business judgement. You will be entering a “marriage” that is much easier to get in than to get out. You will be putting most if not all of your net worth at risk and only owning a minority position in the business. Even more important is to know that you will not have voting control.

Understanding what happens if the store is successful, maintains status quo or is not successful is most important  BEFORE signing an agreement. Congratulations on your opportunity, but go into this transaction with your eyes open.

When buying into a dealership, make sure you understand what you are purchasing and how the business operates.  This will help minimize conflicts after becoming the new owner. Below are the top items you should understand or address before the buy-in.

  • Obtain a full understanding of the assets and liabilities and their effect on future cash flow.
  • Agree to the timing and determination of distributions.
  • Agree to compensation and benefits for yourself, the current equity owners and family members.
  • Agree to facility rental terms and how future major renovations or factory required upgrades are to be handled.
  • Obtain an understanding of related company transactions and loan guarantees.
  • Address future expansion that affects the current company or your involvement with new stores.
  • Determine what “toys” are owned and how costs are allocated.
  • Agree to F&I product pricing and who receives over-remits.
  • Agree to reinsurance company ownership.
  • Address lawsuits resulting from pre buy-in actions.
  • This transaction requires factory approval before being completed.  Determine what your status will be with the manufacturer.r,
  • Obtain an understanding of how income will be distributed.
  • Obtain an understanding of how losses will be treated and how recapitalization will be made.
  • Agree to the terms if you cannot get along.  Will your ownership be repurchased and at what price?
  • Agree to an annual determination of value.
  • Address the situation in the event of death, disability or divorce.
  • Obtain an understanding in the event of a sale of the store’s assets on your portion of proceeds allocated to personal goodwill, non-compete or other off-book items.

 

While this is a long list of items to consider, it is not all encompassing. Rather, it will start the discussion to help avoid future problems.  It is highly probable you are entering into a business transaction with an honest and fair individual.  But sometimes things do not go as planned.  These suggestions are to help protect you.

The final article in this series will address considerations for the seller during a buy-in transaction. There are a few quirky tax issues that need to be understood before you sell a portion of your company. If you are actively selling today and cannot wait for the final article, contact us today.

TAX CONSIDERATIONS FOR BUYING OR SELLING A DEALERSHIP
(Part 1 of 3)

Posted by Admin Posted on July 28 2016

By Robert Vawter, Principal, CPA

Vawter, Gammon, Norris & Company, PC

Dealership franchises cannot be bought or sold.  However, that does not change the fact that stores are bought and sold on a regular basis.  With today’s record multiples for dealership operations, we want to provide you with a few thoughts if you are actively participating in the buy/sell market. 

If you are selling, are you selling to an employee over time or selling out completely?  If you are buying, are you doing a buy-in over time or are you buying outright?  Each of these scenarios creates its own set of challenges and questions.  Your individual position in a transaction changes everything.

This month we will focus on the buyer side of the transaction.  Over the next two months, we will focus on the seller side.  Our discussions are not intended to be all inclusive but to assist you in the process of making informed decisions and avoiding major mistakes.

There are two basic ways to acquire a dealership.  You can purchase the assets (new, used and parts inventories, fixed assets and goodwill) or you can purchase the owner’s stock/entity.  While the largest majority of transactions are asset deals, do not rule out an entity purchase without an in-depth analysis of the transaction.

The chart at then end of this article gives you the tax treatment for the most common categories purchased in a transaction.  It shows the differences between an entity purchase and an asset purchase. 

There are many issues other than taxes to be considered when acquiring a dealership.  Several are listed below:

  • Use an attorney experienced in dealership transactions. 
  • Develop a due diligence plan.
  • Do not put too much reliance on the dealer’s monthly statement.  Reconcile the statement to the tax return to gain comfort with the historical results of operations.
  • Obtain market effectiveness and units in operation data to determine any up-side potential of the target dealership.
  • Make all agreements contingent on manufacturer approval, including facility compliance with manufacturer image requirements.
  • Understand the process to be approved by the manufacturer(s) as a new dealer.
  • Determine working capital requirements, debt to equity limits, and sources of funds.
  • Specify the purchase price (or method to determine purchase price) for each category of assets purchased.
  • Limit assumed contracts to specified list.
  • Obtain proof that new vehicle inventory units have not been reported as sold to the manufacturer.
  • Obtain damage disclosure of any new inventory.
  • Determine what is to happen to the DMS of the selling dealer.
  • Determine that the non-compete of selling dealer includes not investing in a dealership and not hiring any employees.
  • Ensure the factory tool program is up to date and meets manufacturer standards.
  • Ensure all taxes are paid by the seller.  In certain states, the liability can be transferred to the buyer.
  • Allocate the goodwill individually if there are multiple franchises.
  • Allocate personal goodwill to individual franchises.
  • Close dealership the prior Saturday and Sunday if closing is scheduled for Monday.
  • Determine if there are any dealership obligations for employee benefits.
  • Determine if there are any dealership obligations for warranty programs, tires for life, maintenance programs that you need to consider.
  • Determine if this is an entity purchase where the considerations grow exponentially. 

The asset purchase agreement is your tool to detail the terms of the purchase.  It protects you, but it also obligates you to specific performance.  While we would all like a one-page agreement, be prepared for twenty-plus pages; then read them all and question everything you do not understand. 

We hope this article will provoke thoughts and questions as you begin the process of acquiring a dealership.  Whether it is your first acquisition or tenth, our professionals are available to assist you. Please contact our office for more information.

Are you selling?  Do you want to know how to improve your structure and help keep more of the dollars from the sale?  Our next issue will address the family or general manager buy-in.  Then, the final in this series will address the sale of the entire store.  If you are actively selling today and cannot wait for the articles, contact us now.

CYBERSECURITY - CAN YOU ANSWER THESE QUESTIONS?

Posted by Admin Posted on June 23 2016

By Bishop Norris, CPA, Partner

Vawter, Gammon, Norris & Company, PC

This article was inspired after a client experienced one of the new tricks that hackers are using to misappropriate funds…

The controller in a dealership received a legitimate looking email requesting that funds be transferred to a new personal bank account for the dealer. The reason given was that he was opening an account with a bank where he had just purchased a vacation home. So, on the surface, this made sense to the controller. As it turned out, a hacker had embedded himself in the dealership emails, learned the positions and habits of the key players, then sent a legitimate looking email from the dealer to the controller making the request. Fortunately, the funds were never released.

One only needs to read the daily news to realize that hackers are getting better and cybersecurity is more important than ever for dealerships. The story above describes a potential theft of dealership property, but customer privacy and your reputation are also at stake.

In light of this, here are some questions for consideration:

General IT Environment - Dealerships have IT support of some sort. The question is how much are you really getting? Does the support include anti-virus and malware protection updates, reliable back-up procedures, limited employee access to customer information? Are there restrictions on websites that can be visited? Do you employ “white hat” hacking to test security? If the dealership is hacked, do you have a response team and plan, and insurance to cover potential damages?  Are you releasing customer information to outside vendors? If so, how well protected are they from cyber-attacks?

Employee Training- Do your employees understand that you expect them to use best practices when using your IT resources; including not opening links from unknown senders, not storing customer information on desktops, password diligence and not responding to information requests from unsolicited emails? Have you instructed them to report viruses or computer performance issues?

Online Banking- Circling back to the opening story of this article, what safeguards are in place for internet banking? Is there dual control for online payments, meaning someone creates the transaction and another approves it (like co-signers on checks)? Are emails not accepted as approval for online payments by your employees without oral or text confirmation? Are bank accounts reconciled daily?  If not, is banking activity reviewed daily for potential misappropriation? Are you familiar with the safeguards that your bank provides to detect and prevent unauthorized payments?

If you have not visited these questions with your management team recently, you may want to. While having discussions with our clients about cybersecurity, it is not unusual for questions or weaknesses to emerge that require follow up. Cyber-attack threats are constantly changing, and your cash and customer information are desirable targets. That means it is more important than ever to be proactive with cybersecurity measures.

AM I REQUIRED TO HAVE A 401K AUDIT?

Posted by Admin Posted on May 31 2016

By John Gibbs, CPA

Vawter, Gammon, Norris & Company, PC

Am I required to have a 401k audit?  As the Plan Administrator of a retirement plan (401k), it is important to understand when a 401k audit is mandatory. 

While all qualified retirement plans must file Form 5500, only plans that are considered "large" plans need to submit an independent auditor’s report along with their Form 5500 filing.

So, what is considered a large plan?  It is solely dependent on the number of eligible participants  in the plan on the first day of the plan year.  Eligible participants are defined as those who have become eligible to participate, regardless of whether they have elected to participate.  It also includes retired, separated, or deceased participants who maintain an account balance in the plan.

In the Plan's inception year, if the number of eligible participants are 100 and greater, then it would be classified as a large plan and an audit would be required. If eligible participants are less than 100, it would be classified as a small plan and an audit would not required.

If you did not qualify as a large plan in the inception year, then in subsequent years the 80/120 rule applies.  This rule allows the plan to fluctuate between 80 and 120 eligible participants without changing the prior year's small plan classification; thus, not triggering an audit.  However, when eligible participants exceed 120, the plan would be considered a large plan and an audit would be required.

Once a plan has been classified as a large plan, then eligible participants must fall below 100 in order to revert back to a small plan status and not be required to undergo an audit.

If you have any questions on whether your retirement plan falls under the large plan or small plan category, please contact Bishop Norris or John Gibbs at vgncpa.com.

Rising Interest Rate Effect

Posted by Vawter, Gammon, Norris & Company, PC Posted on Mar 29 2016

We invited James Taylor, Managing Director for The Presidio Group, to submit this article. James addressed our group, the National Alliance of Auto Dealer Advisors (NAADA) at a recent meeting. If you have any questions regarding this article and would like to speak with James, please let us introduce you to him.
 

Much has been said in recent years about high dealership valuations. To illustrate the fleetingness of these historic times, we walk through the negative effect on dealership valuations in rising interest rate environments. The key drivers in decreased dealership valuations in an increasing rate environment are:

  1. higher financing cost and
  2. higher ROIC demanded by investors.

In this example, we use the U.S. Treasury Note’s 10-year yield (www.treasury.gov), which has averaged approximately 2.30% since May 1, 2015, and representative ROIC hurdles we have experienced by public and private strategic buyers.

First, we apply the 10-year risk-free return to a simplified dealership valuation. Then, we assume that the dealership generates $10 million in annual pre-tax profits.

Next, buyers would require a 20% annual return in today’s interest rate environment. We have assumed that this would result in a $100 million valuation to produce this 20% return.

We next analyze the effect of 2% and 5% increases in the 10-year Treasury yield to 4.30% and 7.30%. In the +2% scenario, a $100 million dollar investment would need to generate an additional $2 million in cash flow to compensate for the 2% risk-free rate increase.

As a result, the valuation for our business decreases 22% to $78 million from a 2% increase in interest rates. Similarly, a +5% scenario would drive the value of our dealership down by 42% to $58 million.

To further complicate the scenario, we all know that profits generally decrease in arising interest rate environment with pressures from tighter consumer credit and increased borrowing costs. We simply decreased profits to $9 million in a +2% interest rate environment and to $8 mil-lion in a +5% environment but realize that the pressure on profits could be more substantial.

We have enjoyed historic low rates since 2008, which hit a near 34-year low in January 2015. However, a 10-year Treasury of 4.30% was normal from 2004 to 2007 following the Dot.com bubble burst recovery and 7.30% was normal from 1994 to 1999. With the unemployment rate near 5% and in-creased inflation concerns, an increase in interest rates from the Federal Reserve is anticipated in the near-term.

This valuation analysis should not necessarily be viewed as a caution to acquisition. The most valuable dealerships are generally run by sophisticated owners who understand market timing and the business cycle as it relates to interest rates. As a result, premium dealerships are usually only sold in top markets with the highest valuations. Dealers that sell in lower valuation environments are often smaller and are forced to sell from overleverage or poor performance. In rising interest rate environments, sophisticated dealers that are larger and better capitalized use these down markets to opportunistically acquire and grow their businesses.

If you would like to discuss the interest rates discussed in this article, contact one of our professionals today.

Three Trends Dealerships Must Not Ignore in 2016

Posted by Robert Vawter Posted on Jan 26 2016

This year, dealers have experienced significant increases in both sales and profitability.  2015 numbers were at an all-time high, while 2016 is projected to set records before an estimated decline in 2017.

What should dealerships be focused on in 2016?

  1. 1: Mobile Devices

It’s no secret that mobile is hot.  A report by J.D. Power reveals that tablet research jumped 83% between 2012 and 2015, and the use of smartphones for research increased by 70%. Consumers are using their smartphones and tablets to conduct detailed research before making high involvement purchases, such as a vehicle.

This makes them better informed and empowered with information such as competitive vehicle pricing, detailed model information, dealer inventories and sales incentives.

Traditionally, a customer would make initial contact with a dealer the old-fashioned way by simply visiting their showroom.  However, it is becoming more common for shoppers to make initial contact with a dealership through a virtual medium such as a webpage, email interaction, online quote or social media channel.

Dealership owners are responding in kind by using mobile devices as a tool to help get in front of consumers. As a result, this is helping many increase their sales.

As dealers look to 2016, they should be considering how best to embrace the mobile marketplace to drive sales.

  1. 2: Dealership Acquisitions

Consolidation in the auto dealer industry is on the rise and has been for some time. As manufacturers make changes and existing dealership owners continue to retire, many dealers are looking to acquisition opportunities.

Berkshire Hathaway's acquisition in early 2015 of family-owned Van Tuyl Group, the fifth-largest US dealership chain, highlights growing consolidation in the industry.  The auto retailer, renamed Berkshire Hathaway Automotive, will serve as a platform for Berkshire Hathaway to purchase more dealerships in Van Tuyl’s established markets in the South and Midwest. Asbury Automotive Group, similar in size to Van Tuyl, has been snapping up small independent dealerships that are looking to cash out.

As the example above shows, smaller dealerships will cash out while mid-size dealerships will continue to maneuver for regional market share. Dealerships should expect this trend to gain speed in 2016.

  1. 3: Sales at a 10-Year High

According to data from Kelly Blue Book, Auto Dealers are expected to have sold 16.9 million vehicles in the United States in 2015.  This would put vehicle sales at the highest they have been in a decade.

The following factors can be attributed to the significant increase in sales:

  • ✓ Solid economic growth
  • ✓ Low interest rates
  • ✓ Low gasoline prices
  • ✓ Improved job market
  • ✓ Better incentives from auto manufacturers and dealers

 

Looking forward, Auto Dealers should consider allocating more money in their budgets toward advertising and marketing to attract customers and compete in an increasingly competitive marketplace.

What These Trends Mean for Dealers in 2016

2015 was a remarkably profitable year for most dealerships. But, as many dealerships have likely experienced, profitability will eventually decline.  The National Automobile Dealers Association predicts U.S. auto sales will come full circle, likely declining in 2017.  Auto Dealers should take note of the following factors which can attribute to an eventual decline in sales:  

  • ✓ Rising interest rates
  • ✓ Declining prices of used cars
  • ✓ Consumers holding on to cars longer

 

Regardless of the state of the economy, dealerships that produce consistent results are those that manage their dealerships effectively and actively seek out opportunities for growth.

If you would like to discuss the trends discussed in this article, contact one of our professionals today.

USED INVENTORY MANAGEMENT
You Can’t Control What You Can’t Track

Posted by Leigh Ann Merwin Posted on Nov 24 2015

The first question, do you have control of your used vehicle inventory or is it controlling you?  This is an age old problem for dealerships whether large or small.  Let’s take a step back to the basics of inventory management with a few questions to see if you are in control of your used vehicle inventory.  Always remember, “you can’t control what you can’t track”.

  1.  Is the age and valuation of your used inventory reviewed at least monthly to determine potential problems?
  2. Are your wholesale losses manageable month after month?
  3. Are wholesale units being identified at the time of appraisal and handled promptly?
  4. Are all retail units being reconditioned at the time the unit is stocked in and are the reconditioning costs being managed?
  5. Is used inventory being purchased based on what sells in your market and are the day’s supply of inventory being monitored on an ongoing basis?

 

Managing your used vehicle inventory effectively creates positive cash flow and is crucial to the success of the dealership.  If your answer to any of the five questions was no, this will create negative cash flow which effects the dealership as a whole especially if cash is being “held hostage” by aged units that do not qualify for floorplan due to age or value.  Take a step back and review your policies and procedures in place for your used vehicle inventory to ensure you are not being controlled but are in control.

 

401K Sponsor Responsibilities- Internal Controls

Posted by Bishop Norris, CPA Posted on July 27 2015

Consider this. You are opening a new dealership and, along with it, an operating bank account. Your bank is custodian of the funds. Your dealership personnel make deposits and write checks. Most likely you also have an outside CPA firm that goes through your books at least once a year. Even though you have a bank that holds your money and a CPA that probably looks at your cash to some degree each year, you establish internal controls for daily operations. You require two check signers, documentation to support checks being issued, and reconciliations to the bank statements. In other words, you implement internal controls to prevent or quickly detect mistakes and misuse or diversion of funds.

As a 401K sponsor the Department of Labor (DOL), the IRS and your plan participants expect no less. Once you decide to open a retirement plan, you are expected to protect the assets of the participants and adhere to the rules and guidelines that you have represented to them through your plan document. One way to accomplish this is to establish internal controls within your organization pertaining to your plan.

So, you ask, what internal controls should I be implementing?

A good first step is to know what parties are involved with your plan (the trustee, the third party administrator, the record keeper and the CPA firm if the plan is required to be audited). You should know what role each party plays. For example, what parties are involved in approving a participant loan?  More importantly you should know what roles they do not play and that you would be responsible to fill. If a problem arises down the road saying “I thought my trustee was handling that.” is not a good defense. You should know for sure. After all, the ultimate responsibility lies with you.

Here are some other internal control procedures that a plan sponsor is expected to implement:

    Compare deferral elections with amounts deducted from employee wages.

    Verify that new participants are indeed eligible.

    Verify that payroll deductions are deposited timely into the participant accounts.

    Verify eligibility and proper approval for plan distributions and loans to participants.

    Compare amounts being deducted and amounts credited to the participant’s account.

These are just a few.  More information may be found at www.irs.gov/Retirement-Plans or contact Bishop Norris or John Gibbs at vgncpa.com.

INCREASE SERVICE SALES FOR THE PRICE OF A QUARTER

Posted by Robert Vawter, Principal Posted on Apr 07 2015

INCREASE SERVICE SALES FOR THE PRICE OF A QUARTER

Most customers know that their tire tread depth should be at least to the top of Washington's head on the US quarter.  So give your service advisors a roll of quarters.   When the customer pulls their car into the service lane, require your advisor to walk around the vehicle and measure every tire.  Check the inside and outside wear.

If the tires are wearing evenly and of a good tread depth, give the customer the quarter along with a business card.

 If the tires are not wearing evenly, a rotation is needed.  Maybe even an alignment is needed.  All this while the customer sees the quarter test.

 If the tread depth is below the top of Washington's head, here is your opportunity to sell a set of tires and time to exam the brakes.  This is also a good time to educate your customers on the necessity of good tread depth.

Your customer will appreciate the attention.  They have seen this common test even if they do not understand the meaning.  You educate your customer in the products available, there is no reason for them to go to a tire store or anywhere else.

All of this for the price of a quarter.