DEALERSHIP INSIDER | June ‘12

HOW TO WIN OVER LENDERS

Not long ago, dealerships could pick from a large pool of banks that were eager to provide mortgages, credit lines, floor plans and other kinds of financing. This type of carte blanche abruptly halted when scandal struck the banking industry and recession hit the streets. With lenders still clutching their pocketbooks tightly these days, what can you do to loosen them up?

IMPRESSIVE NUMBERSFirst, up the ante by strengthening your balance sheet. Inventory is a prime source of collateral. You should have a car on the lot for each item on your floor plan loan. Some dealers keep a private stash of vehicles for their personal use or use their floor plan loan as a credit line — a major faux pas in the eyes of modern financiers.

Lenders also look at your days-in-inventory ratio. Order the bare minimum stock to keep yourself afloat and identify slow-moving vehicles. Discounts and auctions can help you move metal, if needed. Consider returning extraneous parts inventory to the manufacturer; some offer refunds (or at least credits).

Then, turn to your income statement. Lenders like profitable businesses. Strong inventory management can help you lower variable costs, such as storage and interest expenses. Fixed expenses — including equipment leases and payroll — should also be pared back.

For example, lenders prefer a lean high-energy staff that’s loyal, well trained and generously rewarded. Temps and outside consultants can be a low-cost way to fill any gaps in your staffing.

PREPAREDNESSBefore meeting with your lender, assemble a package of relevant documents, including three years of financial statements and tax returns, detailed lists of used and new vehicles, business plans, and the dealer-owner’s personal financial statements.

Learn to speak the lender’s language. Know what common terms — such as “debt coverage,” “accounting payback,” and “debt-to-equity ratio” — mean, as well as the adjustments the lender customarily makes when evaluating your financial statements.

Debt coverage, for example, is the ratio of cash available for debt servicing to interest, principal and lease payments. The ratio’s numerator equals net income plus amortization and depreciation expense. Some bankers also adjust for owners’ compensation and other discretionary expenses. The ratio’s denominator is the sum of principal, interest and lease payments.

THE LITTLE THINGSOther ways to “wow” your lender include closing your books by the 15th of the following month, preparing weekly cash budgets and strictly adhering to loan covenants, the financial statement benchmarks set forth in your loan agreement. The bank might require a minimum current ratio (current assets divided by current liabilities) of 1:2, for example.

Dealers who violate loan covenants automatically default on their loans, unless the bank waives its right to call the loan. If you’re in violation of a loan covenant, auditors won’t sign off on your financial statements until they’ve received the bank’s waiver.

ENDURING, OPEN RAPPORTA long-term banking relationship can win you points with your lender. If you’ve stuck by your bank in good times and bad, chances are that they’ll do the same, especially if you’ve always made timely loan payments. If you’ve switched banks in search of greener pastures in the last few years, you may be out in the cold if you need to take on more debt — or when it’s time to renew your existing loans.

Communication is paramount to building your lender’s trust. Lenders reward borrowers who maintain open, honest lines of communication. Never hide deteriorating financial performance. Experienced lenders have been around the block before and can smell “cooked books.” STANDOUT PERFORMANCEAlthough dealerships may no longer be the “apple of lenders’ eyes,” it doesn’t have to be that way for you. By implementing a few simple business improvements and planning ahead, your dealership will stand out among other borrowers.

F&I PRODUCTS: ARE YOU PAVING YOUR SERVICE LANES WITH PROMISE?

A growing number of owners are finding unconventional ways to put their dealerships’ service lanes to better use by expanding product lines beyond batteries and floor mats. If your store hasn’t tried selling service contracts and other F&I products while customers are in your shop, you may be missing some golden opportunities.

WHY TAKE ON F&I PRODUCTS?Although new car sales have plunged during the last few years, core customers continue to drive to their dealerships’ service lanes for scheduled maintenance and repairs. As a result, some stores are putting new emphasis on their service area by extending the hours or adding a shift.

Dealerships also are finding that it’s easier to sell F&I products at the time of a costly repair, or when the customers’ warranties are about to expire, than it was at the sales closing. As a result, more service writers are being trained to talk about the value of service contracts and prepaid maintenance plans and how to close them.

“What do I have to gain?” you may ask. Consider this: If your service area sells only two service contracts per week for the next year, that would be more than 100 additional customers a year who would be tied to your dealership for the next, say, four years. And keep in mind that the first 180 days after new- or used-car delivery is generally considered the most critical time for a service area to establish a relationship with customers. It’s that relationship that keeps them loyal to you.

WHO’S THE TARGET CUSTOMER?Take Shirley Smith and her recent-model SUV. The service writer, armed with Shirley’s customer information, asks her if she knows that her warranty is going to expire in six weeks. Shirley becomes more interested in purchasing a service contract than she was when she first bought her new vehicle.

Or using a different technique, the service writer asks Shirley to figure out when her 36-month warranty will end. Getting customers to realize on their own what they’ll be paying for service can be a powerful tool. This is also a good time to point out that many auto parts aren’t repairable today, and then provide some pricing examples for replacement parts. The customer will likely see the wisdom of a service contract.

Or consider Sam, who wasn’t interested in tire and wheel protection when he bought his 4-year-old sedan from you. But he’s changed his mind now that he’s paying for his first tire repair. Keep in mind that tire and wheel protection is one of the best selling F&I products, along with service contracts and prepaid maintenance plans, guaranteed asset protection, insurance, and security products, according to AutoNation, one of the country’s largest dealership groups.

WHAT ELSE SHOULD YOU CONSIDER?The service writer can use the dealership’s customer relationship management (CRM) software to find out when your customers’ warranties are up and prepare for their next visit. (Service might also send an e-mail notice before the customer’s next visit.) Preparation also includes making sure that your service area has up-to-date brochures on the F&I products you’re promoting.

A few years ago, when selling these products in the service lane was new, the service writer would get the customer interested in the product and then walk him or her to the F&I department, where an F&I person would close the sale. But these days well-trained service writers usually handle the promotion and sale in the service area, either in the customers’ waiting room or by the service writer’s station. This quickens the process for the time-conscious customer — and, because the sale will be recorded to the service area, heightens service manager motivation.

The service manager should coordinate training, typically by the store’s F&I manager, a contract provider or another vendor. The service manager also should set sales goals and evaluate individual performance.

GIVE CUSTOMERS AN INCENTIVE

It’s a sad fact that many customers perceive dealership service pricing to be higher than pricing at an independent garage. However, providing value-added products, such as service contracts and parts warranties, can sharpen your competitive edge for the life of your customers’ cars.GUARDING AGAINST FRAUDSome less-than-honest service writers might consider selling a service contract to a customer whose vehicle already needs work. Let’s say that the customer needs $4,000 worth of repairs. The service writer convinces the customer to buy a service contract for $2,000 but advises the customer to wait several weeks before getting the work done. As a result, the customer saves $2,000, the employee gets a glowing evaluation and a wink — and the dealership is out $2,000.

To guard against such fraud, you should:

• Charge a high deductible if the customer brings in his car for repairs during the initial life of the contract, or

• Include in the contract a rule that the customer can’t file a claim for the first 90 days.

You certainly don’t want to lose money on the F&I products you sell in the service lane, so make sure that internal controls are in place.

DEALERSHIP INSIDER | June ‘12

YOUR NEXT WARRANTY AUDIT: BE PREPARED!

Manufacturers conduct periodic warranty audits to ensure dealers follow their reimbursement protocol. Audits also have become more frequent as manufacturers seek ways to compensate for more dealer-friendly warranty laws that some states have passed to increase warranty reimbursement rates and eliminate manufacturer surcharges. Every dealer gets audited at least once, so it’s best to be prepared.

BEST DEFENSE IS STRONG OFFENSENo one likes dealing with warranty red tape. But pushing this administrative task to the lowest level of the priority totem pole might decrease the number of repairs that qualify as warrantable — and increase your chances of being audited.

Assign an experienced technical individual to handle warranty claims from start to finish. Train this warranty administrator on how to effectively process claims using your manufacturer’s online warranty systems. These systems often are DOS-based and require the use of dozens of parts and labor codes.

Your warranty administrator also should be familiar with all current technician service bulletins (TSBs), because they recommend service solutions for common customer complaints and address whether the fixes are warrantable. TSBs are available through each manufacturer’s service portal.

Service technicians also require training in warranty protocol, including how to write a comprehensive customer concern description and how to split time between warranty and other repair work. You’re more likely to be audited if you submit more claims per vehicle serviced (CPVS) — or if your technicians spend more time completing the work — than other dealers.

Examples of paperwork blunders in protocol include missing customer signatures, mileage readings that end in 000, and ambiguous customer concern descriptions. Verbiage that implies wear and tear — such as “bent, cut, dented or torn” — also raises a red flag.

PREVENTION IS KEYProactive owners don’t wait for the dreaded “We’re coming . . .” letter. They mock-audit themselves each month by reviewing a random sample of warranty repair orders. Evaluate each claim as if you’re an outside auditor. (See below.) Also check the repair backlog to ensure timely completion of warranty claims.

Consider asking your manufacturer’s rep for an honest assessment of your warranty claims processing. If the rep spends hours each visit helping the warranty administrator code simple claims, pick a new administrator. Your rep is there to evaluate more complex claims that require the manufacturer’s approval. Routine fixes often can be self-authorized online with proper coding.

MANUFACTURERS REWARD PREPAREDNESSOrganized dealers with dedicated warranty administrators have less to worry about when factory auditors arrive. They anticipate auditor requests, have paperwork and faulty parts ready to go and set ground rules when factory personnel arrive. Keep in mind that most manufacturers require dealers to keep records for a minimum of 12 to 24 months.

Auditors will tour the shop to look for obvious concerns — packaging from aftermarket parts in your trash, for example — and then sift through a sample of warranty claims, looking at the three C’s: complaint, cause and correction. In addition to incomplete descriptions and administrative omissions, common reasons for expensive chargebacks include non-warrantable add-on repairs, repeat claims and improper handling of battery claims.

LEARN AND MOVE FORWARDA few weeks after your audit is over, your manufacturer’s rep will meet with you to discuss any proposed chargebacks and ways to improve your claims processing. Don’t be afraid to appeal unfair warranty audit findings, however.

Sometimes chargebacks are a wake-up call. View the warranty audit not as a battle with your franchisor but as a learning opportunity. Inefficient claims processing hurts both you and the manufacturer. Work together to preserve profits and build goodwill.

APPROPRIATE USE OF SOCIAL MEDIA

As the use of social media increases, dealerships might need to implement a policy for the appropriate use of Social Media. The social media guidelines should apply to all Dealership staff, contractors, and business partners and must be followed for all online communications that reference Dealership.Social Media: For the purposes of creating a policy, social media is any on-line social structure made up of individuals or organizations that are tied by one or more specific types of interdependency, such as values, visions, ideas, financial exchange, friendship, business operations, professional exchange, etc. Social media sites operate on many levels and take many forms, but some examples of social media activities subject to this policy include, but are not limited to, the following specific technologies: blogs; web sites; professional networks such as LinkedIn and Plaxo; Twitter, Facebook, and MySpace; private networks using applications such as Kickapps and Ning; video sites such as YouTube and Yahoo! Video; and online rating/review sites that invite feedback and commentary on products, services, and other topics. These are a few of a growing number of social media outlets to which this policy applies. The access to and use of social media sites are not a requirement for most Dealership positions. Guidelines need to be developed for both the Dealership-sanctioned social media activity and the personal social media. Some suggested guidelines for both dealership-sanctioned and personal social media activity follow.

DEALERSHIP-SANCTIONED SOCIAL MEDIA ACTIVITY:Your Dealership may decide to develop, sponsor, host, or otherwise participate in social media on behalf of Dealership business and related activities (“Dealership- Sanctioned Social Media Activity”). Dealership-Sanctioned Social Media Activity shall occur solely at the direction of, and under the exclusive guidance of the General Manager. Only those Dealership employees granted authority by their departmental manager may (1) set up, access, update, or otherwise maintain Dealership-Sanctioned Social Media Activity; (2) identify themselves as Dealership employees, or purport to speak on behalf of Dealership in social media, or (3) utilize Dealership assets to participate in social media.

Any participation in Dealership-Sanctioned Social Media Activities, or in social media representing Dealership, or identified as a Dealership employee, must:

• Reflect positively on your co-workers/colleagues, your department, and Dealership as a whole;

• Not conflict with Dealership’s mission, culture, and/or values;

• Not reveal any confidential or proprietary Dealership information;

• Be respectful to the company, other employees, customers, and business partners;

• Remember that your actions captured via images, posts, or comments can reflect on Dealership;

• Not reference or cite business partners or customers without their express written consent and that of your Vice President;

• Comply with the Dealership procedures in accessing Highly

Sensitive Information including comments posted on blogs, forums, and social media sites);

• Comply with all FTC and other federal, state and local governmental laws and regulations.

All uses and disclosures of Dealership data or information in any social media is strictly prohibited except as specifically directed by the Dealer or General Manager in writing, and only in compliance with applicable privacy policies, regulations, and standards. Should you have questions about the policy or any restrictions contained herein, please contact the Dealership General Manager. The inappropriate use of social media by Dealership employees that conflicts with Dealership’s mission and values, violates Dealership policies and procedures, and/or compromises the privacy and security of confidential or propriety Dealership information shall be subject to corrective action . Dealership management considers any violation of acceptable use principles or guidelines to be a serious offense and reserves the right to copy and examine any information on the systems allegedly related to unacceptable use. Employees who violate this policy will be subject to disciplinary action, up to and including termination of employment.

PERSONAL SOCIAL MEDIA GUIDELINES:Dealership employees may take part in social media on their personal behalf outside normal business hours and during personal time, with the understanding that personal opinions can reflect on Dealership.

Any material presented online is the responsibility of the individual who posted the material, the author (poster). The following summarizes the responsibilities of the individual for personal social media activities;

• Personal social media should have clear disclaimers that the views expressed by the poster is the poster’s alone and do not represent the views of any other party.

• Write in first person and make your writing clear that you are speaking for yourself and not on behalf of Dealership.

• Do not participate in social media activities during working hours or use Dealership assets.

• Post meaningful, respectful comments—in other words, no spam and no remarks that are off-topic or offensive.

• Always pause and think before posting.

• Respect the confidentiality of proprietary information and content.

• When disagreeing with others' opinions, keep it appropriate and polite.

INACCURATE OR DEFAMATORY CONTENT Should Dealership staff become aware of social media activity that would fail the “good judgment” test, they should notify their immediate supervisor upon learning of violations of this policy. Dealership reserves the right to change this notification policy at any time. Dealership staff who participates in online communication deemed to be in violation of the social media policy will be subject to the disciplinary action described above.

RANDALL HEBERT, MBA, CPA, CVA 423.702.8145

RHEBERT@HHMCPAS.COM

TRAVIS M. HORTON, MBA, CPA 423.702.7275

THORTON@HHMCPAS.COM

CALL THE DEALERSHIP SPECIALISTS AT HENDERSON HUTCHERSON & MCCULLOUGH, PLLC

FREIGHT DEPOT | 1200 MARKET STREET | CHATTANOOGA, TN 37402 | 423.756.7771 | HHMCPAS.COM