What to Consider When Facing a Buy-Sell Agreement
Robert C. Davis, a partner with DHG Dealerships, has been involved in countless buy-sell agreements. In fact, dealing with those types of transactions has become one of his professional specialties.
Because of that, Davis is well versed on how a dealership can brace for a buy-sell. Recently, he has seen several examples of what not to do when facing such a business arrangement. Poor operational procedures, he notes, can make a facility look bad at an especially inopportune time.
“I’ll use an example,” says Davis, who often provides litigation support for DHG. “When we go in and do buy-sell parts inventories, a lot of times, we’ll find there’s just a stack of old cores that haven’t been returned to the manufacturer, that are still in parts departments. Well, you ought to be returning old cores on a regular basis—because that’s pure cash to the dealer.
“And, as a buyer, I don’t want to buy the old cores and return them; I want the seller to return those, under the dealer code that’s about to get turned off. So, you have to hustle and do that, leading up to that parts inventory the weekend of the buy-sell.”
In the days leading up to a buy-sell agreement, there are more issues to brace for than one might think, especially for dealership leaders like parts managers. Below, Davis notes a few such issues.
In general, what do parts managers need to be concerned with leading up to a buy-sell?
Having inventory that’s not moving, or having too much of something. The interesting thing about parts is that, in many cases, it may be a very large, unencumbered piece of working capital. The interesting part in many buy-sell agreements is the parts inventory has gone through a cut and paste process, say, from other buy-sell documents. Regarding obsolescence, it may speak in terms that make sense for Manufacturer X, where Manufacturer Y may have a totally different program, you know? So, formulate the wording in that paragraph of the agreement so that it becomes something that makes sense in terms of the manufacturers’ parts programs, and it’s something that can be computed and run on reports by the seller’s DMS when that parts inventory is taken.
What are some of the usual legal sticking points during buy-sells?
What would we want to know, as legal counsel, in terms of writing a paragraph to address parts? There are things to be considered, and regarded or disregarded. The thing you see most often in the parts paragraphs in a buy-sell is “returnable” or “not returnable.” The question becomes, returnable when, and under what program? It used to be that, when you said “returnable,” you just meant that it’s returnable in a termination return. Now many manufacturers don’t have that availability. Now, your DMS’ have a field that says whether this part is returnable or not. Most buy-sells now will use that field to determine whether it’s returnable. It’s a yes-no flag that accountants can use to [tell] whether it’s returnable or not.
Is the movement of parts noteworthy in buy-sell negotiations?
You need to do a cut based on movement. Parts like fan belts don’t have serial numbers. In order for a part to be considered a moving part, I only have to sell one of them and it moves the whole thing to “current.”
And, if your agreement said, “We’re not going to buy any parts that haven’t moved in 12 months,” well, the factor on that is “months no sale.” Months no sale is typically the obsolescence piece. And it has flaws—in other words, if it has never sold, then how do you compute how many months it hasn’t sold? The fallacy in the normal measurement for parts that aren’t moving is the fact that, typically, the picture looks better than it actually is, because you only have to sell one to make all of them “current.”
The next best thing is months no receipt. That’s going to be the flag in the system that shows me the last time I got a part in and it went into stock. I can go to months no receipt and I’ll have some idea of when it hit the shelf, and its age. The legal community hasn’t picked up on this as a partial solution to the limitations of how parts inventory is kept yet.
Are there any other, often unforeseen issues that arise during a buy-sell situation?
Typically, a buy-sell agreement will separate itself into, “Here are the terms for manufacturers’ parts, and here are the terms for non-manufacturers’ parts, and here are the terms for miscellaneous stuff like gas, oil, and tires.” The problem is that, many times, gas, oil, tires, and things like that are manufacturers’ parts. And that creates confusion in many agreements that I clarify if I get my fingers in the agreement. I say that the miscellaneous supply is going to be that stuff that doesn’t have regular parts numbers as a manufacturer’s part. That’s the last issue, typically, in buy-sell agreements.