The Automobile and Factory Dealership are Death

13 Mins read

Closing a store requires considerable Web Posting Mart effort and attention. In no particular order, the items listed below are minimal considerations when terminating a franchise and closing a dealership operation. THIS CHECKLIST IS NOT “ALL-INCLUSIVE.” YOU SHOULD CONSULT WITH YOUR ATTORNEY AND ACCOUNTANT, AND THIS LIST SHOULD BE CONSIDERED AS AN ADDITIONAL AID FOR YOU TO USE TO BUILD UPON WHEN YOU CONFER WITH THEM.


Basic Preparation

1. Officers, Directors, and Shareholders

Be sure to hold directors’ and shareholders’ meetings and obtain resolutions from each entity authorizing the dealer to liquidate the used car dealerships or a substantial portion of the used car dealerships’ assets. Determine whether or not the board and shareholders may charge you a termination bonus and prepay for your services in “winding down the business.” Consult with your accountant and attorney to determine a reasonable compensation amount if a company creditor challenges the transaction. Determine if it is suitable for officers to buy themselves and their spouse’s vehicles. Pay “Net” “Net,” which would be the sales price if the car were returned to the factory or sold to a business purchaser.


The officers should open a new bank account at a different bank and: (a) use a PO Box or Private Mail Service as a mailing address and (b) use a separate check color to determine pre-post-closing checks easily written. Authorize payment to and prepay the company’s attorney and accountant with a retainer. Their services will be needed to close the business properly, and the company might not pay them later. Authorize pre-payment of whatever services or supplies the company will need to be serviced during the wind-down period. For example, property and personal insurance, real property taxes (if a third party does not own the property), rent, utilities, etc.

2. The Facility and Insurance

A one-sheet lease summary should be attached to the original to facilitate matters. The summary should include such items as the dates of the base term; the base rent; the current rent; the dates of any option periods, together with notations regarding rent increases; the facility ownership; the lessee and lessor; a note as to whether or not the factory has a point or site protection; the rent as an equivalent to the dollar value per new unit sold; and, a notation as to WHETHER OR NOT THE LEASE IS ASSIGNABLE and under what conditions. Other considerations regarding the facility lease include violations of the ADA and hazardous materials (underground gas tanks or underground oil disposal tanks) on the property.

Owned Facilities

Concerning receiving “factory termination assistance,” some Sales and Service Agreements, General Motors, for example, make a distinction between “owner-occupied” and “leased” used car dealership facilities. Read your Sales and Service Agreement to understand and capitalize on the merits.


Leased Facilities

Suppose the selling dealer’s rent factor before the sale of the used car dealerships is within factory guidelines. In that case, the factory should make the dealer’s lease payments for the period specified in the Service and Sales Agreement. (See, however, the EPA section.) Check with your insurance agent to determine the requirements for ensuring an empty building.

Other Insurance

In addition to facility insurance, the dealer will need a “tail” or rider on their garage keepers insurance. Most insurance today is “claims made” versus “occurrence”. In actual practice, most settled cases are settled within the insurance policy limits, and the insurance company will have paid for both the defense and the settlement. Concerning Medical Insurance, arrange for COBRA for all employees of the company. Again, officers and directors may include medical insurance payments as part of their wind-down compensation.

3. UCC, Mechanic’s Lien, and Title Searches

Most dealers are unaware of all existing liens on used car dealerships’ assets. To accurately estimate the selling dealer’s anticipated net proceeds, all of these lines will have to be discovered, preferably before negotiations. Possession of title reports and UCC-1 reports will give the dealer adequate time to address the issues and to have readily available answers if and when a prospective purchaser raises the issue.

4. Taxes Due and Anticipated

The dealership’s comptroller or accountant should prepare a sheet of all taxes currently owed by the used car dealerships and all anticipated taxes. The list should identify the amount, who owned and the reason. In individual states, unpaid taxes have a “super lien” status, and if unpaid, the selling dealer’s assets can and will be attached to recover unpaid taxes due by the selling dealership. This attachment can occur months after the used car dealerships have closed.

As a general rule, anyone authorized to sign on the checking account can be held personally liable for at least ½ of the payroll withholding tax and 100% of all the sales taxes due. Besides, in some instances, dealers have been held personally liable for monies collected from customers that should have been treated as “trust” monies, such as customer trade payoffs, customer credit and life insurance premiums, and customer warranty and service contract premiums.

5. Notes and Accounts Receivable From Others

The “Notes and Accounts Receivable – Other” account is usually a “catch-all” account on the used car dealerships statement. For purposes of a used car dealerships sale, this account should be purified (1) to appraise the dealer of any extra funds, which may be available for final sales and property taxes, and (2) to make both the dealer and accountant aware of any “in-house” loans to officers, directors, and employees, which may have to be repaid.


6. Prepaid Expenses

The prepaid expense account is another “catch-all” account that must be purified. When scheduling the prepaid expense account, the comptroller should thoroughly search for all lease and contract deposits. In many instances, service equipment on lease, vehicles on a lease, computers on a lease, and other leases made to the dealership carry security deposits, last month’s payment, or both.

7. Dealership Employees

Along with the normal employer-employee relations, two significant legal areas may affect automobile dealers: (a) pension fund liability; and (b) state and federal laws regarding closings. In some states, the selling dealer could be personally liable for funding employee pension funds, while in others, the dealer must give employees advance notice of any closing. Also, the United States Congress passed legislation regarding “closings.” In “closings,” state and federal laws put a minimum on the number of persons employed, usually 50 or 100 before the rule applies to the dealer’s company. Check the Hart Scott Rodino Act (HSR) and the WARN Act.

Regarding wages, some jurisdictions have enacted statutes making individual shareholders personally liable for corporate debts due to laborers and other employees. Welfare and pension funds also qualify as wages under New York’s law.

The comptroller or accountant should prepare a

list of these liabilities, including any amounts due to the employees concerning accrued vacations, withholding taxes, pension, and profit-sharing plans and wages, as of the close date. Insofar as the actual terminations are concerned, if the used car dealerships are “union,” the dealer should talk to the union’s representative to ensure that all of the union contract conditions are met.

8. Long-Term Debt

All long-term debt should be itemized, and a method of repayment determined. Interest should be computed. When past-due interest and past-due payments are added to the loan balance, the loan payoffs are generally higher than anticipated. The comptroller should prepare a list of these debts, including the amount owed, including interest, to who owed, the purpose of the debt, maturity, terms, and security given. After completing the list, the comptroller should keep a running total daily through the close of escrow.

9. Other Notes Payable

As with long-term debt, the amount should list other notes payable, including interest to the date of close, who owed, a purpose of notice, maturity, terms, and security was given, and arrangements should be made to retire the debt.

10. The Financial Statements

The retail automobile business is one of the few businesses requiring a complete closing of all books and records promptly at the end of every month. Factories and finance companies require reporting on factory-originated or approved forms. A reconciliation statement may be used to prepare the store for closing, explaining categories such as “other income & expense,” warranty, finance, insurance income not shown on the news, and extraordinary items. You will need a final financial statement for tax purposes.

11. Storage of Records

Dealerships amass a great deal of paperwork, the safe, accessible storage, which will present a necessary problem to the selling dealer. No dealership record will be as vital as it is on the day it cannot be found. Former dealers have related stories of attempting to retrieve documents from mini-storage facilities in rain and snow. The appropriate period should be determined only after the dealer’s accountant and the attorney has considered and advised the dealer concerning the statute of limitations problems and other document retention regulations peculiar to the political area in which used car dealerships are located.

12. In-House Service Contracts

If the dealer has sold any “in-house service contracts,” the selling dealer will not want former customers calling their home for repairs or complaints; therefore, a system of service, along with the following lines, should be negotiated with a dealer near the closing store.

13. The Hard Assets, Parts, and Accessories

Each factory has its definition of “returnable” parts and returnable accessories. Most also include a discount for packing and shipping. Before closing, a computer printout should be obtained listing all parts and accessories, their purchase date, and the cost of an invoice. Parts and Accessories must be segregated into “returnable” and “non-returnable” categories. Returnable parts and accessories need to be inventoried and packaged according to the factory’s specifications

Non-returnable items need to be marketed to other dealers or parts houses such as “Napa.” Note: Some “non-returnable” parts may be returnable to the supplier from who it was purchased, such as Delco, Motorcraft, Mopar, Napa, etc. Do not mark on or damage original packages when inventorying or packing, as some factories will not classify items in marked boxes as “returnable”. Be sure to account for aftermarket items such as Gas, Oil & Grease, Nuts, Bolts, Supplies, Work in Process, Repair Orders (Need to collect A/Rs), Signs, Tools, and Miscellaneous Equipment & Supplies.

Furniture, Fixtures, and Equipment

The hard assets fall into two categories: (a) Those repurchased by the factory, such as special tools, parts equipment, signs, some computer systems, etc.; and those not repurchased by the factory, such as desks, chairs, etc. Repurchased and non-repurchased items should be segregated, and an inventory/auction service should be contacted to bid the auction on the non-repurchased items. When considering the auction, terms such as advertising time, location, minimum bids, guaranteed minimums from the auctioneer, and so forth must be considered.

Leasehold Improvements

The value of Leasehold Improvements is generally lost in the termination process.


While accomplishing a new vehicle inventory valuation is a relatively routine matter, it is also time-consuming; consequently, for a dealer to realize the full value for each vehicle, a checklist must be compiled and maintained at a transfer time. Certain additions to, and subtractions from, the invoice price must be made. The difference in cash paid by the purchaser’s flooring entity to the dealer’s flooring institution can be considerable, especially concerning domestic lines, where holdback monies routinely average between $400 and $600 per unit or more. A dealer needs to be aware of this figure early to provide for the negotiation contingency.

Various states have laws more liberal than the factory’s Sales and Service Agreements, and the specific rules of the terminating dealer’s jurisdiction should be reviewed. For example, Maine requires that the factory repurchase terminating dealers’ entire new vehicle inventory, regardless of the model year. Some states require the factory to repurchase only current model year vehicles, and others require current plus one-year carryover. In MSO states, the dealer should control all vehicle keys and MSOs – if the lender does not already have them.

Prepare to liquidate used vehicles and any used car dealership vehicles such as parts trucks, courtesy vans, demonstrators, and snowplows. It is generally easier to obtain a reasonable price for them by not letting anyone “cherry-pick.” Several wholesalers should bid them as a “group”. Make the list of carryovers, and if the factory does not repurchase them, have the wholesalers bid them separately and shop them with other dealers. Dealer plates must be surrendered and accounted for when the dealer license is terminated.

13. Appraisals and Auctions

There are several competent, recognized appraisers our firm could recommend. To maximize the dollar value of an appraisal or auction, the dealer should contact several firms and determine how they operate, what records will be required, and the method for valuing. After obtaining such information, the dealer should know the precise form and schedules necessary to maximize the fixed assets’ appraisal or sale. Also, by assigning an employee to prepare the investments and plans thoroughly, the dealer will better understand its value at the premises.

Perhaps the most significant problems concerning appraisals and auctions are: (1) neither party takes the time to understand the methods and reasoning used by the appraisal/auction company, and (2) the dealer rarely adequately prepares the assets schedules. We invariably find that all of the used car dealership assets do not appear on programs, either because they have been fully depreciated or because of an error.

14. Contracts for Services

Service maintenance and personal service contracts should be reviewed for personal guarantees, terms, and assignability. An oversight could mean that personal liability for performance would remain with the selling dealer. Service maintenance contracts should be scheduled, with detail indicating the amount of each payment, duration of the agreement, service to be rendered, and any personal liability. Any contracts that can be canceled should be calendared for cancellation.

15. Contingent Liability and Reserves

The dealer should know the amount of all outstanding retail paper, which the dealership or the dealer has unconditionally guaranteed. The dealer should know which dealership’s reserve account will be subject to chargebacks for early payoffs and the amount, if any, of recourse against the dealer and the dealership.

A spreadsheet of the outstanding contracts should be compiled, detailing, in addition to the collateral description, remaining term and delinquency status, and credit grade, such as A, B, or C, or whatever system the finance company uses. The type of recourse, average monthly reserve chargebacks, and the current reserve balance should also be included.

Shortly after informing the financing institutions of the dealer’s intent to close the dealership, the lenders should again be approached regarding the availability of any “walk-away” programs. Furthermore, if the dealership has been operating with reduced reserve retention, the amount required to bring the reserve(s) to standard should be determined upon cessation of retail operations. On occasion, this amount has proved to be significant.

Eventually, when confidentiality is no longer an issue, the dealer should discuss the handling of future repossessions, extensions, renewals, and other maintenance functions with the lender. If the prior dealer-lender relationship were good, the dealer would discover an incredible amount of help from a cooperative finance company. Lastly, if the dealer finds a large contingency, a certain degree of assistance may be negotiated with the buyer.

16. Accounts Receivable and Cash

While obvious, dealership cash must be considered. Generally, a new checking account should be opened at a financial institution not affiliated with the dealer’s current business. Also, if possible, a locally owned bank should be used versus a national bank. The dealer should consider reducing the number of signatories on the checking account(s) to two, one of which is the dealer, and, effective the day of the close, the number of signatories should only be reduced to the dealer principal.

Factory Receivables

From the moment a decision to close the store is reached, factory receivables should receive concentrated attention. The moment awareness of the pending closing calls the factory, the payments cease. Try to resolve all problem receivables, such as warranty disputes, well before the finish. In any event, assistance from the factory following the close of escrow will be essential to process warranty re-submissions and other problems.

Employee Receivables

Employee receivables should also be thoroughly analyzed during this preliminary stage. An immediate policy of no advances should be established. Without causing alarm, employee receivables should be scheduled and a course of repayment set. One of the better methods is to prepare a schedule of what each employee owes and, as the final pay periods approach, make sure the receivables are deducted from the employee’s last checks. Unfortunately, some states do not allow dealers to set off debts against wages. Your state’s policy/law should be reviewed with your attorney before setting off any employee debt.

Customer and Vehicle Receivables

The selling dealer should ensure that vehicle receivables and customer accounts, other than service and parts, are pure. Necessary adjustments and write-offs should be made to arrive at a receivable figure which realistically depicts the amount of cash that can be expected. If the dealership’s service and parts policy has been well monitored, these accounts should pay in an orderly manner. The dealer should also decide whether collections should be performed by a dealer and one or more employees or whether the dealer can sell the accounts to a factoring house.

17. Leased Equipment

Not all leases can be canceled. The dealer should determine which, if any, of the leases have personal guarantees and, concerning such leases, make a concerted effort to negotiate a settlement with the lessor. That assumes that the corporation is insolvent. If the corporation is solvent, then compromises need to be dealt with concerning corporate leases.

18. EPA Inspection

If the closing dealer owns the real property, the dealer must determine where and what the problems will likely be. Suppose underground gas or oil storage tanks have ever been located on the dealership’s real property. In that case, the dealer should, if not already available, contact a private inspection agency and obtain a certificate of clearance or compliance. Be aware no agreements between the parties can modify or redistribute their respective liabilities relating to state and federal laws.

19. Expenses of Transaction

Certain extraordinary expenses, such as real estate appraisal, consultant, and attorney and accounting fees, are incidental to preparing a dealership for closing. These expenses will be paid from the dealership’s general account and the closing dealer’s personal history. The dealer should alert the bookkeeper to maintain a separate journal to record these expenses so that the accountants may readily determine the costs of sale and categories of expenditures for income tax purposes, both personal and business.

Closing Date

Absent difficult circumstances, the dealer should estimate the time necessary to prepare the store for closing, usually approximately thirty days. If possible, the conclusion should be on a payday.

The Comptroller’s Responsibilities

  • The Dealer’s comptroller should prepare, or be responsible for the preparation of, the following items and documents for transfer:
  • The Books & Records;
  • All Purchase Orders and Deposits;
  • The Franchise Termination Letter and the Factory’s or Distributor’s Acceptance of the Buyer’s Resignation;
  • The Accounts Receivable List;
  • Prepaid Expenses;
  • Preparing a Leased Equipment Inventory;
  • Securing Old Credit card plates and Machines;
  • The Parts and Accessories Return, Vehicle Return, and Rent Assistance Demand Letters;
  • The Transfer and cancellation of various: Telephone Numbers; Post Office Boxes;
  • The insurance arrangements: life, garage keeper’s tail, real and personal property, health, etc.

The Dealer’s Responsibilities

The Dealer should prepare or be responsible for reviewing and supervising all of the items in the checklist and for the preparation of the following items:

  • Decide on the employees required to stay to complete the store’s closing.
  • Check for sold orders and decide whether to deliver, cancel, or refer to another dealer.
  • Cancel company credit cards, including any phone and mobile phones – except your own.
  • Secure telephone service. Set a Voice Mail message regarding a dealership referral.


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