When an overly extended automobile group was facing bankruptcy, its lender approached Gavin/Solmonese, then known as NHB Advisors. Over the course of the next three years, our team enacted a strategy that earned the business an exit from its lender’s workout team, enabling it to return to its original bank’s floor plan financing. The following is a summary of the steps NHB took in cooperation with the auto group’s leadership to secure the successful exit and return to profitability.
In 2009, we met with the primary owner and senior partner of the business to discuss corrective action. At that time, the auto group was comprised of nine widely disbursed dealerships in Pennsylvania and New York. Only one of the dealerships was 100% floor plan financed by its manufacturer, and not by the primary lender under discussion.
At the beginning of the engagement, the auto group was generating $65 million in gross revenue, but failing to produce profitable results. It was dealing with slowly paid (and therefore angry) vendors, negative cash-flow, frequent lender oversight and failure to eliminate the sales out of trust (SOT) that had occurred. Managers also disclosed the existence of supplemental financial entities for warranty and insurance liability, corporate treasury and investment property asset management. They indicated their intention to rapidly consolidate and reduce the corporate staff that had been increased to support and manage these entities.
Following the initial meeting, the exit strategy/turnaround team conducted on-site assessments of each of the nine dealerships. Three had been recently closed. An analysis was conducted for each of the remaining open dealerships, with a focus on respective financial performance, employees, and managerial and operational processes to determine initial, long-term and operational changes, and prospects for each dealership under discussion.
Analysis and Oversight
Our team met with the primary lender’s workout group to discuss options for the auto group and its dealerships. Most importantly, we designed and prepared processes to protect the lender from further erosion of its vehicle valuation, and improve the outstanding $2 million SOT (floor planned vehicle sales were not paid to lender). We also outlined the actions required for the dealerships to reduce and eliminate their respective SOT.
The lender requested and agreed that our team take over control and possession of all vehicle titles previously located in either the lender’s off-site offices or at the auto group’s dealership locations. Our responsibility was to release titles only upon confirmation of receipt and deposit of funds from related vehicle sale transactions. Additionally, NHB was also tasked with complementing and conducting field audits by the lender, should they be unable to conduct the weekly audits.
Following these discussions, the lender agreed that we should add experienced staff to minimize the extensive travel between dealerships to maintain maximum oversight. It was also agreed that we should meet daily with individual general managers, controllers and supervisory management at the six still-operating dealerships to discuss financial and operational changes.
After receiving and reviewing the monthly financial statements for the 2008 and 2009 years, we prepared a monthly report that combined the financial results of each of the six remaining dealerships, along with forecasts. This enabled the team to develop a cash-flow forecast to be used by each of the local controllers. Any unusual transactions noted by the individual controllers needed to be immediately reported to our team members or senior management.
We provided the auto group senior management, dealership general managers and lender monthly reports by dealer, consolidated group results with actual result comparison to dealer forecasts prepared by the controller, along with prior year results.
Catalog of Concerns
Several problems were revealed, which were brought to the attention of the auto group and floor plan lender:
- Senior management lacked adequate oversight of each dealership by failing to communicate with the general manager or controller.
- Weekly on-site audits at the dealerships revealed communication between dealership general managers and controllers was limited, which often resulted in poor choices in new vehicle replenishment, cash-flows, used vehicle trade-ins and poor auction decision results.
- At the six operating dealerships, vehicle keys and titles were not logged or sufficiently controlled. Poor reconciliation of vehicles transitioned from closed to active sister dealership floor plans complicated the tracking of floor plan values.
- It became apparent that the COO, who had sales responsibility for four of the six active dealerships, ordered the respective controllers to make unethical adjustments to create the appearance of profitability on any used vehicle sold in auction. Those and other unethical financial adjustments were forced upon the local dealerships’ financial statements, overriding the controllers’ proper entries.
- While the COO possessed and used vehicle property of the auto group, which was an approved benefit for executives, he also allowed his wife and two children to use similar expensive vehicles. The COO chose to leave the auto group shortly after the items noted above were brought to the attention of the partners.
Fortunately, the primary owner and senior partner (and another partner) of the auto group had access to corporate and personal sources of cash and assets derived from profitable performances in years previous to 2008.
- Along with the resignation of the COO (which freed up his $500,000 annual compensation), several senior staff members were also retired or released, providing an additional reduction of $300,000 in annual compensation.
- The long-term partner took over managerial control of back office operations, advertising and marketing for the four dealerships.
- Upon conclusion of the firm’s turnaround, the primary owner and senior partner’s daughter began training and providing oversight of the four controllers in the dealerships.
- As a result of previously poorly managed trading of used vehicle transactions, the primary owner and senior partner appointed a long-term, experienced and loyal employee to coordinate and control sale and purchase of used vehicle auction transactions for the entire auto group.
- While the recently planned corporate centralized headquarters’ investment was halted and then cancelled, the primary owner and senior partner sold and applied the proceeds toward the $2 million SOT.
- Certain valuable real estate lots, retained for future use, were sold and the proceeds were applied toward the $2 million SOT.
- One of the six operating dealerships, though profitable, was remotely located and sold at a profit toward reduction of the $2 million SOT.
- The sixth operating dealership, which was profitable and not receiving financing from its manufacturer lender, was sold at a profit; its proceeds were applied toward the $2 million SOT.
Our firm’s involvement ceased fully in December 2012, following cessation of continued forecasting guidance to both the auto group’s individual controllers and its CPA firm. By the spring of 2013, the auto group was able to earn an exit from its lender’s workout group, and returned to its original bank’s floor plan financing.
As a result of NHB’s three-and-a-half year guidance and oversight, the auto group decreased its geographical map, closed the weak dealerships, reduced its corporate overhead, and learned how to develop and utilize financial forecasts to drive its monthly activity and operating decisions based on comparative history.
Further, by August 2012, the remaining four dealerships were lucrative and the auto group was generating profitable revenue of $80 million. The business continues to maintain revenue growth from its well-managed dealerships.
Jon Jensen is a managing director at Gavin/Solmonese LLP. With more than 35 years of business expertise and knowledge, Jon’s emphasis is on turnaround of underperforming companies, mergers, acquisitions and divestitures, and debt acquisition and restructuring. He can be reached at email@example.com.