Turning to the Asset Purchase Agreement, there are several significant topics you should consider: 1. Assets a. New Cars: Determining what is being paid for new cars is very important. Generally, a buyer will negotiate a price below or at triple net pricing, further reduced by floorplan financing credits and advertising. While commonly accepted, this can leave the selling dealer with a deficiency in the floor plan balance, depending on how many units are on the lot or in transit. During COVID, this was not a significant issue as inventories were sparse, but as the industry gets back to its pre-COVID inventory levels, this is the significant negotiating point that a dealer on either side of the transaction needs to consider. A seller should attempt to hold as close to the invoice minus holdback as much as possible. On the other hand, a buyer will certainly wish to have all the credits on a purchased unit. b. Used Cars, Service Loaners, Demonstrators: Sellers should consider whether they have an additional dealership to which used cars can be transported if a purchase price agreement cannot be reached with the buyer. If you do not own an additional dealership, then the buyer will have additional leverage on used car prices. Service loaners also need to be addressed. Various manufacturer programs will impact the price paid for service loaners. If the service loaners are titled in the dealership’s name, they are considered used cars, and prices will need to be negotiated accordingly. On the other hand, if not titled, they may be considered new cars and will be priced as such with some deduction for mileage. Importantly, the buying dealer does not wish to be without service loaners on day one of operations, and usually, these matters can be worked out by reasonable parties. c. Furniture, Fixtures and Equipment (FFE): Commonly, this asset category is all the furniture, office equipment, special tools, lifts, EV chargers, shop service equipment and everything related to the service department, and, if applicable, the body shop. I caution any selling dealer to be careful about agreeing to the price of depreciated value as most dealers have their furniture, fixtures and equipment depreciated near zero, although the FFE’s value is much more. Any relatively modern dealership will have hundreds of thousands of dollars in furniture, fixtures and equipment. The parties can generally agree upon a price to be paid for the FFE but may negotiate a provision to retain an appraiser to determine fair market value. d. Parts: The primary issue here is to determine what inventory is current and what is obsolete. Usually, the parties negotiate the time frame when a part will no longer be considered current (typically 12 to 18 months) and if non-returnable parts will be considered obsolete. The purchase price is usually at wholesale after an appraisal, but the parties can agree upon a price to avoid the cost of a parts appraisal. A dealer also needs to think about non-manufacturer parts and whether they will be purchased at dealer cost or a negotiated price after an inventory, which usually occurs the day before closing. Obviously, in the latter situation, the buyer has the leverage and if an amount can be negotiated in the purchase agreement, then disagreements can be avoided at the closing table. e. Assumption of Contracts: This can be particularly important for the selling dealer as many contracts do not allow for termination, even if the dealership is sold. This is particularly prevalent with dealer management systems, and I would encourage discussions with the buying dealer on whether these contracts can be assumed or perhaps some price agreed upon if not. Importantly, consider negotiating an addendum to your dealer management system contract so that in the event of the sale, the contract may be terminated with no penalty or at a significantly lower price. f. Intellectual Property: Discussions will need to be held about ownership and transfer of websites, phone numbers, etc. Does the selling dealer keep the dealership name or sell to the buying dealer? The point is that IP concerns need to be considered so that practical operational issues do not arise post-closing. 2. Representation and Warranties: It is difficult to provide too much in detail here due to the practical constraints of this article, but when negotiating warranties and representations, parties need to be thinking about how the representation is presented and, interestingly, how the word “knowledge” is defined for the party making the representations. Also, the seller must decide who will make the representations, the selling entity only or also the dealer principles. Warranties and representations will substantively address a party’s authority, clear title to assets, current litigation, tax liabilities, environmental issues, employees, employee benefit plans, working condition of assets and brokers, etc. 3. Indemnity: Indemnification is important for both parties; the buyers want unlimited indemnity from a seller while the seller is attempting to limit the length and scope of indemnity. Considerations can be made to what is referred to as a “basket.” This basically means that indemnification obligations do not accrue on behalf of any party until a certain agreed-upon amount of loss has occurred, for example, $10,000. Ultimately, dealers can negotiate caps on indemnity, limit timeframes for indemnity claims and establish procedures for handling indemnification requests. 4. Miscellaneous Considerations: These may include termination provisions, contingencies to close, deposits, escrow, allocation of the purchase price, confidentiality of the agreement and provisions to prohibit additional WVADA NEWS 11
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