While there is little doubt that this is the worst of times for many auto dealers – with the likes of General Motors aggressively paring down its dealer network and consumers determined to hang on to their current vehicles longer than usual – it just might be the best of times for dealers who are ready to grasp today’s opportunities.
KPMG Enterprise’s advisers have been actively involved on both sides of the dealer equation: those looking to sell voluntarily or under automaker wind-down orders and, on the other side, dealers looking to broaden their businesses or move to larger or newer facilities.
Terminated dealers’ options
Let’s take a look at the first scenario: how are the approximately 245 GM dealers who have recently been handed a franchise termination letter from
For many dealerships, liquidation may not be the best answer, and there are other options to consider. Dealerships in prime locations may find that another auto-maker or OEM may be interested in the lot, or in granting a new franchise to that dealer.
Currently, KPMG Enterprise is advising a number of terminated dealers, both in advisory and tax capacities. From a tax perspective, there are many ramifications if a sale is not structured properly. Among some of the issues that arise are how shares in the business are held, the zoning implications, and the value of the buildings on the properties.
Purchasing or repurposing
Among terminated GM dealers, the most common business scenario is the potential sale of the store and property to a dealer with another OEM. While it may seem relatively straightforward, there are a number of tax issues that can arise from the sale of real estate and liquidation of unsold vehicle inventory.
The second scenario is purchasers who are interested in re-purposing the franchise for similar businesses such as a used-car lot or body shop. A third scenario under consideration by some terminated franchisees is to retain the location and switch over to a used-car format. In addition to the income tax considerations, these other scenarios might impact previously implemented estate planning strategies and require the proper tax re-structuring of the business.
Many of GM Canada’s terminated dealers also face the issue of complicated ownership structures. For example, the real estate may be owned by one company and the dealer franchise is held in another corporate entity. This raises the possibility that income is generated in one company, while there are losses in the other company and those losses cannot be used to shelter income or gains from the sale of real estate. It is also possible that the sale of real estate could result in a capital loss that can’t be used to offset ordinary income. Generally the termination payment from GM Canada will be treated as a sale of eligible capital property with 50 percent of the proceeds being treated as ordinary income. This also means that capital losses cannot be used to offset income arising from the GM payment.
Such a situation may necessitate a re-organization to combine the real estate and dealership companies before either selling the property or accepting any payments. Many multi-entity dealers may have different shareholder groups, which may further complicate the amalgamation of companies.
When facing a franchise termination, it may seem, at first, that the future is bleak. However, by stepping back and examining all available options, coupled with the right advice, former GM franchise owners are finding that while the situation is not without its challenges, they are also seeing new opportunities ahead.
KPMG Enterprise, which is devoted exclusively to serving the needs of private companies in Canada, serves both auto dealers and OEMs among its clients. With over 50 years of combined experience, KPMG Partners Tom Kostopoulos and Ted Spevick are trusted advisers to the auto dealer industry.
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