Dealership Buy-Sells – Understanding the Words
Everyday dealers enter into buy-sell agreements and have no idea what the words mean.
I recently worked with a long-time “automotive” attorney that told me he used the same buy-sell agreement for every deal, whether he was representing the buyer or the seller.
He said the parties would eventually reach the agreement he proposed, so he saved everyone time and money by just changing the names and addresses in his template and no one has ever complained. An unbelievable, but true story.
Dealership buy-sells are technical documents. One preposition and one verb could change the price a quarter million dollars or more. I have seen it! A comma here or there, or an adjective inserted in the right place could change the entire meaning of the document.
The dealer said the factory will pay for it. The dealer, said the factory, will pay for it. Identical words; opposite meanings. In one instance the factory pays, in the other the dealer pays. A simple example, for certain, but still an illustrative one.
There are dozens of instances in buy-sells where dealers left hundreds of thousands of dollars on the table, or paid hundreds of thousands they did not have to pay. And when they left the closing table, neither the parties nor their advisors ever knew what they did.
OEM = original equipment manufacturer. OEM refers to parts used in the original assembly of a vehicle – vis-à-vis, aftermarket parts that can be installed after the car comes out of the factory.
The following example does not apply in all transactions, but there are dozens of other technicalities and without question, several situations will surface in every sale.
The typical sentence in a buy-sell, regarding parts runs something along the line:
“BUYER shall purchase all of SELLER’S inventory of current (listed in Manufacturer’s current parts books and/or computer tapes), unused, undamaged, new and factory rebuilt parts and accessories for the General Motors vehicles it sells on hand at the Closing, excluding parts and accessories which are not returnable to the Manufacturer.”*
Suppose, for example, one is buying or selling a General Motors dealership, how does the aforementioned sentence apply to AC Delco parts?
To understand the distinction, one must understand the history of the various manufacturers’ aftermarket parts distribution.
AC Delco Parts
Delco is an acronym for Dayton Engineering Lab Co. and AC stands for Albert Champion, the man who started Delco.
Just as the Vitamin manufactures wanted to cash in on the bargain hunters by allowing grocery stores to sell their vitamins under a different label and at a lower price, General Motors wanted to cash in on aftermarket bargain hunters by selling GM parts at lower price.
The powers to be at GM thought using the Delco brand name would be a way to distinguish the parts and accessories from General Motors’ OEM parts and accessories, and thus it would limit complaints from its dealers that the factory was going to be in direct competition with them.
AC Delco was and still is owned by General Motors. General Motors manufacturers Delco parts and some of them used on GM vehicles (ball joints, struts, etc.) come with lifetime warranties, if installed by an AC Delco garage.
Some GM dealers use Delco parts because they are cheaper and the factory allows them to be considered “genuine” insofar as the customer is concerned. **
But the fact is, Delco parts are “not returnable to General Motors” under the General Motors’ Dealer Sales and Service Agreement.
Keep in mind that although AC Delco parts are produced by General Motors, they have different parts numbers and a different distributor.
Consequently, any GM dealer having AC Delco parts in inventory must address the issue and come to an agreement between the buyer and seller prior to signing the asset purchase agreement.
Getting to the closing table and then protesting that AC Delco parts should be counted as “returnable” creates problems. A buyer has a right to assume that the seller knows what the words in the contract mean at the time the deal is made and if a seller did not include a manufacturer’s aftermarket parts,*** then that is the seller’s problem.
Brokers, Attorneys, Accountants, Consultants
Which brings us to the topic at hand. Just because someone ran a dealership for 20-years, or handled dealership buy-sells for the factory for 20-years, does not make them students of the industry with respect to buy-sells. And, in the case of the attorney that used the same buy-sell in every deal – buying or selling, neither does being an “automotive” attorney for 20-years.
As mentioned above, there are dozens of technicalities that surface in every dealership sale.
Furniture, Fixtures and Equipment
There are, for example, five ways to value hard assets. Do you know which definitions benefit the buyer and which benefit the seller? In the sale of a Chevrolet-Cadillac store, the addition of a prepositional phrase added $480,000 to the amount the buyer paid for the hard assets. Neither the buyer, nor his advisors ever understood why the price was so high.
Representing both parties
If an advisor (broker, attorney, accountant, etc.) says they will represent both parties in a transaction, which definition do they choose? Is it the one that favors the buyer, or the one that favors the seller? If they represent one party, the choice is simple. If they represent both, even explaining the differences would hurt one of the parties. The same is true with respect to other technical definitions and exceptions.
As I stated in the beginning of this article, “Everyday dealers enter into buy-sell agreements and have no idea what the words mean,” but they all walk away, happy with the results, thus proving the old adage “Ignorance is bliss.”
* Manufacturers differ in their definition of returnable parts.
** The Magnuson-Moss Warranty Act of 1975 provides, in part, that does aftermarket parts do not void a manufacturer’s warranty, unless the warranty clearly states they would, or if it can be proven that the aftermarket device is the direct cause of the failure. Various state laws also protect consumers that use aftermarket parts.