Anyone who owns a business needs to think about “succession planning” – a fancy phrase for determining who will take over when an entrepreneur retires or dies.

In the case of auto dealers, it’s a particularly important concern and not just because a dealership is often a multi-million dollar business that might well represent a significant portion of the owner’s personal assets. Careful planning is crucial because every dealer’s basic agreement with a manufacturer spells out in detail not only how such a transfer may occur but it gives the automaker vast power in deciding who may buy or inherit the business.

Even worse, without a carefully thought out succession plan, the car company may terminate the franchise agreement within 30 days from when a dealer dies. In the time it takes to read a registered letter, a lifetime of building and managing a business can be wiped out.

Advance planning in conjunction with lawyers who understand both estate planning as well as auto industry franchising can reduce or eliminate the risk of thinking you have provided for your heirs only to have them discover – too late – that you ended up leaving nothing behind.

Effective Approach

In many respects, language about succession in the agreement between a dealer and the car maker is frustratingly vague. But it does lay out a basic roadmap to follow.

Even though a manufacturer holds veto power over a succession plan, each sets out criteria covering who might be allowed to take over a dealership in the event of the franchise holder’s retirement or death. In creating a plan, the dealer needs to identify potential buyers who meet the basic criteria and then send a proposal to the car maker, asking them to consent to the individual. Beyond having the financial resources available to acquire the business, the person needs to have extensive experience in the auto industry; it is unlikely a manufacturer will approve someone from the outside who has never managed anything in the car business. Increasing the odds of ensuring a go-ahead from headquarters is for the person to be already working in the dealership – although that isn’t always an automatic guarantee as some dealers have discovered.

Assuming the approval nod is given, the dealer needs to review their succession plan every few years to make sure that individuals they’ve named continue to meet both the manufacturer’s criteria as well as the current dealer’s estate planning objectives.

Meeting The Basics

Different manufacturers have somewhat different criteria but basically each company’s dealership agreement requires that a Successor Addendum be drafted naming who will take over the business. The company only issues the addendum if the dealer is meeting its obligations in the agreement and the proposed successor dealer is considered qualified to take over the business. There are four basic actions that are taken into account when a manufacturer is considering a succession proposal:

First, what are the personal, business, and financial qualifications of the proposed dealer and do they meet the basic requirements of the master agreement? For example, he or she must be a competent business person, an effective manager, can demonstrate a caring attitude towards customers and has a successful record selling automotive products and services.

Second, will the proposed change result in a successful dealership with acceptable management, with capital that is both unencumbered and adequate, and will the new owner continue to provide satisfactory sales and service while promoting and preserving competition and customer satisfaction?

Third, has an agreement that is acceptable to the automaker been executed between the current dealer and the proposed owner?

And fourth, have any outstanding financial obligations of the dealer to the manufacturer been satisfied?

Even still, the automaker can attempt to exercise a lot of discretion in determining an application because it will try to ‘deem’ the dealership agreement to be a personal service contract between the car maker and the dealer.  The reality is that most automotive dealerships are unquestionably franchises under the laws of all provinces in Canada that have franchise legislation. It does not matter what one calls the agreement, whether it be explicitly called a ‘franchise agreement,’ a ‘personal services contract,’ or a ‘dealership agreement’, it will be viewed by our courts as a franchise agreement.

Trimming The Sails

Courts have been trending towards reducing some of the latitude of manufacturers in approving succession plans.

For example, a recent Alberta decision found that, rather than being a personal services contract, a dealership agreement was actually a commercial agreement that could be assigned to a third party.

Furthermore, in Ontario the Arthur Wishart Act governs all franchises and requires car makers to act in good faith when assessing the successor’s application.

Necessary Evil

Not many people like to think about their inevitable death, which may explain why a surprisingly large number of otherwise proactive owners do not have a will, let alone a succession plan for their business and an estate plan for their heirs.

Yet when it comes to an auto dealership, creating all three is more than a necessary evil, it is a smart step. Indeed, without a succession plan, the family of an owner of a dealership may find itself startled and disheartened to find that rather than sharing in the proceeds of the sale of the business it is facing a revocation of the franchise.

Without a succession plan being added to the basic franchise agreement, when a dealer dies the auto maker typically has the option of terminating the agreement within 30 days. Although a potential buyer – called the “successor dealer” – may apply within this period asking for an extension, it puts the original franchise holder’s family under tremendous pressure to find a qualified buyer, negotiate and finalize an agreement, and then submit it to the car company for approval in a very tight timeline. If the dealer’s death was sudden and unexpected, the task can seem insurmountable. No one should be put in a position of having to deal with their shock and grief at the same time as they are desperately trying to find an acceptable buyer for the deceased’s business.

All dealers should ensure they take the following two steps:

  1. Choose a successor for the business; and
  2. Ensure the succession plan is manufacturer-approved.

When dealerships can be worth millions of dollars, it only makes sound business sense to take care of protecting the business and the dealer’s family or heirs well in advance.

Rachel Loizos is a business succession, estate planning and wealth preservation lawyer at Toronto law firm Sotos LLP, which has worked with car dealers and other franchise businesses across Canada since the 1980s.

This article originally appeared in the June, 2014 issue of Canadian Auto World.