By Jamie LaReau, Crain News Service
DETROIT (Jan. 21, 2014) — Auto dealer Jim Estabrook, 69, has no immediate plans to retire.
"My hobby is the car business," said the president of Estabrook Motors Co. in Pascagoula, Miss.
But 25 years ago, Mr. Estabrook started planning to ensure his family would be financially secure when he died. About 10 years ago he began grooming his sons to take over after they expressed an interest in the business. In 2005 he hired succession planners to arrange a legal and orderly management transition for when he leaves the business.
"One of the problems a lot of people have with transition planning, both financially and personally, is you have to be able to contemplate your own death, or at least giving up the reins," Mr. Estabrook said. "Realistically, both things have to happen, so you might as well suck it up and do it."
Without proper succession planning, a car dealer could leave behind a legacy of litigation and failed business and family relationships. That's why many experts agree dealers should start succession planning when they are in their late 40s or early 50s.
Most succession professionals say their dealer clients resist succession planning for a litany of reasons—fear of death, lack of successors and the cost, which can be tens or even hundreds of thousands of dollars. So despite an aging pool of auto dealers, only about a quarter of all U.S. dealers have factory-approved succession plans, said Hugh Roberts, a partner in the Los Angeles office of Rawls Group, a succession planning firm.
Good planning "guarantees your family's going to keep the dealership," said Dennis Amico, chairman of Wealth Preservation Solutions, an estate and business succession planning firm in Ridgewood, N.J. "You won't have the manufacturer pulling the plug."
A dealer who does a proper job of succession planning, including training a successor, can ease into retirement while maintaining a good standard of living, Mr. Amico added. "And when you die you reduce your estate settlement costs significantly."
Just turning the business over to a new owner "is fairly easy," said Jeffrey Faulkner, a principal at Rawls Group of Orlando, Fla. "But doing it in a way that preserves the business continuity and family harmony makes it very challenging."
Mr. Roberts said making a specific plan to define the dealer and the successor's expectations and roles is critical, along with spelling out how the business will be affected when any partner in the business retires, dies or gets divorced.
"You don't want to find out the divorce settlement judge is going to turn over some of that stock to the ex-spouse. Now suddenly you're in business with the ex," Mr. Roberts said.
Auto dealer Jerre Penney, 62, did not want his children to suffer the uncertainty he did.
Mr. Penney's father started Bill Penney Motor Co. in 1955 but did not plan for a proper succession. Jerre worked at the dealership for years, with his future in limbo until he arranged a buy-sell deal with his father in 1981 that would allow him to own the dealership eventually.
"I have had to acknowledge that I won't be here forever, I will demise. That has been very upsetting for me and a difficult issue," said Mr. Penney, owner of Bill Penney Toyota in Huntsville, Ala. "But I felt in case something does happen to me, I want my children to have peace of mind that we have done previous planning and looked at every aspect."
About a year ago, with Toyota's approval, Mr. Penney made his son, 33, who is the store's general manager, the dealer addendum.
"Which means I am the dealer of record, and if I die he will become the dealer of record with no issues and no uncertainty," Mr. Penney said. "That's the most important thing about this staying a family business."
Peace of mind is not cheap. Experts say it costs about $20,000 to $30,000 to pay lawyers, accountants and succession planners for the basic paperwork. Some dealers estimate the entire process cost them $200,000 to $250,000.
But that expense is a bargain compared with the financial and emotional cost if litigation arises because of inadequate succession planning. A lawsuit could cost into the "high seven figures" with lawyer fees and possible settlements, said Joe Aboyoun, a partner in the law firm Aboyoun & Heller in Pine Brook, N.J.
Mr. Aboyoun has seen lawsuits arise over just about any detail left unchecked in a dealer's succession plan. A typical problem is infighting between the kids running the operations and those who are not.
A common mistake, Mr. Aboyoun said, is dealers' leaving the business to one child and the real estate to another without any guidance on rent or lease terms. This often leads to arguments over rent rates and store improvements, he said.
"This has become a major problem," Mr. Aboyoun said. "Where, if the architect of the estate plan, the owner of the dealership, had really thought this through and designed a workable estate plan that provides direction, the children might not like it, but at least they will have direction."
One of the most well known examples of succession gone wrong is the case of Jerome Duncan Ford in suburban Detroit.
Before retiring in 1995, co-founder Richard Duncan passed control of the business to his daughter in 1993. He later tried to reverse the sale, alleging she was ruining the business. The dealership entered Chapter 11 bankruptcy proceedings in 2005 when it defaulted on a loan to Ford Motor Credit. Mr. Duncan sued his daughter after a long series of family disputes. He won a settlement, but the family dealership finally was sold.
Dealer Bob Hall, 68, has two successors: His oldest daughter, Jaclyn Midkiff, and her husband, Jason Midkiff.
Mr. Hall owns Bob Hall Auto Dealerships in Yakima, Wash. He has been planning his succession since March 2013 because he wants to hand over ownership by July 2014. By planning succession early, he can consult with both successors so as to ensure a smooth transition, he said.
Mr. Hall said Jaclyn Midkiff is "fully qualified." She is listed as the official successor with the brands he sells: Chevrolet, Honda and Mazda.
"If I got hit by a train today, the business goes forward and she would be automatically approved as the dealer operator," Mr. Hall said. "It'll be a husband and wife team, but no one officially sits in that role yet. It's still to be determined."
Most manufacturers, who must approve the successor, require that person to have an ownership stake, usually at least 20 percent of the dealership's stock, Mr. Amico said.
Lawyer Aboyoun said he works with Toyota often and they are "really pressing their dealers to have succession plans" by withholding approval of new points or buy-sell deals until the auto maker sees a succession plan.
In an emailed statement, Ernest Bastien, vice president of Toyota Motor Sales U.S.A.'s (TMS) retail market development, said: "While TMS does not require a succession plan, we continuously encourage dealers to engage in such planning."
Mr. Bastien said the average age of the company's dealers is 61 at the Toyota brand and 64 at Lexus. Roughly 10 percent of Toyota dealers have nominated successors on record, while Lexus is only slightly higher, he said.
At Chrysler Group L.L.C., the average dealer age is 58, according to a company spokesman. Chrysler does not track how many of its dealers have succession plans in place and does not have any formal criteria for succession plans. But the spokesman said the auto maker will assess all management changes which "could include ones that are a result of a dealership's succession plan." Chrysler's approval depends on such factors as the person's operational expertise, management history and retail automotive experience, the spokesman said.
General Motors Co., Ford Motor Co., Nissan and Mercedes declined to give their dealer's average age. But all vet proposed successors—and can veto a proposed successor.
Dealer Jim Estabrook's succession plan calls for his sons—Reed, 41, and Drew, 34—to one day co-own the business. Both sons will receive equal shares in the total enterprise, while running separate stores, Jim Estabrook said. The manufacturers have approved the plan, he said.
"For me, it was pretty much a given. It was something I always wanted to do," said Mr. Reed, general manager of Estabrook Ford-Lincoln-Nissan in Pascagoula, Miss. "My father and I always had a very close and good relationship and I love where I grew up."
Jim Estabrook gives Mr. Reed free rein to run the Ford-Lincoln-Nissan store so that employees will see Mr. Reed as the leader. But the father still works closely with Drew, who is the general manager of Estabrook Toyota, also in Pascagoula.
Jim Estabrook knows he can't oversee his sons forever, but he feels confident he has groomed them well and laid the groundwork—with a good succession plan—to preserve both the family business and their brotherly bond.
"There are two separate car dealerships that they could split down the middle and have their own stores if they decided," said Jim Estabrook. "I don't have any assurance they'll get along with each other. What I am assured of is they will agree to disagree and do it like gentlemen and have a resolve to be fair."
Reporters Mark Rechtin and Larry P. Vellequette contributed to this report, which appeared on autonews.com, the website of Automotive News, a Detroit-based sister publication of Tire Business.
What is the best business practice?
|Treating your customers fairly.||
67% (36 votes)
|Offering the lowest price possible.||
2% (1 votes)
|Doing the job well, as quickly as possible.||
22% (12 votes)
|Staying ahead of technology.||
4% (2 votes)
|Be heavily involved in the community.||
6% (3 votes)
|Total votes: 54|