Investing Your Dealership’s Capital – Moves to Make to Set Your Dealership Up for Continued Success

Whether you call them pre-owned, previously loved or used, one thing that’s almost certain is that your pre-owned inventory is sitting at a level that only two short years ago seemed astronomical. This is being caused by some combination of the following factors: used vehicles units on hand, the cost of the vehicle and the cost (and probably the time) to recondition these vehicles has all increased and increased dramatically at that. Could this be leading to a bubble in the used vehicle market? Possibly, but with deal velocity continuing at a relatively good pace despite reductions and eliminations of government aid packages that were subsidizing shoppers, it’s tough to gauge when that bubble might burst.

Something that’s a bit easier to gauge is how much of your available capital is being absorbed by these increases in pre-owned vehicle levels. On the spectrum of dealers that Withum partners with, we have folks who like to keep their pre-owned inventory unencumbered with floorplan loans – they like to look at their pre-owned inventory like their “rainy day” fund. We also have dealers who want to floor any units they can in order to keep the lubricant that is capital running through their stores. Most of our dealers land somewhere in the middle of that spectrum in more normal times. Over the last year or so, however, we are seeing a shift to dealers paying off floorplan loans on their pre-owned inventory, and at the same time, not flooring incoming pre-owned units. Dealers are using this as a way to “invest” available capital and reap the benefits (although limited) of reduced floorplan interest expense.

Is this the “highest and best use” of this available capital? Probably not. If you’re going to look at the picture from a purely economical point of view, you can earn higher returns by investing your excess capital in any number of ways (our wealth management arm, Withum Wealth has developed some options) rather than paying down floorplan. Not everyone has appetite for the stock market and the risks it bears though, so what if you’re struck from that mold? What’s the “best” way to invest for you? I would propose the following for your consideration:

If you have a franchise, you are subject to various facility standards, and not maintaining them could be costly. Is it time to invest in the project the factory is pushing for? If you’re not a franchised dealer, could you still benefit from some sort of image upgrade to your facilities?

Generous depreciation laws could generate some additional benefits from this type of investment.

I’m guessing the answer to this question is almost a universal “yes”. No matter how new your shop may be, there’s probably some piece of equipment that would benefit your store in some way (ability to sell more services / ability to improve productivity). Why not make that investment now?

This is a huge topic, and one that deserves as much consideration (if not more) than any of the other topics. With teams of people literally devoting careers to trying to hack into businesses and steal as much personally identifiable information as possible, are you doing all you can to prevent that from happening to you (and your customers)? Reputational risk is a real thing, so how would you feel if it was your store’s name splashed across the news associated with a cyber event?

It’s an age-old question – is it better to pay down long-term debt and save the interest on it (assuming there’s no pre-payment fees), or to conserve cash for a future event? While it’s always nice to get some debt off the books, long-term debt can be difficult and costly to replace should you need liquidity in a hurry. The same goes for lines-of-credit and floorplan, and these can sometimes be closed down because you don’t have activity on the line. Should an event occur when you need cash, it’s better to have it at your fingertips, than to have to go through the process of procuring loans during what could be a challenging time for your store.

There is no one-size-fits-all type answer to this question. It’s a matter of what works best for you and the goals that you would like to achieve. There is a lot of capital within dealership balance sheets right now, and unlocking that capital is of paramount importance in order to set you and your store on the path for continued success when (if?) this ride starts to slow down.