e h T to” w o “H uide G
Strategic Planning for Retail Automotive Dealers
Created by:
OCD Consulting, LLC and
O’Connor & Drew, CPA’s Quincy, Massachusetts © 2002 All Rights Reserved
Eight Steps to Strategic Planning Step 1— The Cycle of Value Step 2—Setting Goals
Page
3 4
Step 3—Defining the 5 Drivers of Value Step 4—Can We Execute
7
Step 5—Measuring our Performance
8
Step 6—Exit Options
9
Step 7—Tax Planning
10
Step 8—Build a Planning Team
10
Bring the Power of Strategic Planning to Your Dealership! Over the course of many years, we have been privileged to call hundreds of successful automotive retailers, our clients. From our close relationship with these dealers, we have discovered a simple truth; those who plan are more successful than those who don’t. In creating this “HOW TO” Guide for Strategic Planning, we have tried to articulate what we have learned from these “planners” by laying out a step-by-step process that will help you plan for and realize a more successful financial future. Every day your business is becoming more complicated, more difficult, more demanding, and more
competitive but it is also offering more opportunity than ever before. Capitalizing on these opportunities requires courage, vision, and skill. It’s a brand new world out there, let’s go exploring. Harry Salerno, President , Principal Joe Greenspan, Dir. of Automotive Services, Principal, O’Connor & Drew, CPA’s Michael McKean President, OCD Consulting
A complementary copy of this Guide can be obtained at www.ocdconsulting.com
Eight Steps to Successful Planning. Strategic planning for a business, is all about the creation, preservation, and conveyance of value. The purpose of this guide is to walk you through to a successful plan in eight simple steps. One: Determine which phase of the value cycle you and your busi-
ness are in. Two: Formulate and articulate your short and long-term goals. Three: Determine the drivers of value for your business and separate those you can influence from those you cannot. Four: Ask yourself, can my employees and I execute my
plan? Five: Assess your dealership’s long-term economic viability. Six: Consider your long-term exit options. Seven: Have an efficient tax plan in place. Eight: Share your plan with those who will help you achieve it.
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Strategic Planning for Retail Automotive Dealers
Four Long-term Trends You Can’t Afford to Ignore. Strategic planning is not about fortune telling. No one can predict your future. There are, however, four consistent, long-term trends that will greatly influence the future of your business. They are not to be ignored. Trend No. 1. The number of dealers in the US has been on a long and continuous decline. Trend No. 2. The number of passenger cars and light trucks in use in the US increases at a steady annual rate of just over 2%. Fewer dealers will be
serving bigger markets; if you plan to be among the survivors, you must plan for
Trend No. 3. The number of manufacturers ebbs and flows, history would indicate that we we are now poised 23500 for a world wide consolida23000 tion. Trend No. 4. Auto 22500 manufacturers, in seeking to 22000 protect market share and 21500 increase their own efficien21000 cies and profits, will continue 20500 to reduce new vehicle profit margins, to transfer costs to
growth.
dealers, and to demand more control over daily retail operations. N um be r of U S A u t o D e a l e r s
1992
1994
1996
1998
2000
2002
Bring the Power of Strategic Planning to Your Dealership. A good strategic plan will empower you to deal with the risks and uncertainties inherent in your busiU ni t s i n Ope r a t i on
220000 210000 200000 190000 180000 170000 160000
ness. A proactive/pre-emptive move in anticipation of change is usually more rewarding than a reactive response. An achievement thinker looks at problems from the offensive side of the ball and differentiates those things he can control from those he cannot. A strategic plan will prepare you to deal with change.
Preparing a strategic plan will cause you to set goals. Top performing organizations typically have clearly defined and universally shared objectives and expectations. The success of the Apollo Space Program is often credited to the fact that the mission of the project was so clearly defined; “Send a man to the moon and return him to Earth safely.”
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
“In an age of rapid consolidation you have to make a choice; become a bigger fish, or become bait”
Instructions:
A Strategic Plan is: ♦
♦
♦
Your handbook survival.
List your own reasons for having a strategic plan.
your stated goals.
for
Your guide to keeping the life cycle of your business synchronized with your personal ambitions. An assessment of the resources you have available for achieving
♦
A living document that is continuously changing to adapt to our changing environment. Anonymous client:
“We work on our strategic plan weekly. Every Saturday we have to decide; will it be donuts or bagels for the sales meeting?”
♦
___________________ ___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________ ___________________
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Strategic Planning for Retail Automotive Dealers
It’s All About Value! A strategic plan has one purpose, increase the value of the business to its stakeholders; owners, employees, vendors, lenders, customers will all benefit from a relationship with a superior performing entity. Businesses have life cycles. In our experience, the life cycle of a dealership often follows the life cycle of the primary stake-
STEP 1 holder, the dealer. Dealerships seem to work better when the life cycle of the business and the dealer are synchronized. We see the cycle of value as having three phases: creation, preservation, and conveyance. To start your strategic plan, you must first determine where you and your business are on the cycle of value.
Creation
Conveyance
Preservation Instructions: Mark your own position on the value cycle; next mark your dealership’s.
Number of Manufacturers Selling Vehicles in US
Finding Your Place on the Value Cycle. You know you’re in the Creation Phase when: You’re highly energetic, and naively optimistic. You have no aversion to risk because you haven’t made many mistakes yet, and you have no idea what they cost. You can’t grow your business fast enough, you can’t work hard enough or long enough. You’re so
highly leveraged, your banker calls you every day just to check on your health. You have no time to golf.
and are more cautious. Your net worth is headed in the right direction and now your banker sleeps at night. Your handicap is under 15.
You know you’re in the Preservation Phase when: You want your business to grow but you want money in your pocket too. You know the cost of bad decisions
You know your in the Conveyance Phase when: You are totally averse to new risks. Cash is your best friend. Your handicap is a 6.
Year
Cars
Trucks
2000
38
28
1990
44
22
1980
34
11
1970
25
10
1960
28
14
1950
22
15
1940
21
15
1930
31
14
1920
59
25
What Should My Plan Look Like? A strategic plan might be a formal document, or it might be notes on your desk pad. It may have many numbers, charts, and graphs, or it may just be a list of goals and ideas. Your plan needs to be a living document that can change with time and circumstance. Your plan
should have milestones that allow you to asses your progress and perhaps change directions.
and evaluate your resources; capital, management, facility, credit, and market.
Goals are an important part of your strategic plan, both short and long-term. Some goals may have definitive time tables other may be more open-ended.
Whether a set of thick binders or just a loose collection of ideas, your strategic plan is your weapon with which to protect your business from the many risks of your industry.
Your plan should itemize
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Strategic Planning for Retail Automotive Dealers
Setting Your Goals. STEP 2 Longer term goals:
Short term goals:
Evaluation of the resources I will need to accomplish my goals: S = Sufficient N= Not Sufficient
♦
Are limited in number.
♦
Are definitive as to time and measurable results.
♦
Hold someone accountable for completion.
♦
Are replaced with new goals when accomplished or abandoned.
Are more open ended but tend not to change over time.
♦
Should be synchronized with the life cycle of the business and the principle shareholder.
EXAMPLES Short Term—Increase my used vehicle inventory turnover rate from 6 to 9 times, annually. Longer Term—Represent franchises that collectively control at least 15% of the car and truck market
Instructions: Write down your short and longterm goals. List the resources you will need to accomplish each.
My Short Term Goals Are: ♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
Working Capital ___ Facilities ___
♦
Financing ___ Management ___ Sales Team ___ Service Team ___
Hint—Limit the number. Have a time for completion. Assign so meone to be accountable. Have measurable results.
Franchises ___ Product ___ MIS Systems ___ Market Growth ___
My Long Term Goals Are: ♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
♦
___________________ ___________________ ___________________
Brand Image ___ Prof. Advisors ___ Family Support ___ Personal Health ___ ♦
_____________
♦
_____________
Hint—Leave open ended. Synchronize with life cycle of business. Note milestone dates for assessment and redirection.
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Strategic Planning for Retail Automotive Dealers
Understanding the Drivers of Value. Driver of Value (Column I) a
Product
b
Location
c
Facility
d
Capital
e
Management
f
Competence
g
Customer Loyalty
h
Expense Structure
i
Profitability
j
Demographics
k
Economy
l
Market Size
m
Market Growth
n
Consumer Confidence
o
Market Share
p
Gross Margin
q
Employee Turnover
r
Interest Rates
s
Franchise
t
Corporate Org.
u
Brand Identity
v w x y
STEP 3
Impact on Value
Degree of Control
(Column II)
(Column III)
As certified business valuators, we are often asked to put a value on a business. But determining value is different from understanding what creates value. It is important to examine and understand each of the elements that help to create the value of your dealership.
A. Here is a list (Column I) of some of the drivers of value you may want to consider. Instructions: Add as many more to the list as you wish. B. Now on a scale of +5 for Great Impact to –5 for little Impact, in Column II, score each driver as to the real effect it bears on the success and profitability of your business. C. Finally in Column III use the same scale to measure the degree of control you have over each of the Drivers you listed. (+5 for Total Control to –5 for no control)
Here are some examples. The demographics of your market might have a lot of influence on your sales volume and market share, however in the short run you have little or no control over the situation. You might score demographics +3 for Impact but – 4 for control. Employee Turnover also has a great impact on the success and profits of your business, but here you have considerable control over the outcome. You might score Employee Turnover +3 for Impact and +3 for Control. The idea of this exercise is to identify those drivers of value that have great impact on your business that you also can control.
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Strategic Planning for Retail Automotive Dealers
No Control/ High Impact
Plotting the Drivers of Value
Total Control/ High Impact
Drivers of Value 5 4
Control
IV
3
I
2 1 0
-5
-4
-3
-2
III
-1 -1 0
1
-2 -3
2
3
4
5
II
-4
You may want to use this scatter graph to better visualize how the Drivers of Value effect your dealership. Use the scores you assigned on the previous page. The Impact score is plotted on the Vertical scale, the Control score on the Horizontal scale.
-5 No Control/ Low Impact
“Understanding the Drivers of Value is the key to discovering profits and cash flow that may be hidden in your business.”
Impact
Drivers in Quadrant I — For obvious reasons, the Drivers you plotted in Quadrant I (High Impact/High Control) should receive priority in your planning efforts. Improvements in these areas of your business are within your control and can make a real difference to your bottom line. Drivers in Quadrant II — While you have control over these
Total Control/ Low Impact
elements of value, they have little impact on results and should therefore be less prominent in your planning. Drivers in Quadrant III — Since these elements of value have little impact on your business and you have no control over their outcome, they probably do not need to be a part of your strategic plan. If you feel they are
important, then you may want to reassess your scoring. Drivers in Quadrant IV — These are the elements that keep you up at night. They can have a tremendous and sudden impact on the profits of your business but there is little you can do about them, at least in the short run. You need contingency plans for each of these nasty devils.
Proactive vs. Reactive — Asking the Right Questions Review each of the Drivers you plotted in Quadrants I and II. Here your actions can influence value. For each of these elements of value ask the question: If I do this, what are the possible results? For example: Let’s say you plotted Facility in Quadrant I. You might ask, if I add six quick lube bays to my shop, will the return on my investment go up, or down? This process will help you formulate plans of action that will increase the value of your dealership. For each of the Drivers you plotted in Quadrant III and IV, you should ask this question: If this happens, what will be my response? These are your contingency plans for events over which you have no control. For example: If my new vehicle business drops 25%, what expenses can I cut to remain profitable? You strategic plan should most definitely include plans for emergencies and climatic events.
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Strategic Planning for Retail Automotive Dealers
STEP 4
Can We Execute Our Plan?
For a business entity to be successful it must enjoy organizational competence and it must be able to deliver goods and services with value that exceeds price. To achieve this goal, we subscribe to what we call The Customer Based Management System. Customer Based Management looks at the seven internal elements of your dealership that determine organizational competence. How does your dealership score in these key areas of management? Your Score
Planning
Your Score
Your Score
People
Information
♦
Mission
♦
Relevant
♦
Screening/Selection
♦
Vision
♦
Accurate
♦
Orientation/Training
♦
Forecasts
♦
Timely
♦
Performance Standards
♦
Daily Objectives
♦
Digestible
♦
Career Development
♦
Long-term Goals Your Score
Your Score
Roles
Instructions:
♦
Job Descriptions
♦
Internal Relationships
♦
Synergists
♦
Customer up Communication
Score your dealership, from 1 to 10 (10 being excellent) in each of the seven elements of Customer Based Management
Flawless Execution
Accountability
strategic plan in the World is ♦
Personal Responsibility
♦
Positive Motivator
♦
Consistently Reinforced
♦
Universally Embraced
Your Score
♦
Operational Competence
♦
Process Standards
♦
Performance Standards
♦
Employee Driven
“The greatest
Hint! Look at the elements where you gave your dealership a low score. Do your short-term goals include plans for improvement in these areas?
worthless without flawless execution.”
Customer Loyalty
Your Score
♦
Employee Loyalty
♦
Frequency of Contact
♦
Fair Pricing
♦
Broad Spectrum
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Strategic Planning for Retail Automotive Dealers
Measuring Management Performance STEP 5 We believe the best measure of management performance to be Return on Assets, which is the product of multiplying a company’s asset turnover ratio by its net profit margin. This benchmark measures not just a company’s sales, gross, and expense, but also the efficiency with which the assets of the company are employed by its management. Complete this Table to determine your five year trend for Return on Assets. *This program is available at www.ocdconsulting.com
Instructions:
“A business has achieved Economic Viability when its internal cash flows are sufficient to fund its long-term growth potential.”
Line No.
Year
1.
Total Sales
$
$
$
$
$
2.
Total Assets
$
$
$
$
$
3.
Asset Turnover (Line 1/Line 2)
4.
Net Profit Before Tax
5.
Profit Margin (Line 4/Line 1)
%
%
%
%
%
6.
Return on Assets (Line 3 * Line 5)
%
%
%
%
%
Annual Return on Assets
1998
1999
X’s $
2000
X’s $
2001
X’s $
2002
X’s $
X’s $
Is Your Management Team Measuring Up? To achieve economic viability, dealerships must earn a minimum of a 10% Return on Assets, over the long-term. Earnings of less than 10% do not produce sufficient cash flow to finance the ever growing need for working capital, facility and equipment upgrades, and debt service. Where does your dealership fall on this scale?
2 0 .0 % 1 8 .0 % 1 6 .0 % 1 4 .0 % 1 2 .0 % 1 0 .0 % 8 .0 %
Return on Total Assets of
6 .0 % 4 .0 % 2 .0 % 0 .0 % R OA
1998
1999
2000
2001
2002
1 5 .2 %
1 8 .1 %
1 2 .3 %
9 .7 %
1 6 .8 %
Hint! Tie your management pay plans to Return on Assets and watch your profits soar.
Less than 10%
Not viable
10% to 15%
Minimum Acceptable
15% to 20%
Expected Performance
Over 20%
Superior Performance
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Strategic Planning for Retail Automotive Dealers
Three Options to Exiting—Consider Them All STEP 6 Family Succession—
Management Succession—
Sale of Business—
The majority of automobile dealerships are still owned and run by families, many are in their third or fourth generation. Obviously, family succession is real option. Ask yourself:
Selling the business to key managers is sometimes an option, but ask these questions:
Selling the assets of your business, including “bluesky”, is a straight-forward proposition. Before you decide to sell, ask these questions.
♦
Do I have family who wants to run the business?
♦
Do I have family who can run the business?
♦
How can I best transfer management responsibility?
♦
How can I best transfer legal ownership?
♦
♦
Can this manager really run the business in my absence? How will a fair market price be determined?
♦
Where will the money come from, will I have to finance the buy-out?
♦
How do I transfer control?
♦
Do I want a minority shareholder? ESOP?
♦
How will a buyer value my business?
♦
Will the cash proceeds be sufficient to support my financial needs?
♦
Will I have to finance part of the purchase price?
♦
How can I best market my business?
What’s the Difference? Succession Plan
Risk
Horizon
Complexity
Family
Risky — family emotions can interfere with good business decisions.
Long time line. Planned successor may find other interests with age.
Many tax and legal matters to consider. Need good professional advisor.
Leveraged Management Buy-out
Sale of Business
Very Risky — transfer of Long time line. Planned control and fair market successor may not perform value need to be negotiated to expectations. carefully.
Low Risk — With qualified buyer. Let the buyer beware.
Extremely complex financial and legal issues. Have an experienced advisor.
Relatively short time line. Straight forward with experiMarketing, approval, closing enced attorney and good can all be done in months. broker or business advisor.
“Having a contingency plan for an unintended exit is a must. Do you have these item in place?” ___ Will ___ Successor Addendum for Sales and Service Agreement ___ Cash/ Insurance to settle estate ___ Management Plan to Operate During Probate.
e ” h T to w o “H uide G O’Connor & Drew, P.C. OCD Consulting, LLC 1515 Hancock Street Quincy, MA 02169 Phone: 800-446-6829 Fax: 617-472-7560 Email:
[email protected] www.ocd.com www.ocdconsulting.com
This document and related spread sheets can be downloaded from our web site. Please direct all questions and inquires to Michael McKean, President OCD Consulting, 1-877-851-6232
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Strategic Planning for Retail Automotive Dealers
Have an Efficient Tax Strategy in Place Tax planning is important for every business. Retail automobile dealers have several options for tax savings. In completing your strategic plan, make sure your CPA has discussed these options with you. ♦
Gifting and estate planning options.
♦
Facility cost segregation studies.
♦
Year-end tax planning (Dec 31).
♦
Off-shore reinsurance companies.
♦
Employee Stock Ownership Plans.
♦
LIFO inventory valuations.
♦
Corporate Structure (C, S, LLC).
STEP 7
Not all of these tax saving devices are suitable for every dealership, but you should discuss them with your financial professional to assess the merits of each with respect to your own financial needs.
You’re Going to Need a Lot of Help! STEP 8 Form a Strategic Planning Team. — Here are some of the people whose help you will need in formulating and executing your strategic plan. Consider the role each will play and share your plan with them as appropriate. Key Person
Role in Planning
♦
Managers _____________________________________
♦
Employees_____________________________________
♦
Bankers_______________________________________
♦
Factory Reps___________________________________
♦
Attorney_______________________________________
♦
Accountant_____________________________________
♦
Business Advisor________________________________
♦
Spouse________________________________________
♦
Family_________________________________________
Notes
In today’s competitive environment, having a long-term strategic plan is no longer optional, it’s a necessity! Strategic Planning for Automotive Retailers As your industry continues to consolidate, you must make a choice: Become a bigger fish, or become bait. At O’Connor & Drew and OCD Consulting we have decades of experience helping automotive dealers achieve their financial goals. Now, these considerable resources are available to you. Call us today and find out how together, we can make strategic planning work for you and your dealership.
1515 Hancock Street Quincy, MA 02169 Phone: 800-446-6829 Fax: 617-472-7560 E-mail:
[email protected] www.ocd.com www.ocdconsulting.com
