July 27, 2016
MBAF's Ira Silver discusses many ways an M&A deal can "blow-up" at the closing table, and how to avoid them, in the article "Don't Let Your Merger Deal Crash at Closing!" published in Automotive Buy Sell Report™.
The buyer’s offer has been made, the seller’s response has been given, negotiations have ensued back and forth, and an agreement has been reached. As the deal gets to the closing table and both sides are now building the all-important closing statement, what can go wrong? A lot, if you are not careful.
Here is a list of each item that needs to go into your closing statement, and the pitfalls to watch out for so you do not blow-up the deal at closing.
- Goodwill: Usually this amount is given in the APA – (“Asset Purchase Agreement”). The “value” of “goodwill” must include manufacturer dealer sales and service agreements, records (customer lists, URL domain names, and telephone numbers). The buyer needs to make sure that the seller has included these records, and not transferred them to himself or other assigned affiliated companies.
- Fixed Assets: Fixed assets can be sold at agreed upon price, based on FMV (“Fair Market Value”) or NBV (“Net Book Value”) which can be determined on a GAAP or Tax Basis. If using FMV, both parties need to agree in advance on the appraiser you will be using to determine FMV, and when he or she will do his or her physical evaluation. If NBV, whether GAAP or Tax, you must agree on the longevity of the fixed asset components. Most importantly, once you sign an APA or LOI (“Letter of Intent”), it is critical that any specified fixed assets from that point forward remain on the property. If an asset is missing, specify that the purchase price will be reduced by the original cost of that fixed asset.
- Inventory: New vehicles should be at invoice price, less all manufacturer credits (ie: floor plan interest, holdback, advertising credits, etc.). You must agree to the model year that will be accepted as “new.” You should also specify that any vehicles over 365 days in inventory should not be considered “new.” Make sure all co-op advertising funds, and mileage allowances, are properly accounted for. Be sure to list how many demos will be allowed.
- Used Car Inventory: The easiest and best method of assessing the worth of used car inventory is to agree upon value by taking a physical inventory 3 days prior to closing. If you are selling the dealership, and you do not have any other dealerships to move unsold units, you may want to sell remaining inventory to a few wholesalers on the day before closing.
- Rental Cars/ Company Vehicles: Both parties need to decide if rental, or company vehicles will be included in the purchase at NBV, or as used cars.
- Parts Inventory: Generally a physical inventory is taken the day before closing, and parts (OEM parts, undamaged and returnable) on the shelf over 12 months or for model years more than 5 years old will not be purchased. No tires over 12 months old based on tire dates should be purchased. In addition, a clear definition should be used for WIP, shop supplies, etc. and how they will be purchased.
- Real Estate: This is usually purchased at agreed upon price, or FMV (“Fair Market Value”), and will be included in the closing statement as the Real Estate Purchase Agreement, or REPA. If you elect FMV, and are each using your own appraisers, have a clause in the REPA, that states what will be done in the event that both appraisals are materially different (specify dollar spread before a 3rd independent appraiser is brought in). In addition, if the dealership needs to be brought up to manufacturer image compliance or a new facility, you should specify a threshold dollar amount estimate, above which the buyer can back out without a penalty.
Other Considerations at Closing
In addition to the above list, it is also very important to list any and all assets that will be exempt from the sale, i.e.: artwork, owner’s office furniture, tow trucks, etc.
While we have spent a lot of time discussing how to handle the transfer of assets at closing, like it or not, the buyer will also be assuming certain liabilities. These also must be covered in detail in the APA. If you will be assuming customer deposits, that is easy to list and determine.
However, it is a little more complex to determine how you will handle future “open programs,” or special deals that have been made with car buyers, such as “new tires for life,” maintenance programs, lifetime car washes, etc., and how will credit for these programs be calculated at closing date. In regard to employees coming to work for buyer, is a credit to be received for past vacation pay, or will seller pay at closing?
Details, details, details
Taking the proper measures to not crash a deal at the closing table all starts with the detail and expertise that goes into preparing the APA and REPA. The more detail, the less items to negotiate and/or fight about at closing. It is also vital, that the accounting office has all information requested (ie: inventory schedules – vehicles, invoices, MSO/Titles, floor plan statements, etc.) available 3 days prior to closing date. To facilitate the closing, have the bank/financial source taking over the floor plan, take the physical walk through, and reconcile the day before the closing. This way, the morning of the closing, nothing holds up the closing statements being agreed upon before noon, so all wire transfers of funds can be transacted that day.
Ira Silver, CPA, CGMA, is a principal in the Tax and Accounting Department at MBAF and is the principal-in-charge of the firm’s Orlando office. Ira has been in the public accounting profession since 1982. He can be reached at (407) 781-0150 or firstname.lastname@example.org
Click to read the article on Automotive Buy Sell Report™