Mike Linn, president of the National Independent Automobile Dealers Association, says he has seen an increase in the number of buy-here, pay-here stores over the past two to three years. He cites an unsettled economy and an increase in personal bankruptcies.
But Linn says it is mostly dealers already in the business that are expanding. He says no growth has occurred in the number of new-car dealers or independent used-vehicle dealers taking on buy-here, pay-here stores.
Linn says about 5,000 of the association's 20,000 members operate buy-here, pay-here stores. About 5 percent of those operate new-car franchises as well. He says new state regulations and training stipulations have reduced the number of dealers getting into the business. "The better ones are staying in the business; the marginal ones are getting out," Linn says.
Ackermann says Byrider made a conscious effort to slow down its growth over the past two years to weed out underperforming franchisees and concentrate on training dealers how to improve customer service. "We wanted to slow down and better commit our resources to improving the existing stores that we had," he says.
How it works
Duncan says Byrider's turnkey program showed him how to underwrite loans, match the right car with the right customer and manage collections. "Can you imagine having a million dollars riding around and not knowing how to collect it?" Duncan says. "They save you from yourself."
Ackermann says Byrider is actively recruiting entrepreneurs who own new-car dealerships.
The privately owned chain has 123 J.D. Byrider stores in the United States. Thirteen are company-owned; 57 franchisees own the rest. About half of those franchisees also own new-car dealerships, Ackermann says.
Besides recruiting new franchise holders, Byrider plans to open at least 13 dealerships this year. Those stores will be owned by existing franchisees in those markets. Byrider plans to open one company-owned store in Pinellas Park, Fla., this year.
The typical investment in a Byrider store and its related finance company is $5 million, of which $750,000 to $1 million is in liquid capital, Ackerman says. The rest is financed.
But make no mistake, buy-here, pay-here dealerships can be risky. The business model's very nature is often the target of intense scrutiny and sharp criticism from consumer-advocacy groups and agencies.
For example, it is common for buy-here, pay-here patrons to pay 25 percent or more to finance their vehicles, depending on state usury laws.
A J.D. Byrider franchise store in Louisville, Ky., drew so many consumer complaints about the pricing and condition of vehicles that the state attorney general sued the dealership and J.D. Byrider Systems in 2004.
The lawsuit alleged numerous violations of the Kentucky Consumer Protection Act. The complaints included false and misleading statements about the condition of vehicles and improper disclaimers of implied warranties and failure to honor those warranties.
The suit was settled in January for $7.4 million. It called for the Louisville Byrider store to pay restitution of $500 refunds or credits to more than 14,000 consumers who purchased vehicles at the location from Jan. 1, 2000, through Dec. 31, 2004.
Ackermann says the company terminated that franchisee in January and over the past two years has parted company with about 19 others that did not adhere to the Byrider's customer-service standards.
Twenty-five percent of consumers in the segment default on their loans, says Ken Shilson, a Houston certified public accountant who helps dealers set up buy-here, pay-here stores and related finance companies.
Conversely, buy-here, pay-here dealers put a lot on the line when they hand over a vehicle to a person who does not have a track record for paying bills. Twenty-five percent of the consumers in the segment default on their loans.
Toby Reiley, president of Dealer Finance Technology LLC in Marblehead, Mass., offers dealers a "finance company in a box." That includes helping them get licensed; providing software to underwrite and service the loan; and servicing the loans, including collections.
His business model requires dealers include starter-interruption devices on the vehicles they finance. The devices are programmed to prevent the vehicle from starting if a customer fails to make payments on time. "It's all about preventing loss," Reiley says of the starter-interruption devices.
Ackermann says Byrider discourages the use of such devices.
Shilson says it's not easy to borrow money to get into the buy-here, pay-here business. Dealers must have excellent net worth, a solid business plan and a good management team. "They need what you would expect from any good businessperson," he says. "They've got to have some of their own money in the deal."
Adam Lee, president of Lee Auto Malls in Westbrook, Maine, says he makes about 18 to 20 percent profit on his buy-here, pay-here cars and trucks.
Lee says his family-owned dealership group got into the buy-here, pay-here business in 1989. The group set up its own finance company, Maine Auto Credit, soon after because traditional lenders typically shun consumers with severely impaired credit.
The Lee group operates Honda, Nissan, Toyota, Cadillac, Chevrolet, GMC, Chrysler, Dodge and Jeep franchises and has four stand-alone used-car dealerships at 10 locations. The group sold 4,000 used vehicles in 2005. Its buy-here, pay-here operations accounted for just under 30 percent of that volume.
"It has been very good for us," Lee says. "But if you aren't very careful and if you don't do it right, you'll lose your shirt."
You may e-mail Arlena Sawyers at [email protected]