With automakers increasing their use of right of first refusal in buy-sell deals, some dealers want to structure transactions to effectively block its use.
But they must be watchful about how they do it, dealership buy-sell advisers and dealer lawyers say.
“You’ve got to be careful that it doesn’t come off as a misrepresentation to the manufacturer about what the real price is,” said Joe Aboyoun, a Pine Brook, N.J., lawyer who handles dealership transactions.
Alan Haig, a dealership buy-sell adviser in Fort Lauderdale, Fla., says he’s seen buyers in recent deals ask to put structuring fees into the sale contract. If right of first refusal is exercised, the original buyer would get a cash award for his or her troubles. Haig has seen requests range from $1 million to $4 million.
For example, if a buyer and seller agree on a $20 million deal, the buyer may ask for the contract to call for a $21 million payment with $1 million returned to the original named buyer, he said. If the manufacturer exercises right of first refusal and assigns the deal to another dealer, the second dealer would pay the $21 million, and the seller would give $1 million to the original buyer.
“Some buyers are becoming aware that this is an increasing challenge, and they seek to protect themselves,” Haig said. “Some lawyers will allow it, and some won’t.”
Some franchise agreements prohibit the use of such structuring fees, Haig said.
Aboyoun also has seen transactions that include breakup fees of 5 or 10 percent going to the original buyer. Those and the structuring fees can be problematic, he said. The legality of such fees isn’t entirely clear, and manufacturers will push back against them.
When representing a seller, Aboyoun advises against such fees. But when representing a buyer, there’s no downside to including it, he said.
Other approaches can be more effective in deterring a right of first refusal, Aboyoun said.
“You try to structure a deal that would make the manufacturer less inclined to exercise it because it involves components a manufacturer just can’t match,” he said.
For instance, a seller could retain a small equity stake, say 10 percent, in the business. That may work for the original buyer, but it may be tough for the manufacturer to find another dealer willing to accept that partnership arrangement.
A portion of the transaction value also could be deferred and paid as a per-car bonus based on dealership sales in subsequent years. It could be $100 per new car sold over a certain minimum for the next five years. The seller might be OK with that because he or she knows the buyer and is confident of the store’s future performance level. But a different operator may be unable or unwilling to meet the seller’s expectations for store performance.
Said Aboyoun: “It’s a very difficult deal for the manufacturer to match.”