Volkswagen dealers are finally in line for some financial relief after watching their volumes, profits and franchise values pummeled by the automaker's diesel emissions scandal.
But will it be enough to cover what they've lost, and may still stand to lose?
The answer will become clearer over the next several weeks, as lawyers for dealers and VW finalize how to divvy up a compensation fund --worth more than $1.2 billion, according to Reuters -- among VW's roughly 650 U.S. retailers, following a preliminary agreement reached last week. The agreement also calls on VW to buy back used diesels that have clogged dealership lots for more than 11 months.
Individual dealer payouts will be based in part on dealership and market size, according to Hagens Berman, a law firm representing dealers in the VW litigation in a U.S. District Court in San Francisco, but the reported $1.2 billion package amounts to an average of about $1.8 million per dealer.
Such a payout would be a boon for VW dealers struggling to turn a profit amid a stop-sale on diesel models that accounted for 20 percent of sales -- and a large chunk of new-car profits -- before the scandal erupted in September.
Jason Kuhn, a VW dealer in Florida and leader of the six-member Dealer Investment Committee formed in March to pursue settlement talks with the factory (See story above), cheered the deal, saying he was "very, very confident that the dealer body as a whole will feel that this proposal is very generous and that VW has fully compensated the dealers."
Yet buy-sell advisers, and even some VW retailers, question whether the fund will be enough to fully address the scandal's impact.
Alan Haig, president of buy-sell advisory firm Haig Partners in Fort Lauderdale, Fla., says an average payout of $1.8 million would be enough to make up for lost profits or diminished franchise value, but not both.
With many VW stores struggling before the scandal, Haig has assigned VW dealerships a flat dollar value since last year, rather than the traditional multiple of earnings. By his method, VW stores are worth between $0 and $1.5 million today, compared with $250,000 to $2.5 million before the scandal.
The impact of lost business and profit comes on top of that decline. Haig says while diesels accounted for a fifth of VW's sales, they made up a larger share of dealers' new-car profits.
As a result, he said, an average payout of $1.8 million, is "not sufficient to pay for the loss in profits and the loss in franchise value."
Buy-sell adviser Erin Kerrigan said the proposed dealer settlements are a key step in moving past the scandal, but echoed Haig's analysis. She estimates VW dealers on average were making an annual profit of about $600,000 before the scandal, meaning an average $1.8 million payout represents three times normal earnings.
"On an average basis it seems fair, but it very much depends on how [the funds] are allocated and distributed, and that's just for the earnings," " said Kerrigan, managing director of Kerrigan Advisors in Irvine, Calif.
"In terms of the value of the business, if someone was planning to sell their dealership in the middle of this scandal, it's not enough," she said.
Steve Kalafer, a VW dealer and owner of the 17-franchise Flemington Car & Truck Country in Flemington, N.J., says more is riding on the settlement than just a payout.
An underappreciated risk of the whole VW fiasco, Kalafer says, is the potential exposure to civil and even criminal fraud liability stemming from dealers who have borrowed money from lenders to bankroll business plans underpinned by VW's projections, which involved the sale of illegally modified diesel vehicles.
"The likelihood is unknown, but the bottom line is that dealers made warranties and representations based on projections [by VW] that were fraudulently computed," Kalafer said, adding: "I'm hopeful that this settlement from VW will put that potential liability behind them."
The risk of such dealer liability is a "legitimate concern," says Anthony Sabino, a federal class-action expert and law professor at St. John's University in New York. A criminal fraud case against a dealer would be "an uphill battle for even the best prosecutor" but civil fraud charges would be easier to pursue, he said.
Dealers could avoid such liability if the court-approved settlement contained an injunction shielding dealers from claims, he said.
Ultimately, Sabino says, the size of the compensation fund is key.
"What really is going to make it work, unequivocally, is money," he said. "People will be more accepting of a broad-based settlement that provides injunctive relief if there's enough money on the table."