Boon or burden? Automakers' use of right of first refusal in dealership buy-sells aids some, hinders others

A sometimes-controversial clause in franchise agreements ultimately helped Alex Medina realize a lifelong dream of owning his own dealership.

Someone else had negotiated with sellers Patrice Ross and Mark Phelps to buy Oracle Ford, a store outside Tucson, Ariz. But Ford Motor Co. exercised its right of first refusal: The move blocked that sale, and Ford redirected the deal — at the same price and terms — to Medina.

He had 90 days to complete the acquisition, which he did on May 10, renaming the store Oro Ford.

"Being a minority, I don't think I would have gotten it otherwise," said Medina, particularly because Ford "required that I be at least 40 percent" owner.

Collaborating with fellow Ford dealers Eddie Stivers of Stivers Automotive, Tim Hovik, chairman of the Ford National Dealer Council, and John Bernath, Medina was able to get the funding he needed to close. And Ford, through a minority dealership program, "forgave a large amount of my debt," said Medina, who has worked in dealership operations and sales for more than 25 years.

"I'm not a young man, I'm 57. It's a dream I thought would never be fulfilled."

For Medina and other would-be buyers from minority communities, the right of first refusal provides much-needed assistance navigating a prohibitively expensive buy-sell landscape by opening up purchase opportunities. But for others, the practice means automakers can derail long negotiations and deals between buyers and sellers.

Buy-sell experts say the refusal right has the potential to harm dealer-factory relationships, strips the dealer's ability to choose his or her own successor and spooks would-be buyers over concerns automakers will snatch away the store.

An exemplary Toyota dealer, as one dealership broker described him, was close to buying his first Honda dealership and initial California store last year when shortly before closing, the automaker intervened.

The original buyer met factory qualifications for sales and customer satisfaction and had no expectation the deal would fail to close with him as the new owner, said Alan Haig, president of Haig Partners, a Fort Lauderdale, Fla., buy-sell advisory firm, who represented the unnamed seller in the deal.

"Not only is [the rejected dealer] really upset with Honda, but he's not going to buy another store in California now," Haig told Automotive News.

Haig warned in his fourth-quarter 2022 Haig Report published in March that Honda in particular has been active in exercising its right and that if the trend continues, demand for Honda dealerships will cool because dealers "won't want to waste time and the risk of embarrassment of being denied at the end of a buy-sell process."

Jessica Fini, a spokesperson for American Honda Motor Co., did not comment on the Honda deal but said in an email that the automaker "finds first right of refusal an important and fair tool to ensure a quality and diverse dealer body that benefits the community and consumers."

Automakers not only can use the right as a tool to boost minority dealership ownership but also to assign deals to operators vetted by the company and weed out those whom they may see as unsuitable, experts say. And automakers can exercise the right in order to close stores, but it doesn't happen often, said Stephen Dietrich, a partner with Holland & Knight law firm in Denver. In those cases, the deal just isn't assigned to anyone new. In some states, the right also allows an automaker to buy a store back itself.

Dealership buy-sell experts say the use of the right by automakers is on the rise, with some having aggressively increased involvement in managing their dealership networks since 2015.

California and West Virginia both put forth bills this year aiming to curtail the power, which is largely banned in at least 11 states, Automotive News found.

Automakers use the right of first refusal as a way to exert more control over who owns their branded dealerships, while some use buyouts to reduce overall dealership footprints, according to Kerrigan Advisors' 2022 Blue Sky Report published in April.

While the refusal can be inconvenient for a single-point dealer exiting the business, it can be disastrous for larger deals, experts say. Dealership sales several months in the making containing numerous brands and stores could be unwound if one automaker decides to invoke the right.

And automakers who overly rely on the refusal tool can harm dealership blue sky values — the intangible value of a dealership, including goodwill — as some buyers will skip making an offer, according to the report published by Kerrigan Advisors, a sell-side firm in Incline Village, Nev.

"When the buyer pool for a franchise is reduced for this reason, the laws of economics come into play — less demand often results in lower prices," the report said.

These circumstances largely factored into California's bill introduced this spring, the second attempt in the state in the past five years to eliminate the right, according to Brian Maas, president of the California New Car Dealers Association.

"In California, we've got a huge new-car market, we've got several large dealership groups, and we've seen circumstances where manufacturers step in with ROFRs, much to the chagrin of the selling dealers," Maas said. "To have a manufacturer, especially later in the process, say, 'No, we're exercising our right to first refusal,' it's really problematic."

There was an attempt to strike the practice under a bill introduced in the state in 2018, but the provision was taken out in committee. This year's bill is similar, with the right of first refusal among many dealer association concerns.

The bill passed both the Senate and Assembly in September and awaits the signature of Gov. Gavin Newsom, who has until mid-October to take action. If signed by Newsom, the law would be updated to say, "The franchisor does not use, or threaten to use, the exercise of the right of first refusal in bad faith," according to Maas.

"Adding the 'bad faith' provision was an improvement on existing law, and it was what we could accept," Maas said, describing negotiations from the introduced bill. "It allows a dealer to challenge a right of first refusal where they're just doing it to harass the dealer, for example."

Proponents of the tool, meanwhile, argue that the right is one method of expanding minority dealership ownership.
Three years after the murder of George Floyd and an outpouring of automaker promises to diversify dealership footprints, the industry has made meaningful strides, with the number of minority-owned dealerships in the U.S. reaching levels not seen since the Great Recession.

Automakers in 2022 added more than 100 minority-owned stores for the second year in a row, according to the National Association of Minority Automobile Dealers.
Still, minority-owned dealerships remain well below historical levels, and marketplace factors including high dealership prices aren't favorable to minority dealers inheriting a deal, according to Damon Lester, vice chair of NAMAD and owner of Nissan of Bowie in Maryland.

Minority buyers may have difficulty acquiring the capital to match deals put together for a different buyer, Lester said.

While the refusal right remains a viable option to increase the minority dealership network, Lester said the time crunch — often about 30 to 45 days to close once the deal is reassigned — also is tough for many would-be buyers.

"There's really a finite number of people who can execute on an opportunity that fast at these blue sky levels," Lester said. "The price and the times are deterrents, but let's keep the opportunity in play as an option."

In West Virginia, the bill to prohibit right of first refusal failed in the House of Delegates in March, in part because Delegate Evan Hansen expressed concern that prohibiting it could infringe on automakers' efforts to expand diversity among their dealership networks.

But some critics believe automakers may overstate how often it is used for the reason of expanding minority ownership. Johnnie Brown, outside general counsel for the West Virginia Automobile Dealers Association, said of the three buy-sell deals he worked on in 2022, automakers exercised the right on two — and neither store was reassigned to a minority buyer.

Two states — Illinois and Virginia — allow the right only in the event the reassigned dealership goes to a minority dealer, Lester said.

Lester worked on both laws. A third bill pending in New Jersey was interrupted by the COVID-19 pandemic, he said.

Since 2019, the right can be used in Virginia only if a minority dealer is granted at least 51 percent ownership, according to Don Hall, the Virginia Automobile Dealers Association CEO, who worked with Lester on the bill. This ensures the automaker cannot try to reassign the store to someone else later, Hall said, because the dealer has a majority stake.

"This is a real way for minorities to have real ownership, not as a token," Hall said. "This was the right thing to do."

Automakers say state franchise laws make it extremely difficult for them to end a franchise with one of their dealers or add another in the same area.
Right of first refusal allows automakers to exert more control over their footprints, according to David Bright, senior attorney for the Alliance for Automotive Innovation, a lobbying group that represents many automakers.
"State efforts to eliminate ROFR in the automobile franchise space are misguided, not in the best interests of consumers and don't reflect the changing auto market and evolving customer expectations," Bright said in a statement.

Mercedes-Benz told Automotive News that it leverages the right "where we believe prudent to support our business objectives and advance efforts to best serve our customers and brand experience," the company said in an emailed statement.
Some automakers say they try to find opportunities for minority candidates whenever they can. General Motors, for example, has a process where buy-sell applications may be screened by members of its minority dealer development program to determine whether the dealership and location would be a good fit for a minority owner, according to GM spokesperson Sabin Blake.
"Usage of the right of first refusal is not used exclusively for minority dealers but is a tool used in some cases to increase our representation and help foster a diverse dealer network that's reflective of our customer base," Blake said.

"The overarching goal is to get the best dealer in the best location that can deliver the best customer experience."
A longtime employee of Earnhardt Auto Centers, Ford dealer Medina has seen the right of first refusal from both sides. While he was an Earnhardt general manager and a part owner, he said GM squashed the group's purchase of a Buick-GMC dealership in the middle of the process.
"We were already moving our IT equipment in, and they said, 'We don't want you to have it, we're going to give it to a minority,' " Medina said. "As far as how they determined who gets what, I have no idea."