Dealers have options to shore up cash

For many dealerships, the coronavirus pandemic has upended their operations, forcing changes that just weeks ago would have been unthinkable.

One dealership group last week considered floorplanning used-vehicle inventory, while another dealership cut hours and was considering layoffs as the sales outlook worsened.

Sales already were nosediving in many areas of the country, and some dealerships were forced to close last week because of orders from state and municipal governments. The rapid decline in circumstances has dealers making tough decisions on how to trim costs and generate cash to stay afloat over the next few weeks and months.

Accountant Ken Rosenfield, managing partner of Rosenfield & Co. with offices in Florida, New Jersey and New York, said last week that he's been fielding calls from dealer clients "nonstop." As of Tuesday, March 17, none of the clients he'd spoken with had laid off anyone.

"But we have seen them go into cash conservation mode," said Rosenfield, whose firm works with more than 400 dealerships. "So they are tightening their internal controls to conserve cash and make sure that there's no theft going on because we've seen in rough times people freak out."

Jodi Kippe, managing partner of retail dealer services at accounting and consulting firm Crowe, said dealer clients are meeting multiple times daily to adjust to fast-moving federal and local government changes.

"If you look back at the recession, those that reacted the quickest were better positioned," Kippe said. "Some that maybe didn't react as quickly last time, they might react a little bit faster."

Though the pandemic has reached all 50 states, the impact has been worse in certain areas. Some dealerships early in the month were reporting robust sales.

Earl Stewart, dealer principal of Earl Stewart Toyota in Lake Park, Fla., said last week that March sales were tracking to meet his internal target of 237 new vehicles. The service department was humming, though a little less busy than usual. On Tuesday, there were 65 service appointments, down from a typical 90, he said. Service was busier Wednesday and Thursday.

"I'm losing more money in the stock marketthan I am at the car dealership," Stewart said.

Stewart said he reduced the sales day by two hours and he and management are talking about plans for downsizing, cutting hours in service and, eventually, employees.

"I don't want to lay people off permanently," Stewart said. "I have 170 employees right now, but I can't see my keeping and paying 170 employees in a situation where everybody's quarantined at home."

Stuart McCallum, a partner with the Henderson Hutcherson & McCullough accounting firm in Chattanooga, suggests dealers hold onto star employees in uncertain times as they'd hate to see them working down the street in 45 days if the economy recovers.

"I worry that dealers may panic and just start cutting people," he said, adding they may in a short time need employees. "I would be slow to terminate anybody in the service department."

Greg Dougherty, a partner at Crowe, said dealerships could temporarily convert salespeople to porters or concierges as dealerships increase remote deliveries and service pickups.

While some employees might have thought such jobs were below them, "that's not the case right now," Dougherty said. "If I know that I'm going to be able to keep a job and keep a paycheck, people are going to be willing to do that."

While it's unclear how long the slowdown will last, dealers should seek flexibility from lenders, accountants say.

McCallum advises dealers to read their loan agreements, including for floorplans. They must be familiar with terms and covenants, specifically around any equity cure provisions that allow a borrower to fix a loan covenant breach such as not having enough working capital.

Being able "to repair that over the next 30 days could be the difference between keeping your business or not," he said. Dealers also should consider drawing down their credit revolvers. "Take it, so you have access to it," McCallum said.

Buddy Dearman, managing partner of the dealership practice at accounting firm Dixon Hughes Goodman, said he expects some dealers will seek deferrals on mortgage principal payments "so they can take whatever cash flow they do have and focus on keeping their business open and paying their employees and providing benefits."
Tax strategies such as deferring estimated tax payments could also help dealerships preserve cash, Dearman said.

Dealers also can consider tapping available equity in floorplan inventory or taking out floorplan loans for used vehicles if they don't already do that, experts say.

That's something Liza Borches, CEO of Carter Myers Automotive in Charlottesville, Va., is considering.
"We're just trying to simulate every possibility without overreacting," Borches said. "We're just making sure we understand every avenue that we have so we can best take care of all of our associates."

Advertising, one of the top five expenses for most dealerships, is another quick cut, accountants said. But not all dealerships are trimming that cost yet. Borches said Carter Myers hasn't adjusted its advertising spend.

"A lot of consumers are in their homes," Borches said. "It's the right time to reach customers as long as you have the right message."

Her group, with 13 stores representing 16 brands across Virginia, is taking a hard look at short- and long-term expenses, Borches said. Items on the chopping block include nonessential construction projects and hiring new employees.

Rosenfield said the vast majority of his clients are well capitalized and have three months or more of operating expenses in the bank.

"They can weather the storm for a few weeks," he said. "It won't be nice, but they'll be able to do that."