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Block exemption: Keeping deals under wraps

A motor trade executive who advises on car dealership sales and purchases believes that any retailer looking to sell part or all of their business should ensure the manufacturer is the last to hear about it. Under the revised block exemption rules, dealers can theoretically sell their business to any company they wish, but carmakers still have tremendous influence over any deal.

“An AM100 top 20 group with a cluster of outlets in one area is likely to be encouraged to add another. By contrast, a small business can expect to experience resistance – a good deal of arm-twisting is rife,” says the executive, who asked not to be named.

“If a deal goes to the manufacturer first, it will invariably end in tears. Do the planning first, go to the market and enter discussions, and then speak to the manufacturer. They might still try to influence the deal, but the chances are it will end with a better outcome for the dealer.”

It’s a situation that Lindsay Levin understands only too well. She found that block exemption, intended to make it easier for retailers to buy and sell dealerships, did not work in her favour when she decided to dispose of her five franchised outlets.

Levin, chairman of the Whites Group, reckons the 2003 version has given more power to manufacturers and means dealer groups cannot benefit from open market price competition.

Sale was drawn out and stressful

Her group had two Audi centres and three Volkswagen dealerships grouped conveniently in the south of England, making it an attractive prospect for a larger group. Volkswagen Group UK had other ideas and it took Whites two stressful years to sell.

In June 2003, Whites sold Wimbledon Audi to SC Smith, Croydon VW to Driftbridge and Wimbledon VW to Dutton-Forshaw. It was 20 months before Levin was able to sell Audi Camberley to Colbournes and VW Camberley to Martins Group, “We wanted to sell all five dealerships to one group,” says Levin. “They wanted us to sell to five different companies, and they wanted to choose who we sold to. Having to spread the sales out over a long period, and to five different parties, was destructive for our business and meant a high degree of uncertainty for our staff.

“I did get apologies from Audi for the situation but no one did anything about it. In my experience, manufacturers do not trust dealers, and vice versa.”

Three years ago, Whites was a £91m group employing more than 400 and in 1998 won the AM Dealer of the year award. Levin has always been widely respected in the retail motor industry for her constructive thinking and she was not the first to take a positive decision to pull out of motor retailing. The most notable was Lex Service (later RAC group), which was once the largest UK dealer group.

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Levin decided to exit motor retailing (while retaining four bodyshops) and focus on other activities, including property development and dental equipment.

Lack of freedom for retailers

“We decided to get out of automotive retailing largely because of the combative relationships with manufacturers,” says Levin. “They have a high degree of control and we felt there were better ways of growing our assets in other industries. Block exemption has increased their control, yet the money at risk is the retailers’.”

After Whites decided to sell, there was a protracted process while Audi and VW selected its preferred candidates. “In the end, we sold to companies selected by VW and Audi. We did it because it would secure the best possible future for our staff, but it depressed the selling price,” says Levin.

“They told me we could sell to whoever we wanted to, but in our experience we did not really have that choice because dealers won’t negotiate without the full approval and backing of the manufacturer.”

Volkswagen Group UK is unwilling to comment on individual cases but stresses that it goes to “great lengths” to ensure compliance with legislation.

“Prior to the current block exemption regulation, manufacturers were entitled to choose to contract only with candidates they considered appropriate for the particular geographic location,” says a company spokesman. “Under the new regulation, agreements are transferable automatically if the buyer is already accepted as an existing franchise holder. If not, the manufacturer is again free to decide in accordance with its policies for the appointment of new partners, since no previous acceptance has been granted.”

The Office of Fair Trading is keeping an eye on how block exemption is working out in the UK, and EC officials are monitoring how it is affecting strategic changes in the industry, but neither organization was able to provide any feedback on progress over the past two years.

Manufacturers’ input ‘understandable’ Piers Trenear-Thomas, retail motor industry consultant, says: “Block exemption now provides a basis for dealer groups to buy and sell freely, provided the acquirer already represents the franchise.

“It is, however, entirely understandable that manufacturers will still want to influence their dealer network structure.

It requires common sense and good planning to make the transaction commercially acceptable to both sides.”

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Martin Wilson, a director of MTBN (former Motor Trade Business Network), believes that it is more difficult to get proper value, a trend that started with the introduction of market areas, which meant manufacturers wanted dealers to sell to a particular retailer.

“We sent a document to the EC while officials were considering the changes and wanted manufacturers to be less in the driving seat,” he says. “The problem for dealers is that manufacturers can exert a lot of influence over people holding their franchise. Retailers have told me of cases where they have agreed a deal, but then the manufacturer has stepped in.

“One dealer who wanted us to act for them was told that would not be necessary. The reason, of course, is that manufacturers realize we know all about their tactics which, in one instance, led to a dealer losing out on the £150,000 goodwill they had negotiated with their purchaser.”

For the large dealer groups, buying and selling within manufacturers’ preferred strategies is part of everyday life. Before Pendragon bought CD Bramall, Audi made it clear the group would be expected to sell three of its acquisition’s Audi centres (it sold two back to Tony Bramall).

“We didn’t particularly want to, but realized it was necessary to,” says Trevor Finn, Pendragon chief executive.

Understand your franchise partner’s retail game plan

Motor retail property specialists urge dealers to seek professional help when buying and selling as part of the reorganization of a group, or to finance retirement.

One says: “The reality is that each manufacturer has its own game plan for changing the shape of representation in certain areas. This means that, for dealers, the broader relationship with the manufacturer may be more important than a single franchise deal.”

Another comments: “Everyone knows the rules of the game. Block exemption says that if both seller and buyer hold the same franchise, they do not need the agreement of the manufacturer.

“The latest regulation has gone a long way to making the retail motor industry more liberal, but not all the way. It probably never will because, in the end, it always comes down to relationships between people. The sale and purchase of each dealership is in some way unique.”

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