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Opinion: Planning ahead - how to survive and thrive

John Hutchinson, managing partner, Pitmans LLP

Pitmans LLP managing partner John Hutchinson advised Ridgeway throughout the group’s July 2016 acquisition by Marshall Motors Group in the third largest deal of its kind in the UK ever.

Hutchinson has been operating in the market for over 20 years, working with clients including Bentley, BMW, Mercedes Benz and Jaguar Land Rover, and has provided advice on surviving and thriving in the market.

Here he shares some of his top tips on succeeding in the increasingly competitive market.

Exit strategy

Having dedicated decades to building up your dealership, an exit strategy might not be top of your priority list, but succession planning is vital. It needs to be factored into your business plan early on as a successful exit plan is based on constant evaluation of the market, reconsidering business models in relation to these market trends. It also provides time to build relationships and ensure a good management team is in place that will ensure quick integration post sale.

Working with manufacturers

As with all business partners, manufacturers want a proactive rather than reactive partnership. This requires in depth knowledge of the manufacturing market and the cultural differences that come with them, whether that be understanding the German brands that dominate the market, or the likes of Jaguar and Land Rover in the high end market.

Whichever you choose, a combination of brands is vital; vulnerability arises from relying on just one.

While there is credit in going for the high end market, you must be prepared to invest. Franchises are a must, and, while you may get some funding from the manufacturers, you will need to be willing to self-fund them.

That’s not to say you cannot make less prestigious brands work, but your service must outperform that of your competitors.

Regulations

One area of the law that is notorious for tripping up dealerships is tax and accounting, whether it be not declaring tax properly or not claiming back enough. Many are not reaping the benefits of tax tools such as capital allowances, which allow you to deduct part of your profit value before tax. Your finance director should be aware of the rules and regulations, but if ever in doubt, it is advised to seek financial advice.

Market trends

A holistic view of the market is vital for foreseeing potential implications for your business. Brexit is an obvious concern, with one in every 5 German cars being exported to the UK. Dealerships should monitor the multi-party negotiations that will be taking place over the next few years.

Head of the Pitmans Insolvency team and leading Insolvency Practitioner, Brooker has presented the all important early insolvency warning signs you need to be aware of to avoid your dealership running on empty. She recommends talking to advisers if your business suffers from any of the following.

 - Poor account management; this is the number one cause of insolvency. You need to be able to access and understand your accounts on a day to day basis to ensure you have a handle on where they sit in terms of your cash flow and liabilities.

 - Bad inventory management. You need to have a reliable and strict stock management system to avoid being left with obsolete or excessive inventory parts.

 - Unrealistic and non-cautious forecasting. While the true effect of Brexit is still up in the air, will we realistically have the same success in the next three quarters than we have had in the last? Successful forecasting comes from having a universal view of the market.

 - No credit security. Dealerships are often vulnerable to having multiple credit streams with different guarantors. These cross relationships can cause a domino effect of security issues if one goes wrong. It is advised to set limits on security in order to keep control.

 - Poor cash flow. While all business will have cash flow issues at some point, it is important to recognise when this becomes a critical breaking point. Ensuring invoices are processed timely and that you are keeping only enough stock as necessary will improve the flow.

 - Rent arrears. With leasehold properties, landlords are quick to take action if they become aware of any sign of distress. It is advised to ensure your rent is paid on time on a monthly basis. If you’re currently on quarterly payments, renegotiate for monthly payments as this will help you keep a clear picture on day to day bookkeeping.

 - Ignoring creditor pressure. Judges will see this as clear evidence of insolvency and will hold you liable if you continue to overlook this.

 - Not seeking help. No one wants to see a business fail, and that includes manufacturers, HMRC and banks. If you engage early enough, they will be on your side, and certain insolvency solutions can be implemented, such as company voluntary arrangements, which can preserve the underlying business and re-engineer future trading.

So now seems like the perfect time to consider your current business plan; do you intend to grow, why? Stay the same size? Or sell? Are you only interested in premium brands or do you diversify into quantity driven markets? 

Think about the many environmental and political factors that may suggest you revisit that business plan. If you’re unsure, perhaps that could be a reason to engage with your manufacturers and get their views. 

A positive, proactive relationship with manufacturers could be the key to survival.

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