Cars in row

Helping auto dealers transfer success

  • Tom Kostopoulos, Author |

KPMG has a structured automotive group that works closely with automotive dealerships. Our specialty is understanding their business, and auditing efficiently. Over the years we've created a team that knows the automotive profit centres and the risk areas. We know where to look for efficiencies, and most importantly, we know the best ways to save them some tax.

More and more, we're finding that our focus is on transferring dealerships to the next generation. It's important that dealers consider the nature of what they're passing on, and who they're passing it on to. If they do choose to transfer the dealership, will this cause problems for the family? And does someone in the family have the right skillset to take over? Many automotive dealers are choosing different paths. Some dealers choose to sell to another dealer; others sell the property to a developer.

We also help with tax issues. Many people don't realize that the estate can only be passed on tax-free to a spouse, and that there's a transfer tax on the value of the estate when it passes to the next generation. Where will that money come from? When the biggest asset in the estate is the dealership itself, what other assets can be sold to pay the taxes?

If the business is good, there's always the option of going to the bank and borrowing the money to pay the estate tax. This isn't the worst option—in essence, it puts the family in the same position as they were when the business was started. But if you plan, there are other choices. You can freeze the value of the company in a tax structure and set aside money for the tax bill. You can also take out insurance that will cover the taxes.

If I had a well-established client who was in the middle of their career, the best advice I could give them would be to start thinking about this now, and to put plans in place. This is what prepared dealers do. It's the ideal time for us to get involved. We can assess the value of the business, we can assess the other assets, and we can start planning for the dealer's ultimate retirement. At age 55, there's still time to buy life insurance that can equal the value of the business or cover the tax bill. At 70, it's much more complicated.

I often end up starting the conversation, and only then can we begin to split up the assets fairly and equitably. Once I explain about the tax burden, the floodgates open. It's amazing to me that there are still successful people out there who think that when they die, the business will continue on as usual with their spouse and their children in charge. That might happen, until the spouse dies. And then the children get the tax bill and are caught completely unprepared.

For automotive dealers, as your business develops, take the time to plan, do it early, and get these systems and processes in place. Once you've dealt with them, you (and your family) won't have to worry about them going forward. Don't take next-generation issues for granted—they can become big and complex without a succession plan.