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SEPTEMBER 2016 Volume 48 | Number 9

IN EACH ISSUE6 FrontlineU.S. Rep. Henry Cuellar will be the featured speaker

for the Day on the Hill at NIADA’s National Leadership

Conference in Washington D.C.; agents who administer

the NIADA CPO program are now certified through

training from Warrantech; Cars.com acquires online

dealership review site DealerRater; TrueCar CEO Chip

Perry follows up on his “Dealer Pledge”; and more

70 Industry CalendarTake a look ahead at the big auto industry events

coming up, including the NADA Convention and Expo

in January.

FEEDBACKUsed Car Dealer WantsTo Hear From You. Tell Us What You Think! Used Car Dealer encourages

its readers to send comments, opinions and

suggestions about the publication for reprint. Letters

can by emailed to editor@niada.com. Include your full

name, address and phone number. We are unable to

publish all letters and may edit letters for length and

clarity. This is a great opportunity to hear back from our

readers on what you think about the articles and what

topics you would like to see covered in future issues.

24 | Dealership of the Future: A Leap Into TomorrowFour industry experts offer a glimpse at what the

independent dealership of the future might be like –

and how you can get there.

36 | Embracing Disruption

In order to keep moving forward, dealers must

change the way they view change, Susan Moritz

of NextGear Capital explains.

44 | Service Pays What does customer service have to do with cash

flow? Everything, when it comes to Buy Here-Pay

Here operations.

50 | Word of Mouth

DealerRater CEO Gary Tucker says online

reviews – the new word-of-mouth – are critical to

driving lot visits and sales in today’s digital world.

56 | Succeeding at Succession

Smart – and early – planning for the transition

of your business can make it easier for the next

generation to pick up the torch.

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08 | The Road Ahead

10 | Washington D.C. Update

12 | Legal Musings

14 | Technically Speaking

16 | Industry Insider

18 | Management Matters

20 | Driving Traffic

22 | Association News

WHAT’S INSIDE

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High default rates have inspired someBuy Here-Pay Here dealers to managecash flow through repossession.

They sell cars and, if necessary, repossessthem and sell them again. A customer who fails to

pay is seen as an opportunity rather than a liability.But dealers interested in stronger financial

management are choosing a better alternative.It’s called customer service.Before we go down the road of discussing

transient, hard-to-reach clientele, abandoned carsand months of missed payments, let me say thatcustomer service in the Buy Here-Pay Here worldmeans something different than in your averageretail scenario.

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The ultimate goal is to secure a longer streamof monthly payments per customer, while realizingsome contracts might not get paid in full.

Change Your Service Mindset

It takes time for a dealership operating on therepossession model to develop a focus oncustomer service.

First of all, the sales process must shift froma focus on getting the car sold to a focus onlearning about the customer. Each customer hasunique expectations, needs and approaches toproblem-solving and communication.

That information will be important if thedealer’s mindset is now to keep the customer in acar and to collect payments.

For example, a dealer might explain up frontthat the customer has a full or limited warranty onany mechanical repairs for a set period of time.That option is designed to keep the dealership incontact with the customer and make small repairsto avoid bigger ones later.

Frequently, a broken-down car equalsstopped payments.

Instead, the dealer offers to make repairs,eliminating that common excuse for non-paymentand staying in contact with more customers.

Other examples of establishing regularcommunication and service include offering regularspot checks on the vehicle and letting customers

upgrade to a nicer model while keeping paymentsthe same. Dealers can also offer to pick up avehicle free of charge if it breaks down.

While all the work and expense seem tocome from the dealer, the beneDt of that extraservice is sustaining thousands in payments eachmonth while reducing the need to sell as manycars per month.

Plus, the customer may feel more loyalbecause of the help provided and could referfriends and family.

Get Your Team on Board

For the customer-centric approach to work,the dealer must get buy-in from the entire team,including reception, the collections staff and theservice team.

If, for example, the collections staff is nowfocused on keeping a customer in a vehiclerather than expecting to repossess it, thecommunication style has to change. The staffmust communicate with customers as soon as apayment is missed, rather than waiting 60 to 90days to meet the legal requirements forrepossession.

Collections staff must be trained to askmore questions when calling about missedpayments and to show sympathy by offeringsolutions. They can ask the customer to come inand make a payment. They can offer a discount ifthe payment is made within the week. If the caris broken down, they can discuss repair options.

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Sometimes it is helpful to review thepayment history and the customer’s incomearrangements to discuss paying ahead when cashEow is healthy, then having a couple weeks ormonths of no payments when cash Eow is thin.

Service technicians must provide a cordialenvironment to support the customer relationship.Their goal has changed from getting a job done tokeeping a customer happy.

Follow a Consistent Strategy

A dealership cannot focus on repossessionand also provide good customer service.

A consistent, customer-centric approachlooks more like this:

• Review all customers on a weekly basisand identify which are currently behind onpayments.

• Contact customers and invite them to thedealership to talk about getting current onpayments.

• Offer a list of options that can supportup-to-date payments.

• When customers visit the dealership,provide a welcoming experience that demonstratesyour interest in keeping the relationship.

• Outline a plan to continue the paymentstream.

• Get the vehicle in and inspect it or makerepairs.

• Provide a discount.• Add missed payments or big repairs to

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the end of the existing contract.• Get customers into another vehicle

through refinancing.• Adjust the payment schedule to support

changes in circumstances.• Follow up and stay in contact through

in-person visits as much as possible.• Monitor payment habits and communicate

as soon as there is a change.Once the customer-centric approach is in

place and working consistently, dealers cancalculate how many customers making regularmonthly payments are needed to support aconsistent budget and profit margin. That can helpdealers plan ahead by creating a fund that cancover customer repairs, service area upgrades oradvertising.

That consistent approach can also reduce therequired quota of sales per month, which reducesinvestment in new inventory.

Invest in Better Tools

All dealerships need an effective way oftracking the number of customers they have andthe current level of collections. If customers arebehind on payments, dealers need to know thelevel of delinquency to prioritize which accountsneed attention first.

Again, the longer a delinquency is leftunchecked, the more likely you are to lose that

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customer and default to repossession.There are several software packages that

support dealership efficiency, including but notlimited to DealerSocket’s AutoStar and FEX, Frazerand Dealer-Mate. The software must be usedproperly and regularly for a customer-centricapproach to succeed.

In a repossession approach, dealers simplywait for delinquency. In a customer-centricapproach, dealers must look at reports weekly.They look for signs of changes in payment streams,then communicate with the collections staff, whichmust reach out to those Eagged customers.

Once collections improve, the reports cantell dealers how to improve budgeting, trackinventory and monitor related Dnance companyreimbursements (if applicable). The software canbe tailored to provide the reports that are mostmeaningful.

Dealers should be sure to pay attention to anumber of the reports and elements of reports.

Inventory listing: This keeps track of carsavailable for sale. It should include the purchaseprice at the cost to dealer plus make-ready costs.

Many dealers apply a standard cost tovehicles for making them ready for sale, based onhistorical trends. Some try to assign exact costs,but the recordkeeping can be cumbersome.

A compromise would be to use the standardcost for most vehicles and add large, speciDcmake-ready expenses if applicable.

The inventory list is also used to reconcileagainst the lender’s Eoorplan records. While thedealership’s proDts are primarily earned throughinterest, maintaining appropriate inventory costsby not overpaying for inventory is still a criticalpiece for a healthy dealership.

Accounts/notes receivable (dealership’sportfolio): Keep track of all open accounts andnote those that are past due. This report can alsoseparate the components of the account betweenthe principal balance, current balance, accruedinterest, sales tax and discounts – original andcurrent.

Charge-offs: After reviewing the A/Rreports, dealers can refer to this report for a list ofevery account that will no longer be collected.That’s useful for year-end reporting, as the IRS mayrequire a Form 1099-C (cancellation of debt) to beissued to those customers.

The penalties for noncompliance are steep, soit’s worth it for the dealer to keep accurate records.

Some dealers only move a small portion oftheir contracts to the full charge-off stage – issuinga 1099-C can drive away a potentially good futurecustomer. If you don’t expect (or want) thecustomer to return, consider a full charge-off.

Cash ow report: This is different from thecash Eow statements included in GAAP Dnancialstatements.

This is a report from the dealership’s salessoftware that shows the amount received fromcustomers. It separates payments into downpayments, interest, principal, sales tax andunearned discount.

Some dealers keep track of their cash Eowby the number of open, current accounts.

For example, if they have 100 currentaccounts paying $400 per month, they know theyshould be receiving $40,000 per month. That caneven be broken down into bi-weekly or weekly,depending on the dealer’s needs.

This report also helps track the payments tothe actual bank statement and can be reconciledwith the monthly expected cash Eow receipts fromthe account/notes receivable report.

Sales tax report: This important compliance-based report keeps track of sales tax due.

In certain states, sales tax is due in full whenthe car is sold. In others, the sales tax is due aspayments are collected. In those states, the salestax report works in conjunction with the A/R andcash Eow report to make sure the dealer is payingsales tax only as monthly payments are received,improving the monthly cash Eow.

While all of those reports are very helpful inrunning a BHPH dealership, it’s also important tomaintain the company’s balance sheet, incomestatement and statement of cash Eows as part ofDnancial statement audits and potential IRSexaminations.

Software investment and tracking can paydividends.

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Build in Safeguards for BadBreaks

Not every customer will respond positively toimproved customer service at a BHPH dealership.There will be times when customers takeadvantage and eventually stop paying andcommunicating.

Be prepared for a level of default andrepossession. Build that expected percentage ofdefaults into your budget while focusing themajority of your efforts on well-intentionedcustomers who need the option your dealershipoffers.

Don’t assume it’s a customer issue until youexplore the situation. If collections start to dip,check in with your collections staff to make surethey are reaching out to customers regularly,assessing the situation and discussing paymentoptions.

At times, you may Dnd collections outreach isinconsistent. That is an internal operations issue,not a customer issue. Check the call logs todetermine where and when the communicationprocess is breaking down.

It might also be a matter of how thecollections staff is communicating with customers.In that case, you’ll need more training aroundappropriate or scripted conversations that supporta positive customer response and cooperation.Collections conversations about repossession arevery different than conversations that encourage acustomer to get current on payments.

If your staff is unable or unwilling to work inthe new model, it might be easier to replace thestaff and promote “new management” toencourage more customer interest andcommunication. That includes anyone whointeracts with customers.

The longer you wait to re-educate your staffand get customers talking, the more likely you willlose the payment stream and deal with morerepossessions.

Slower collections might also come from adealer who is not pulling and reading reports everyweek – or at least biweekly. If the dealer doesn’thave the time to pull and review reports regularly,assign a back ofDce team member to pull reportsand summarize the Dndings.

One important factor for achieving regularpayment streams is how the payments are set upin the Drst place.

Customers in BHPH arrangements typicallymake weekly or biweekly payments, sometimes inperson. Payments should be set up according tohow the customer gets paid, which is usuallyweekly or every other week. For some customers,income can change during the year.

It’s much easier to handle a collections issuelater if you are aware of how the customer getspaid, what could hinder the customer from payingand how you will resolve a cash flow issue on thecustomer side if and when it happens.

Meet with your accountant every month orquarter to gain insight on reporting and budgeting

improvements as well as cash flow projections forthe dealership.

Your CPA will not make customer servicecalls for you or force you to design and read moreaccurate reports. But he can make sure thesoftware is set up properly to provide up-to-dateand helpful reports.

CPAs familiar with BHPH can also identifythe information dealers should pay attention to ina customer-centric environment.

Dealers will still have to repossess vehiclesat times, even with good customer service. Sowhy make the switch?

The simple answer is that valuation of thedealership is tied to strong collections, a well-

performing portfolio and healthy margins. Lendersand investors consider those areas of the operationcarefully when deciding to extend credit. At leastone investment group we know of required a dealerto switch to the customer-centric approach as away to improve cash flow.

Mike Rizkal, CPA, is the auditand assurance partner forCornwell Jackson’s assurancepractice and auto dealershipsegment. Mike uses his real worldpractical experience to provide

consulting and accounting services to Buy Here-PayHere dealers and managers across North Texas.