#226 - The 3 Tips To Not Go Bankrupt w/ Gary McMahan

You are listening to the Independent Dealer Podcast with hosts Luke Godwin and Jeff Watson.

Hello, and welcome to the Independent Dealer Podcast, brought to you by Buckeye Dealership Consulting. This week, Luke, I've been dying to get this episode. We always hear the great side. We always hear the roses and the butterflies and how amazing the car industry is, and we make a ton of money and things are great.

We.

We never hear about the dark side or the way it could go wrong, and partially because those guys aren't around anymore and none of them are coming on here to count their story about how they crashed and burned.

Yeah, and you're. I mean, you're a doomsday type of guy.

I mean, I love doomsday. Here's the thing. Not to be negative, but as a cautionary tale, I think hearing all the roses and butterflies, it's like, oh, yeah, I can make a ton of money selling cars, but it's like there's people that have crashed and burned hard. And to get the insight on that, we have Gary McMahon from Primaland, he's the CFO over there. And I cornered him when we were down at Buy Here, Pay Here, United. And I said, gary, you have seen it from that side. Tell us what is going on and what do we avoid? Gary, thank you for joining us.

Jeff, Luke, thanks for having me on. From my view of Prime Land, I have the opportunity to be the cfo, but I get to act as a consultant going out to dealers on a regular basis. And I have the unfortunate view, whenever somebody gets in trouble, of having to go on site, help them through the problems that they're facing. So I get to see that on a fairly regular basis. I would like to just say that it really comes down to one of three things. Every time a dealer gets into trouble, I try to simplify it because what's usually happening is the dealers have 900 things they're thinking about, oh, I got to go buy cars. I got to worry about service. I got to worry about collections. I got to worry about the cash. And they start to fall apart because there's so many things on their mind. But it really comes down to one of three things. Every single time when I go into a dealer, and I don't want to oversimplify it because I could probably speak 30 minutes on each one of these topics. But the first one is underwriting. Oftentimes I go into a dealer, and the dealer will say, hey, this is what we do for underwriting. This is my policy. This is the procedure. And I say that's great. Let me go pull your last 10 deal jackets and let's look at them and see if you're actually following your policy. Nine times out of 10, we'll pull those 10 deal jackets and eight out of those 10 do not follow their policy. And the dealer, the owner is blown away. He's sitting there looking at it with me going, well, this can't be. I'm like, well, this is what your sales floor is doing. If you're not paying attention to this every single day, they're not even following your policy. Whether the policy is good or bad is another issue. When I go in, I first ask them what their policy is and I, and then I just pull the deal jackets to see if they're following it. So every time a dealer is getting in trouble, or almost every time underwriting is one of the key problems, they think something is happening, but it's not and they're not verifying. So one of the suggestions I have with all dealers is they should have a weekly meeting with their key staff, their underwriting, their collections, their service department, their sales manager. And, and they should be going over a number of things. One of the first things they should be going over is last week's charge offs and then looking at the deal jackets and the notes in the system for those charge offs. And they'll start to see a theme very quickly. That theme is more likely than not the same thing I'm seeing. Well, on the front end, you didn't underwrite it properly. So on the back end, you get to see the charge off because they never could afford the payment that went out the door. You, your salespeople, if they are motivated and paid by making a sell, they don't understand what their business and this is the one thing I'd love all dealers who are listening to this to understand. You are not a car sales company. You are a bank. It's not about how many cars did you sell last month. It's about how many good loans did you make last month. If you do not collect the money, you are not going to be profitable. You have to make sure your underwriting is sound and, and you have to have checks and balances. Because you as the owner, you're so busy doing so many things. If you don't have those checks and balances in place, you're assuming everybody's following your policy. And more often than not, they're following whatever makes them the wealthiest. And if you're in sales and you're being incentivized by the Number of cars you're selling, then you're gonna sidestep the policies and procedures so you can sell all the cars you can to get paid.

Yeah, it's so true. I think about that a lot when I'm. When I'm the guy in front of the customer, you know, say we're short on sales staff and I'm helping somebody. That guy gets approved every single time. I bend all sorts of rules and do whatever and throw stuff out the window because I want to sell a car and get something on the books and just get moving on. So, you know, as an owner, you do that all the time. Just because you're. You're lazy, you're trying to move on. But as a salesperson, it's the same situation, right? It's like, hey, I'm going to. This is what you're incentivizing me to do. So you've got to have somebody like your collections manager or your office manager auditing each one of those files.

And Gary, do you. I mean, how often do you walk in? Because I've heard dealers talk about you coming in a dealership and they're trying to get some money because they need it for cash flow problems and you're helping them build systems. How often do you walk in and somebody not have a policy when it comes to underwriting?

Well, first of all, you got to realize that I'm only walking to dealers that do business with primelin. And in order to become a Primaln customer, you have to have an underwriting process and procedure that's part of our underwriting. So I would say 100% of the time when I walk in, somebody has that policy and procedure simply because I'm dealing with Primal in customers.

Okay, how about. I thought that sometimes you went in before they were primary customers, trying to get them on the straight and narrow. Do you ever see that?

I'm sorry, let me turn my volume up just a little bit. I did not hear that last question. So.

I thought every once in a while, you walked into customers that weren't quite primal in customers yet and then have to help them with those things. Do you not do that?

Yeah, so that is correct. But that's on our business development side. So Todd Yates, he's on our website if anybody wants to become a PrimeLink customer. You called Todd Yates. If he reviews your policies or says you don't have policies, then that begins the process of. Well, let us help you. Let us start walking you through what you need to do to be able to become a Prime land customer. And more often than not, if you don't have those policies and procedures, then it's going to take a few months, maybe even six months. We've had more than one customer that becomes a customer after we consult with them for up to a year to help them solve some of the problems that we know are going to cause them to have problems with the lender. And if they solve them beforehand and then they come in, the reason why I'm not on that side of the business, I'm simply the CFO and, or on the back end once they've already come in and we've approved them, if they get into trouble. Now I've got to say, all right, hold on, let's look at what went wrong. We consulted with you up front. What are, what's not working because you should be following processes that lead to profitability.

So let's go down that, that area. What are some of the, what are some of the key things that dealers should have in their underwriting policy and what are some of the things that they should not have in their, their policy? Because if that's, you know, if that's determinant on whether somebody's going to go out of business or not, you've got to know what's good and what's bad.

Right?

The main thing is affordability. And oftentimes when I look at stuff, dealer will say, okay, this, this client makes, and I don't want to give any names or any, I've got so many examples out there. But let's say the potential client comes in the door, they make $1,500 and the dealer is going to put them in a car that cost $500 a month, all the way in with CPI, the payment, insurance, everything. And I sit there and I go, their rent, well, zero sold the car to a homeless person. You actually have to look at the things and say, well, how much is the rent? If their rent is 1000 dol, put them into a $500 a month payment. When they only make $1500 a month, that deal is dead from the get go. So you have to look at affordability. They have to be able to afford it. If they can afford it, then you're, then you're also looking at stability, time on job and time in residence. Those are the three key factors that really go into any underwriting policy. Whether you're using sophisticated software or not. The guys who have the money to develop their own software, that's really the three things that they're keying in on payment income, is it aff? And you have to take in consideration again, rent, groceries, gas and other things. And if you don't and you go, oh, they make $1,000 a month, they can afford a $500 a month of payment. It's a dead deal, day one, because they can't afford it.

I agree with you.

So interesting. So your first tip is the underwriting process. We understand it's about affordability. Your tip is also to have a weekly meeting with your sales staff and your office staff and go through an autopsy of write offs, try to figure out why that person went to repo and maybe look at some new deals that have come in and say, hey, you know, did these ones all follow our underwriting policy? Is there anything else on that, your first tip underwriting that you want to share with us? Hey, everybody, real quick to jump in here and remind you of Buckeye. Buckeye is a great sponsor of the podcast and a real friend of the buy here, pay here industry.

They sure are. And when we talk about today about how the ways you can go out of business, let me tell you this. Having reinsurance is one way not to go out of business. Because if you take that money and set it aside, because every once in a while we have rainy days, it's been there to help many a dealer, and I know that for a fact. And if you get in a buy and you got cash right there, and reinsurance is a great way to get that cash. Jeff.

Yeah. And when you speak with the guys, and I know a lot of people get so scared to start a reinsurance company because they're scared of the cash drain that it puts on their business.

Sure.

And that's a factor. But that's something that you plan out with your, with your rep to say, hey, what kind of a cash contribution can I make to my reinsurance company? Looking forward as that grows and as I fund my reinsurance company, what can I afford to do without putting my dealership into a stressful situation?

Yeah, sure, you got to plan all these things, but in the end it's going to save you in taxes. It's going to be some money for a rainy day and it's a good financial decision to make.

Yeah. The number two is the service shop. The service shop, when you get a lender like prime lend, maybe you were used to selling eight cars a month, now all of a sudden you have the financial flexibility to go sell 20 cars a month and you think it's easy, you just start selling 20 cars a month, and you're not calculating. Yes, but even if you're underwriting really well, and let's say you have a gross charge off ratio per month of two point, which is, you know, that's fairly normal in our industry. 30% per year gross charge off. But if you were doing 10 cars a month, your portfolio, and let's say you were repoing five cars a month or three cars a month or whatever the number is, if you all of a sudden double your sales or triple your sales, you're tripling the number of cars that have to be repoed. You're tripling the number of cars that your service shop has to put to the front line. You're tripling the number of people. Customers come in with a complaint that the car is broken and it needs to be fixed. So more often than not, they start selling more cars and they haven't even thought about the service shop. And maybe when they were small, before they had a lender like Prime Land, they had one service bay, one lift. Okay, great. That is not going to work. As soon as you have a lender that allows you to do more volume, you have to be able to keep up with it. And you have to really think about when the repos come in the door, what are my mechanics? Do I have the capacity to deal with them? Because more often than not, you're going to turn that repo unless it's a wreck or a total car. So do you have the capacity as your portfolio grows and you have to keep up with it? That is a key failure. People are, especially if they get a lender. When they were used to financing all the cars on their own and they had to come up with every dime to go to the auction to be able to buy another car, now all of a sudden they have a lender. The lender says, I give you a floor plan, plus I give you a revolving line of credit. You're able to go buy cars tomorrow at the auction and 10 the next day, and 10 the next day. All of a sudden you're starting to sell a lot more cars. But did you think about service? And you should think about service before you increase your volume. Because no matter what, you have to be able to service those cars or you're going to have a lot of unhappy customers and. Or you'll end up with a pile of your repo sitting around, which is costing you a lot of money. You cannot have the metal sitting around. I've gone to many dealers and when I walk their lot And I see a car out back, I say, what's this car right here? Oh, well, in today's market, is worth seven grand. I'm like, let me take $7,000 in cash, put it on the ground and watch it rot. Because that's what you're doing. It's the same thing. You cannot let metal set around. From a finance perspective, if you're a dealer, y', all, and you sometimes lose sight, that's seven grand sitting in the muddy and blowing away, and you're losing fast, you'd immediately been down and pick it up and say, oh, I got to deal with this and deposit in the bank. Your car is no different. It still has an economic value and you have to deal with it, turn it. And because as it sets, there's nothing happening good for that car. It's got to turn into value to get back out on the road. Into another note.

And Gary, is there for dealers out there, is there a good ratio of car sales or accounts to technicians or to base? How do we determine exactly how many we're going to need?

It's really. That is hard to say because there are so many different business models that are successful. If you have a business model that you're starting with with a 3000 ACV, you're going to need more bays because that car simply is older, has more miles on it, is more prone to break down. If you have an ACV of 20 grand, which we see by the way in buy here pay, the ratio of mechanics is a lot less. So that's really hard to answer for you. The key is, you know your business before you start to grow. If you're going to keep that same model, think about that and start building up. Even if you have to get another lot or another building with auto service bays. That's the one thing that. That's one of the things that we always see fall behind very quickly when you grow a portfolio is they're not thinking about the service shop.

And let's think about the reason behind that. Everybody that's listening, the reason that is is because the number one reason for repossession in our business is the car is not running. That is number one. And so that is correct. If your asset is not producing what it should be producing, your charge off rate's gonna go up. And that's where Gary's trying to get to. If the car's not running for the customer, the customer's not gonna pay, period. And you have charge offs.

Yeah, that seems like a snowball effect, right you're like, my shop's bogged down. I'm not getting cars to the front line. But it's so bogged down, I'm not getting to my customer cars, which means I've got these mechanical failures that people are walking away from because I can't even get the warranty work done in time. It definitely seems like it could just compound and compound.

I got to this situation. I got to this situation last August, and I just want to tell everybody what's going on. Kind of a firsthand experience. My shop had five technicians. It was running great. And then all of a sudden, and we have 850 accounts. Well, then all of a sudden, all my technicians stop started quitting or taking other jobs, making more money, because I didn't realize how quickly the, the increase in salary was with technicians this time last year. Well, next thing I know, I've got one technician. I still have 800 accounts. We're still selling 30 cars a month. I can't get them ready. I can't get warranty work done. I can't get policy work done. It is a mess. And so I had to go out and find other shops to help me in this situation. Gary, what you're talking about is so true. Luckily, our repo rate didn't go up because we were able to to find another way to accommodate it. But this is really serious, guys.

Yeah, every dealer is going to experience. You have to stay ahead of the service curve. And then again, if you're having that weekly meeting, remember, the number one reason I usually see his underwriting if they're having major problems. But then the number two reason, and it's actually, realistically when you read the notes, you go, well, they either couldn't afford it or you're putting a crappy car. Because when you read those notes, it starts often within the first two weeks after the deal is made. And you can read the notes and the company customer called in and said, the car is overheating. But. But the person who took the call didn't tell anybody about it. They just put a note in and said, oh, customer complained about car overheating. They didn't say come in. They didn't make an appointment for them. And then two weeks later, it's a repo with a blown motor. I'm like, had you got that in and dealt with the issue right then, then you wouldn't be dealing with now a blown motor, which is a lot more expensive than dealing with the overheating and the customer complaint. And more often than not the customer has called in and complained about it. What. What happened with it? If your service shop isn't up and running and you're not communicating well with the collections, who is often getting that call? Then they're not making the appointment. And again, then that repo becomes a blown motor. And we see that often in the notes. I'll often see my car is overheating. It doesn't get dealt with. And then within six weeks, I see the repo and the engine is blown.

And you pick up scrap metal. It's funny to me that, like, all of my people, why are we so scared to ask people how their car's running? It's such a funny thing. Like when we call to give them their plates or when we call to ask for a referral. Hey, Susan. Yeah. How's it going? You know, this is Jeff in Four Seasons. How's the car running? It's like we're so scared to, like, get that answered. It's like, shouldn't we want to find out? Shouldn't we want to know so that we can then address it and solve it before it?

Jeff, nobody wants confrontation. And what happens is we're afraid if we ask, how is the car running? They're going to tell us the honest truth, when really that's what we should hear.

That's great. It doesn't mean we have to fix it all, but it's best to know if it's overheating or hard shifting or in impound. I don't know how it's running. That's the tow guy. He's got it.

And Gary, is this a meeting we should have with the entire dealership, or should we have it with the service department, the sales department, the collections? I mean, how do we. How do we make this meeting work?

That monthly meeting should be with the head of each department. Because if you're. If your sales manager is saying, hey, man, I don't have enough frontline cars, I need more, then why don't you have enough frontline cars? That's a service conversation as well. But you also need to head a collections there. Because when you're reviewing these accounts at charge off, just like I do when I go into dealers that are having problems. I'm like, you guys knew about this problem. You knew about it six weeks ago. You just didn't do anything about it. Because the collection person didn't tell staff. They didn't make an appointment for them to come in to get it fixed, whatever the issue is. They just said, hey, you need to make your payment, you're getting behind, right? So they're focused only on the collection. Again, when you start having this weekly meeting, you get all your managers to focus on. This is a business, we're all integrated. Collections is a part of the business. But the collections cannot collect their way out of a bad sell or a bad car. It doesn't work that way. So you got to have service, you gotta have collections, you gotta have sales, you gotta have people really thinking about it. If you're not having any meetings, you're not creating a team environment. You're just creating a bunch of individuals out there doing their own thing, worried about how they get paid. When you start having this weekly meeting, you're starting to say, guys, this is a team effort. This is it. And if you get good, you won't have to talk about those charge offs all the time. Then you'll start talking about other fundamentals of the business. And if the salesperson says, hey, our front line has too many cars that are coming back in the first week with wheels or, or problems, then the service manager is right there and you start addressing. It's not about pointing fingers, by the way. It's about a team. Everybody just has to understand we can only fix the problem if we first recognize we have the problem and then we start addressing it. And there's no better way than just having a weekly meeting. And it's a team environment. Nobody's pointing fingers at a person. You're talking about the issues and what do we do to solve those issues?

It's an interesting concept to have a, to have that meeting with a specific theme, you know, like, hey guys, this is going to be 30 minutes or whatever, but we're only going to be talking about mechanical issues. You know, like, this isn't, let's talk about, you know, who left the toilet paper out or who's putting this in the wrong fridge spot. Like we're going to talk specifically on these mechanical issues of cars or customer complaints. Or, you know, maybe you have a specific meeting where you're just drilling the mechanics on what they're seeing out of a certain make and model. You know, how are Hyundai Sonatas performing? You know, what is the common issues you're seeing? You know, that, that, that's interesting. We avoid meetings so much because we feel like it's such a waste of time. And it's like, oh no, they need to be back there turning wrenches. But like you said, if you're not having them, you're not a team, right?

I Highly recommend that. That's one of the, in any turnaround I've been involved in, that's one of the first things I do. Pull the deal jackets and say, you guys need to be reviewing these deal jackets every week in a meeting. And yeah, it's an hour out of everybody's time. But the not addressing it and not knowing where your issues are means you're going to go out of business versus that hour of time. That hour of time is the best hour you're going to spend every week.

I agree. Gary, what's number three?

Number three is financial mismanagement that comes in many, many forms. The number one issue is dealers start to see cash coming in and they think they're rich. Hey, I got $500,000 through merchant services and deposits this month. That's so much money, I'm rich. Right? But for example, if you have a lender and that lender has lent you 60 cents on the dollar, and let's just use a round number, you have a portfolio where you borrowed or you have a $10 million portfolio, so you borrowed $6 million from your lender and let's say this month you get a million dollars in payments. Okay? The dealer, that is not your million dollars. First and foremost, 600,000 of that goes back to your lender because you no longer have the principal supporting the loan. So lenders are doing what's called an asset based loan. If you have principal outstanding, that is what supports the loan. If that principal goes down either due to a charge off or payments, then you have to think about it as I owe that money back. So every charge off and every principal payment, which is a good thing, that you get whatever your advance rate with your lender, that amount goes to the lender. So again, using a 60% advance rate, which is very typical on a 10 million portfolio, 6 million is you owe the lender. So 60 cents on every dollar that comes in the door needs to go to your lender. So that's number one, you don't really have a million dollars. You only have 400,000. Okay, now that you think about that, how do I manage my expenses to this 400,000? The second payment you have is, well, your lender interest expense. And it doesn't matter if your interest is really low at a bank at 5% or it's with a lender more like prime lend or it doesn't matter, it's an expense, it's got to come off the top. So now you've got your principal and your interest. Those are Two key components and then you have your employee salaries. Oftentimes when dealers see all of this cash flow and they're out there with their American Express, they're buying, they're traveling, they're going to all kinds of things and not even thinking, well, I just spent 40 grand last month. Okay, do you have 40 grand to spend? And then, and related to this, when I go into a failing dealer, one of the first questions I ask on the finances is show me every report that you look at to run your business and I'll be darn if every time. It's not just a delinquency report. That's it. It's a delinquency report and a sales report. They know how many cars they sold last week and they know what their delinquency is like. Well, what about your financials? What's your loss ratio? Well, I don't exactly know that. What's your CRR? CRR is collateral recovery rate, which represents for every $10,000 you put out in a finance receivable, how much of that over the life of the loan do you collect back? So if you collect 70 cents on the dollar, you're getting 7,000 back either through the metal or collection for every 10,000 you put out on the street. Those are key numbers because the way you make money and buy here, pay here, there's three different ways. You make it from your down payments, you make it from your spread of your collateral recovery rate minus your cash in deal. And then, and then you're making your interest spread for your interest income. Those are the really the three ways. Even though I've oversimplified it, if you sit down and went through all the things, why buy a car? Okay, that goes into to your cost of that deal. Well, I have mechanics that work on it and put parts on it, right, that goes into the cost of the deal. So everything I just said goes into those things. And when owners are not looking at financial metrics, and realistically I've helped many people put it together. It's what I just call rolling stats and a balance sheet income statement. If you have those rolling stats, which will be delinquencies, your principal collection, your interest collection, your gross charge off rate, your net charge off rate, and again, I've got about 15 different metrics. If you look at those and then you look at your financials and you get good at it, which if you have it in a basic format, you're going to get really good at it. And the other failure they do for those who do have financials, they look at a year to date. So if they're looking at April's numbers, they're only looking at one column that says April year to date. That's a huge failure because there's seasonality in the business. You got to look at month by month by month and compare. A real example is one time I was doing financial statements for a dealer and I said, something looks really weird. Your gas bill. It's the summer, and all of a sudden, your gas bill. And again, I went in and was looking through everything because they didn't have any financial statements. So I was putting it together and looking at each payment and the bills I sent. Your gas bill, all of a sudden in the summer went up tenfold. That doesn't make sense. You need to call and figure out what went wrong with the bill. They had the gas company come out, and lo and behold, they had a gas leak behind the property that they didn't know about. I'm like, right. And it went on for four months before I had showed up and was going through their stuff. I said, if you're looking at your bills every month and comparing month over month over month versus just paying them, you would have caught that immediately. Said, something's wrong. But instead, they just paid the bills, and they're only looking at one year to date column. If they're looking at it, by the way, and this particular dealer wasn't, I'm like, that was a 10,000 per month expense because they weren't paying attention to the bill. Somebody was just writing the check going, yep, I got to pay the gas bill. And had you been paying attention to what the gas bill really should be versus what it was? That was a huge miss. And apparently they couldn't smell leak out back. And that went on for four months before.

Good way to blow up there.

Yeah. Maybe he was trying to cash his insurance.

Hey, everybody, Sorry to break in here, but let's talk about pastime gps. When we talk about underwriting, there's. There's always the underwriting you have to do. But a good way to make sure you don't lose that asset if you do have to repossess is have a great GPS device. And there's no better, in my opinion, than pastime Jeff.

Yeah, I mean, recovering the collateral. When we talk about collateral recovery rate, I mean, I could not even imagine what mine would be if I didn't have a gps. Both from finding it, finding it quickly, finding it before it's got a mechanical breakdown or gets towed or impounded or just solving the riddle sometimes of like, is this customer where they're supposed to be? And where is this car right now? Can I go get my hands on it to keep it safe? And then we'll ask questions later. Like, I mean, just from a peace of mind standpoint, if anyone thinks that your customer is going to balk, they do not balk. That is the standard these days. They don't expect a full tank of gas and they do expect a gps. So just do it, do it, disclose.

It, and I promise you, you'll sleep better at night. Right?

You said so many things right there, Gary, so I don't know which one to go back to because, yeah, that's one we're going to have to replay over and over and over. So we've heard something said, Luke, and we talked about this. Explain to me if your see, if your cash in deal exceeds your crr, your collateral recovery rate, you're gonna go, then you're insolvent, you're out of business. Right. So if dealers understand that, buy your pay your dealers if your cash in deal. So the amount of cash that you have on the street is a higher percentage of the total loan than what your CR collateral recovery rate is. That means you're putting more money on the street than you have historically collected. Is that I'm understanding that right?

Yes, that is correct. There are some nuances that some dealers will say, hold on, that's not a ,thousand percent or 100% accurate because down payments aren't calculated in your CRR. All right. CRR is based upon the amount that is actually financed. So if I sell a car for 30,000 and take a $20,000 down payment, I've already gotten my money back off of that. Now I'm only calculating the CRR on that $10,000, but that's a nuance. And 99. But that would still be factored.

Into your cash on the street, right?

It.

Would. But remember, it's really cash over the amount financed, so it still would be there. I just want to make that nuance. 99.99% of the dealership. That's not an issue. But there is an issue. That down payment technically is not calculated in the CRR calculation. You're going over the amount financed, but the cash and deal is also going over the amount financed. That's how lenders calculate advance rate. And also go.

Ahead. If you had a pretty high interest income every month, that could throw that off as well too. Right?

Say that again. You cut out a Little.

Bit.

Sorry. If your interest income was very high every month, that would, that could throw that, that, that could save you as well, right?

Yes. That allows you to plug a hole. But from financially speaking and running a sound business, a good spread. As a rule of thumb, your CRR should be 10 points above your CID. Anytime we see it negative, I'm always visiting because something's wrong in the business or if there's a small spread of one or two or three points, it's usually we're out there consulting with them saying, hey, you're having some issues, it looks like, and invariably they are. A healthy company usually has about a 10 point spread.

Wow. And so the factors that would go into that would be, hey, you're not A, you're not collecting your accounts well enough, you're losing them, you're not collecting, you're repoing, you're letting people total loss. All these ways you're losing your collateral. Or B would be you're not getting a big enough markup and or down payment. Right. You're not marking your cars up high enough to have less cash on the street than what you're collecting. Or maybe you're marking your cars up way too high. Yes. And you're not collecting.

Right. So there's, there is a sweet spot. I always refer to everything as a statistical bell curve. You mark it up too much, you're killing your profitability. You market too little, you're killing your profitability. Each dealer in each city is slightly different. So I don't have a magic formula to tell you what I believe is the perfect. Because if I'm in a small rural town of 78,000 people versus down in Houston, there are two completely different models and you have to look at things differently. But as a rule of thumb, there is a sweet spot, statistical bell curve. And you want to try to maximize profit. If you're in a perfect world, hitting the exact peak of that bell curve is where maximum profitability.

Lies. The best way to do this is to underwrite properly and to collect properly and then you don't have to worry about the CRR and the cash in.

Deal. So I would see these days where we talk about not having as good of gross margins on the front end of our cars, right. Because we're paying so much more for everything. And affordability, we look at that factor too. It's like, well, my cheapest car nowadays is $10,000, whereas I used to have a 6995 starter car. So not a lot of people can afford my Vehicles, that's an issue. I feel guilty about marking them up too much. So now I've got less gross profit. So that's a recipe for disaster if I'm not collecting really, really.

Good. In fact, all dealers need to be mindful right now, what prime lit is recommended to most people is make sure you tighten your underwriting and lower your markup just a little bit. Because if used car prices normalize, which we all believe they will, whether I've talked to many experts and economists, there's a very large range of opinion out there when things will normalize. And some people think in as little as 12 months, and some think people think as long as three years. What we. What everybody agrees is it'll eventually start to normalize and nobody knows how fast. So the best way to not get clobbered on the back end is to have really good underwriting today. And in a payment structure in a deal that allows them to get into the money as quickly as possible. By allowing your customer to get into the money, by the way, allow. That's where you're breaking. You're basically trying to make your break even point. Be in a sweet spot and just make sure that a year from now they paid down enough principal that if. If the car prices start to go down, they're not so far upside down that they say, forget it, I'll just go get a new one from the dealer down the.

Street. Yeah, not only that, your charge off is going to be astronomical at that point because of car prices.

Correct? That's correct. So one of the ways to mitigate that today is lower the markup a little bit. You don't want to start just lengthening terms, though, because again, lengthen the terms just means you get less and less principal. That's not the way to necessarily do it. Lowering the markup a little bit. Again, there's a sweet spot, and I can't tell you what that is. Each dealer is slightly differently, but those who manage everything smartly, again, the service shop, the underwriting and their cash flow, they tend to do well in all these different environments, whether the economy is going up or.

Down. Well, Gary, that's some sage advice there, I can tell you.

That.

Well, thank you. I've enjoyed, you know, sitting down with you guys. Again, those are. If you simplify everything we just covered, it's really underwriting. Have a weekly meeting to go over your deal jackets. Keep up your service shop to make sure that you can service the cars and the portfolio as it grows. And please look at your financials and know the other thing that I didn't mention on the financials, there has to be a reconciliation of the DMS to the bank account of every single penny. So you know, every penny coming into the company, we see fraud regularly. And when there's fraud, it's because there's no reconciliation. Often they'll give me a, they'll give me just a checking account roll forward, which is not a reconciliation. You have to take your dealer management system and if it says you collected $20,000 yesterday, you have to see $20,000 hit the bank to the penny and make sure that you're collecting all the cash. So it's, it's financial management, it's underwriting and keep up your service shop undeposited.

Funds. You got to check those, you got to balance them, everybody.

Absolutely.

Absolutely. All right, thank you, Gary. We really appreciate your time.

Today. Thank you.

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