#381 - Would YOU Buy This Dealership?

Every bank wants to talk to you. When you're talking real estate, when you're talking buy here, pay here, subprime receivables, you get the door slammed in your face.

This is the Independent Dealer Podcast Education by Dealers for Dealers. Now here are your hosts, Luke Godwin and Jeff Watson.

Hello and welcome to the Independent Dealer Podcast brought to you by Buckeye Dealership Consulting. And we have a familiar face back. Luke Godwin, welcome. Welcome back to the. Welcome back to the podcast.

Yeah, great job last week. You and Jeff Martin. That was. I even listened to the podcast and it's not as bad as I thought it would be.

It's. It's much better when your voice isn't on it, so that's good. How was. You were out gallivanting in the hills of Italy, huh?

Yeah. 20th wedding anniversary. A lot of fun, a lot of adventure. Yeah.

Cool, cool, cool. Sounds great. Well, we were just here slogging away, keeping the wheels on and just running the day to days. What's really interesting to me is it, you know, getting the temperature check from Jeff Martin last week. It's, it's a little tough out there. You know, it's. It's hard times right now. I would say, you know, we're doing okay. And like I said in last week's episode, I thought I was doing better than I was until I actually looked at my first quarter combined financials and realized that I'm just kind of keeping the lights on right now. And that's a little, A little scary. Yeah. But I think what it does is it puts, it puts pressure on those dealers that say, hey, now is the time to sit and wait because things are going to get good. You know, when times are bad, we just wait. Times get good. We're a cyclical industry. Or it's also a time when a lot of dealers say, hey, man, I'm going to, I'm going to pull the eject cord. I'm, I'm, I'm getting out of here.

It's, it's so cash intensive, Jeff, and it's a lot of work when things don't go exactly right. It's. Hey, man, I'm in the process of winding down. I get it. It's. Sometimes it seems like it's the easier way out. I, I'm actually dealing with a dealer right now in Texas that's looking to sell their, their business, and he's been trying to get out for a bit, so. And I won't mention another name that I know in the industry is Trying to sell their business. A huge buy here operation in Alabama. And there's a lot for sale out there and there's a lot of good businesses to buy out there. And this is one of them if you've got money.

Yeah, that's what I want to talk about today is one of the groups that we're in on Facebook, a guy named Jeremy posted about his business for sale. So he used these numbers, he put it on the Facebook group. So I think we're fine sharing what we know of it. And we're also going to take some liberties because there's a lot of things we don't know about his business. But we want to go into a little bit of a quick analysis to say is this an opportunity for, say you're a 25 year old or a 30 year old or maybe even a 50 year old and you want to get into the business big time? Is buying someone's established buy here, pay here a good route?

Yeah, you know, I would say yes, is that's my opinion. Building this thing from scratch is hard. It's really hard work. And I think in any business, if you can buy one that's already operating well, you do it. The business that the buyer pay your store I have listed for sale right now and is it's been in business 33 years. It makes a lot of sense to buy a business that has been in business 33 years. There's a lot of track record there.

Okay, well, let's dive into it. And not to get too far into the weeds because I know talking about numbers on the podcast gets very confusing, but what we want to do is just a quick kind of back of the napkin analysis of Jeremy's buy here, pay here and say, hey, if I was wanting to really dive into the business either I'm a small buy here, pay here. Maybe I'm a manager somewhere and I want to have my own place. I'm going to take this leap. I'm going to move to Garland, Texas, jump into this place, give Jeremy a good offer. So let's talk about it. Jeremy says he has about 11 and a half million dollars in receivables. He has about 900 accounts. So that puts us at somewhere around $12,000. Average amount financed, right? Yep. It seems like current, current balance, current current amount, finance currently. That seems like pretty healthy.

That seems, seems a little high, you know, but, but he could be selling really high end cars too.

So for sure. And that would probably be one of the first due diligences you would do Right. Luke, is we need to look at the health of that portfolio. What. What are some of the things you would want to know from a seller?

So, you know, we bought accounts before, and the first thing I want to do is I want to the biggest spreadsheets you can send me on all the accounts. And I'm going to just start digging into that, and I'm going to dig into what is his inventory that is. Is account based. What is it really worth? And because I want to know if every. If I had to repossess every car, what is it worth to me? So I want VINs, I want mileage, and I want to pull Carfaxes, and I want to pull MMRs on every single car. And Jeff, you said, well, what you do, just do sample sizes. No, I want every single one of them because I really want to dig into this.

So you would sit down or have someone run 900 different MMR, Blue Book, Carfax, whatever it is, and dump that all into the spreadsheet and say, hey, I get it that your average loan balance is 12,000 right now per car, but we got a. Either a good or a bad disparity here to say, unfortunately, your average street value of those cars is only five grand.

Yeah. So I look at it, I look at a bulk purchase last year, and about halfway through this process, it was about 300 accounts. About halfway through this process, what I figured out quickly is that a lot of them had $12,000 principal balances, and the cars are worth about $2,000. And so right then I knew I didn't want. I didn't want the accounts at all. I. I wouldn't have paid anything for the accounts.

Yeah, yeah, you'd say these things are completely underwater. You, You've just. And there's some other numbers. They're going to show you that. Right. There's some other numbers that will kind of reinforce the fact that, you know, there's a lot of funny money on top of these cars, like their crr, Right?

Yeah. And so that's one of the big things I would look at, especially with this particular dealership, if it's been in business for any. Any timeframe. And hopefully at 900 accounts, it's been. It's been in business for a while. The. You know, I would look at 22 and 23. I mean, 23 and 24 CRS, and I would look at 18 and 19 CRS, because I don't think 20, 21 and 22 is going to really give us much data. And so I'D want to look at both of those and say, okay, is, is his CR 50% or is it 80%? And if it's 50%, then, then we got some problems. Right. If it's 80%, then we've got a pretty good portfolio and we need to figure out. All right, well, well, what's it worth at this point?

Yeah. And that would match up with the data that you get from pulling the carfaxes and the MMRs on everything. Right. Those should in theory match up so that, you know, one's true or the other. How much are you going to look at delinquency and recency and historical collections numbers?

Yeah, I'm definitely going to look at charge off rates and CR is going to tell you a lot of that, but I'm going to look at historical charge off rates. Charge off rates as compared to number per portfolio and also severity per port of the portfolio. And I want to see those under, you know, 22% on the high end, you know, and if it's over that, then we're going to have to, to further discount the accounts, I think.

Yeah. And of course, anything that's still sitting on the books that's over 60 days delinquent or 90 days delinquent, you just, those are just gone right off the top.

Yeah, we're just gonna, we're gonna throw those out. We're gonna take them and we're not gonna, we're not gonna have any recourse. We're gonna take those accounts, but there's not gonna be any money in it for anybody.

But let's, let's dive into that real quick when you say no recourse, because what that brings in is this seller's other opportunity, right. If he said, hey, I just want to sell the portfolio and get out, I'm not, I don't care who buys it, I'm going to send it to a servicing company and just dump it. Those, the valuation recourse or non recourse is obviously a bit of a swing. Right. Because if you say I'm going to take 80 cents on the dollar with recourse, I'm going to end up getting 65 or 60% on the dollar. I might as well just take 70 up front with no recourse. Right. Because my opinion is if you have a strong recourse period and you have a third party non owner operator collecting your accounts, a servicing company, it's going to get pretty, pretty bloody.

It could, it could get bloody even if you have your own company servicing them. So you just have to stay on top of them. And the, the recourse, recourse is a protector. And I, and I would think if you want to get top dollar for your business when you, when you sell it, you would probably want to give them some sort of recourse. As a buyer. I'd probably want to try to get the, get the price lower and take no recourse.

Yeah, I would. I mean, and this is a message for all sellers out there. I don't know, I think if I was selling mine, I would have a no recourse. I don't think I would want it hanging over me. I don't think I'd want to deal with how they operate or how they don't operate or be beholden to their collections techniques or, or attention to detail or stress level or whatever it is that they're dealing with. If that's affecting the dollars that I take off the table, that seems like that would add a, a level of nuisance to me that I just need a plan on. Hey man, I'm, I'm not going to get 80 cents on the dollar. I'm going to get 70 or 65.

Yeah, of course.

And I'm walking.

Let's, let's, let's take this off the board. I don't think anybody's gonna get 80% with recourse without, in this type of situation. I think the best case scenario with or without recourse is around 70%. You know, when we buy these accounts, we're trying to buy them in the, the 55 to 60 range without recourse. And, and I think that's where if you buy, if you're buying a business like this, especially if the business hasn't been in business a long time and these aren't seasons accounts. You know, if you get 65 to 70%, you've done well to get out of the business.

Okay. And I think that's a good message to all sellers that you need to plan on that. I think it's so funny when we see either their folks that are trying to get out of the business or even first generations that are trying to sell to second generation owners for some reason they just think their portfolio is worth a hundred percent and that they can take it all off the table or 110 because there's interest, you know, still out there that they're going to collect. Like the unrealistic standard that some sellers have, I think lock up this situation and honestly it sets sometimes buyers that maybe don't know Better or maybe somehow get into it. I mean, it kind of puts you in a bad situation right off the bat.

Yeah.

Especially your second generation. Paying out your dad at some unreasonable valuation.

Yeah, that is not good for the family. There is, there is zero value in the seller for the interest. It's zero. And I hate to say that, but there's, you can't expect to get any of that because it's not your interest at that point. So you shouldn't even worry about that 29, 25% interest that you've charged because you've already made it on the accounts you've collected. The rest of it is for the new guy.

Yeah, that's true. That's a really good point. Now let me throw in one more curveball. What about your reinsurance company? So say you have a, your Buckeye, you've been at it for a decade and a half. All 900 accounts have some, well, probably not 900, but maybe 400 of them still have some sort of 12 or 24 month warranty left on it that is administered by the seller's reinsurance company. How does that, how do you handle transferring reinsurance companies to make sure that, hey, if I'm buying these portfolios, I don't want the seller to just deny every single claim or do I have to buy the reinsurance company too?

You can buy the reinsurance company. I probably wouldn't recommend that in a lot of these situations, but it can be done. I would probably draw a line and saying I would let my reinsurance administrate the rest of my warranties on this portfolio and, and start a new reinsurance company with the new owner is what I would probably do. And I would think Buckeye would probably lead to tell you to do the same. CPI is easy though. CPI, it's month to month. And in Texas probably 900, it's just 900 accounts. Probably got 800 of them are on CPI. So we didn't even discuss the value of that in the portfolio. But there's a big value in that. And, and who knows, the new buyer may not even understand, you know, war reinsurance yet. So as a seller you could, I mean in theory, keep your reinsurance open and reinsure this guy's stuff. I think you can do that.

But you got a $910 million portfolio, you better understand reinsurance.

You better. Right, because you're going to be making a lot of money.

But do you just put an agreement in with the seller to say, hey, we're going to your, you have X amount of warranty liability still out there because Buckeye obviously knows what's unearned and I expect you to pay out at a 30, 40 rate.

Well, well, hold on. The warranty administration and the warranty contract is the warranty contract. Your reinsurance company is on the hook for that period. And so you don't need anything extra. It would just be like, you know, a car, you know, a car company buying, buying a portfolio from somebody and any warranties that are intact, stay intact.

Yeah, but then, you know, there's a lot of gray area in the warranty claim space. There's a lot of area, the gray.

Area would go away.

So when I'm. So if the car comes to my location six months later and it needs an engine, there's a difference between my engine and the retail engine across the street. Right. And I do things to either help or, or to either draw from my warranty company or leave money in my warranty company. Right. Because I can, I can kind of absorb those costs one way or the other. Either charge myself retail or charge myself wholesale. So how does that not get abusive if, if someone else owns that warranty company and I'm the new buyer and I'm like, no, every single thing under the written contract is being claimed through this guy's warranty company. Every nut and bolt. I'm going to try to get back from that.

I think I, I think there, there's definitely something that could be worked out there to make sure that there's no abuses. But I think if you just go by the letter of the, of the contract, I think you would be fine.

Yeah, I mean that's probably what you have to do. I don't know, it seems like you would, you would have some sort of sticking point there. So let's talk about the other two sticking points that you really have when valuing an operation that you're going to buy in this situation. The land is not available, it's a lease. So obviously, obviously you would prefer to have the land wrapped up in the purchase. Right. That's just a no brainer. Especially an operation of this size. If you can't buy the land or reasonably move his operation to a nearby location where you can purchase the land. You're, you're, you better make sure that lease is locked down tight.

I think this is a big deal. I think the person selling the dealership needs to own the land. And I'm not saying the land has to be involved in the purchase because that's two totally different purchases. But the stability of the operation at that current location is huge. And in that current area, because if you're paying, if you're paying any blue sky, that blue sky is inherently connected to the property. So I think that when you don't own the property, that decreases what your business is worth that you're selling. Because if you do own the property and you're selling it, you can write a long term lease with the company that's buying it and then nobody has to worry about it. But if you're leasing the property, there's a big difference there.

Yeah, but I think if the buyer, if me, the new buyer, leases it from you or leases it from a third party, what's the difference if I've got a 10 or 15 year lease signed at the time of purchase? As long as they're leasing it, either way, either I'm leasing it from you or someone else.

Sure. As long as there's a long term lease involved, I don't think it matters. But I would like to see it. The person selling me the, the business also owning the property is what I would like to see. It doesn't have to happen, but I think best case scenario, I would, if.

I, if I was capable financially, I would like to include the property in the purchase of the business, in my opinion.

Yes.

I think lenders, obviously, I think lenders look at that better. Right. Because any portfolio lender would also love to have the real estate tied up in that agreement as well. I'm sure.

Yeah. And I mean, I, I think buy here, pay here businesses are, are closely tied to the community they're in and it's very important for them to be in the same location.

Yeah. And the difference is, is on that land, if you're, if you're not going through the finance company that's helping you with portfolio, you could SBA the land and the business itself could be an SBA loan at a, at a preferred rate, and then the portfolio could be a separate purchase through a portfolio company. Because I, I know SBA doesn't do buy here, pay here portfolios from what I understand. So as far as your financing options go, you get a little bit more. When you've got real estate, every bank wants to talk to you. When you're talking real estate, when you're talking buy here, pay here subprime receivables, you get the door slammed in your face. So one thing you mentioned was Blue Sky. How would you value blue sky on a dealership that sells 50amonth, has been around for 15 years. You know, you've got some fixtures, some equipment, some, a tow truck, a couple lifts and shop equipment.

I truly don't believe there's any blue sky and buy your pay here, but I'm gonna say. But, but maybe there is. Okay, let's value it at a hundred thousand per ten years in business.

Okay. I mean, unless it says Godwin Motors on it and my last name's not Godwin, then there's, I think, less blue sky in that situation. Well, because it's now tied to you and you're gone.

I don't know, you know.

Or is it a standalone brand that survives regardless of who's behind the desk?

Yeah, I, I think it depends on every city in the size of the community and what that company's done in the, in the community. I think it's. There's less value in, in a Godwin Motors than there is in a.

Let them ride trade. Right, Mart, for sure.

Sure. I think there's less value because of Godwin being in the title. So. But I think, I think a good rule of thumb and what we do, if your brand has been around for a long time, there is a little bit of blue sky. And I would think 100 grand per 10 years is a, is an easy standard to me.

Yeah. Let's talk real quick about the fixtures and things because those are separate. If you talk about computers, assets, you know, alignment racks, anything that's kind of a big fixture or a piece of equipment. Now do you value, do you value things like websites that have traffic? Would you value. Like what if you're tied into long term software contracts?

I, I don't, I don't see that being a problem. And I think that would be more of a liability than a, than an asset. Those long term, those long term contracts, you know, if there's some stuff, if you're, if you're current buy here pay your operation, maybe you're buying a new buy here pay here location and they're on a different software platform. I think that could be a liability because you may have to continue that contract until the end. So that might be something you have to take out. You know, ideally you're buying another company that's on the same software platform as you are and you can just keep rolling. Now if you're new to the buy here, pay your space or, and you already know the product, like moving into it, it shouldn't be a problem. Or if you don't know the product, you can learn it pretty quickly.

Yeah, ideally both locations would be on A similar platform, you'd have Blitzpay for your credit card payment processing. So it's just a very easy transition for your team, or you assume there'd be a team in place already that's operating under that system. But it'd be very easy for you to now incorporate that and say, okay, instead of two BlitzPay accounts, I'm going to have one account with two locations.

Yeah, I'm sure Blitzpay can handle that being set up. That's pretty easy. And, and you, we've all been through credit card processing contracts and I think, you know, sometimes you, maybe you'd have to let one contract go out and you can bring Blitzpay in and teach your, your, your people how to collect using that software. One thing, Jeff, you just brought up that we didn't even talk about, and that is the staff, the value of the staff, you know, that's part of the Blue sky too. The dealership I've got that I'm trying to broker right now in Texas. They've got long term employees, in my opinion, and they have an owner that's kind of an absentee. That shows the ability of that staff to run the business without you being physically present. That makes Blue sky worth more. It makes the business worth more because all operations and processes and procedure are in place. All you do is buy the portfolio, buy the business and it stays running like nothing ever changed. There's a lot of value in that.

That's a good point. You would want to know that very early in the conversation. Is this owner that is selling me, is he an operational owner or is he an absentee owner? And both have really interesting consequences. Right. If you say, well, he's an absentee owner, blah, blah, blah, blah. Well, like you said, that's actually probably really good that he hasn't stepped foot inside his dealership in five years.

Yep.

Right.

It's a benefit.

It can operate. Now, is it operating? Well, you're going to find out when you dig into the numbers. Right?

That's right. That's the, that's the key. I think an absentee owner in a business I'm buying in a business running well, makes the business worth more.

Yeah.

If I got somebody that is in the business every day selling the cars, cleaning the cars, doing everything, and I'm buying him out and he's leaving, that doesn't go down the tubes tomorrow because I may not be able to do everything.

You just buy yourself a job.

To me, you bought yourself a job and one that you don't know how to do. So I think that detracts from the value of the business.

Yeah. Let's wrap it up real quick with the inventory. So obviously if you're selling 50 to 55amonth, you've got about 100 to 130 in inventory. Maybe if you're depending on what you're buying and your recon and things like that. Do you value that inventory asset at purchase price? I think you go in and do the same revaluation.

In my opinion, what you can do is value it at mmr, which is fair for everybody, if you would want to say less. What's your average recon been for the past five years? Let's say it's fifteen hundred dollars. MMR plus fifteen hundred dollars. Let's call it a day. I think it's the right way to do it. Now you could tell me, let's do MMR times 110 plus 1500. And if I see that all these cars have been recon and am I okay with that? I'm probably okay with that as well. But what you currently have in the inventory plus all your recon, I don't think that's fair because if you had to dump that, that inventory back at the auction, you're not going to get that. So I think MMR is a really good number to go on.

Yeah. And maybe even look at the age of those units and maybe those get valued differently if they've got a whole bunch of aged inventory sitting in the back 50 of those cars or builders that are just on the books because they weren't called repos.

Yeah.

You gotta, you definitely gotta know that. Because MMR doesn't necessarily mean the way it's sitting at the current time. Right. So that could be a very skewed number when you get into it. So to wrap this up, if you take a handful of those numbers and now there's a whole nother side of it. Right. Once you valued the business, you've determined the portfolio. The land, the blue sky, the furniture, equipment, the assets that are in inventory. Now you've got to look at the financing side of it, which we won't get into now, today, but now you've got to say, okay, at today's interest rates and at this financial structure, is this a profitable business for me? Can I move in, make the obligation either through my own assets because I got a $10 million laying around, or I'm gonna go reach out to, to a lender and take on some serious debt. What is my cash flow and am I making a living? Because you're going from, you know, you buy a business, you go from zero to 60 real quick. You're, you're, you're thrown into it, which is the beauty of having a cash flowing business, but also can be a little scary.

Yeah, you know, these are big numbers and they can be scary, but you got to dig so deep into the value of this business. And Jeff, this is a great exercise. You know, as everybody knows, I'm consulting. So if you need me to dig into a number like this for you, I promise you I know how to do it. But if you told me it was going to take me nine or ten million dollars to buy, buy here, pay your store today and get going, would I do it? I don't think I would.

You wouldn't do it in your current situation or you wouldn't do it if you were 25 years old?

I wouldn't do it if I was 25 years old. I think given, given $10 million. Now if I had to leverage $10 million, that, that might be a totally different scenario. And if the leverage was right, but If I had $10 million to invest, or 9 million or $8 million to invest, buy your pay here would not be what I would do.

That's a, that's a, that's a great, great testimonial for the business you ran your entire life.

I'm not saying you can't make a lot of money, but you know, it's, it's a lot of freaking work. I mean, I'm really, I'm 30 years old and I look like I'm 50, you know.

Yeah. I don't know if that's all the buy here, pay here. Maybe it's the rockstar lifestyle you were living for a little bit.

Yeah, yeah.

I think if I was younger and I had 5 to 10 years experience in the industry and as a manager or maybe a dabbling in buy here, pay here, I think when you do the numbers on this, assuming your interest rate is reasonable, I, I think it's a great way to accelerate into the industry and jump forward 15 years.

Yeah, yeah.

If you can handle the debt service now, you got to look at the numbers, you got to be extremely conservative and you got to know that it's going to be a slog fest and back to the owner, operator, absentee owner thing. You're probably not going to be an absentee owner. Don't go into this as a 25 or 30 year old thinking that you're going to be an absentee owner. If some buy here, pay here in Texas, like I don't think that's the move. I think the move is I'm going to buy this and now I'm going to step in and add value and keep very, very tight reins on this operation and maybe run it more efficiently than the previous owner did. You know, maybe I do have to fire a high level manager or the GM and take in that spot and hopefully keep my staff because now I've got to get rid of that two or $300,000 a year salary that that person was making. Because now I'm here personally and I'm going to run this thing, pay my debt off over the next 25 years. And now I'm going to own a $10 million portfolio free and clear.

The other, the other thing we need to talk about is if you go into this and you, and you have this debt that's going to go in here, it's going to be hard to get other debt and so it's going to be hard to grow.

Yeah, that's a good point.

It may even be hard to sustain. And so these are all the things you got to look at because the debt you currently take on to buy this, oof. It's gonna, it's gonna hamper you from, you will not be able to get debt.

Yeah. If you, if you borrow a portfolio at even 60 or 70% on the dollar, don't think you're gonna go back out in two or three years and borrow another $5 million against that same portfolio. That's not gonna happen for 10 or 15 years when you get it paid down to 30 cents on the dollar and then you wanna leverage back up to 60 to grow. So don't think you're gonna buy it and start growing. Don't put that in your equation. I don't think.

No. And your best way out of this is CPI heavy and Buckeye can help you with that. But you would, you would have to have a huge percentage of your portfolio in cpi and you would take, you would just plow every dime of that CPI either in the growth or into paying off this debt.

Yeah, yeah, that's a good point. Because that 900 accounts, if you got 800 accounts on CPI at a hundred dollars a month, it's a lot of money. 80 grand a month, you know, almost a million dollars a year that you can put into paying down that debt. That's, that's pretty sweet. So.

Or growing. Or growing.

Or growing. Cool, Luke. Good times. I gotta run got morning meetings to get to and hopefully get my sales up so I can get this portfolio to the point where I can sell it to somebody else.

All right, buddy. See you.

See you.

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