Editor's Note: Here’s an excerpt from Succession Planning: Step-by-Step. Go here to read more. 

A sound dealership succession plan addresses a long list of issues, including retirement income, transferring wealth to the dealer’s heirs, transferring ownership, dealing with the income and estate tax consequences associated with an ownership transfer, and addressing other issues key to the ongoing success of the business; not the least of which (and often forgotten) is transitioning management.

Step 1: Identify and prioritize goals for the transition.

Step 2: Identify and prepare new management. 

Step 3: Determine retirement cash needs

The optimum succession plan calls for relinquishing ownership and management responsibility prior to death. However, owners are often reluctant to retire due to concerns over how to adequately maintain their desired retirement lifestyle.

The concerns are amplified in situations where the dealership provides for major ongoing expenses, such as a company car and healthcare insurance. So, a major consideration in succession planning is determining the ongoing cash needs of the retiring owner and how those needs will be funded. Even if you do not plan to retire, a contingency plan should be in place to address those issues should you have to surrender ownership or management due to a disability or other unplanned circumstances.

There are many vehicles used to provide retirement cash, such as consulting agreements, payments related to a non-compete agreement, deferred compensation plans, etc. As the surrendering owner, you might also maintain dealership assets. For example, the real estate could provide ongoing rental payments. If the transfer involves a sale, you might use a seller’s note whereby the proceeds are delivered over time. Those agreements need to consider such items as interest and length of agreement and the reliability of the new owner. 

Some funding mechanisms are more or less appropriate when ownership is being transferred within the family. An arrangement we developed recently for a dealer with few assets other than his business involved an income and estate tax-conscious combination of gifting and selling to his son. The retiring dealer will be paid through deferred compensation and rental payments on the real estate. The deferred compensation agreement also included a survivorship clause, which provides for ongoing payments to the dealer’s wife, the son’s mother, if the father is first to die. 

To determine your retirement cash needs:

Quantify the amount needed to fund your desired lifestyle. Recognize that, with the exception of fixed payments like a mortgage, you need to adjust for inflation. Even a small amount of inflation will have a significant impact on the value of money over time. For example, just 3% annual inflation means that in 10 years you will need $1,340 to cover $1,000 of today’s expenses. Be sure to include costs being covered by the business, such as the company car, insurances, country club membership and so on.

Offset the total cash needs figure with amounts from sources other than the business, such as IRAs, Social Security and other investments, again with adjustments for inflation and interest rate risk. Typically, retirement will also involve reshaping an investment portfolio to a less risky position, say, more bonds than stocks. 

The difference between the funding you will receive from other sources and your retirement needs is the minimum amount of cash that will need to be provided by the dealership sale or as part of the ownership transfer agreement.

10 Steps to Successful Succession Planning

  1. Identify and prioritize your goals.
  2. Identify and prepare your management successor.
  3. Determine your retirement cash needs.
  4. Review options for funding the transfer in light of required retirement funds.
  5. Plan for ownership succession.
  6. Identify options for transferring ownership.
  7. Integrate succession and estate plans.
  8. Develop an implementation strategy.
  9. Design a contingency plan.
  10. Monitor and adjust the plan.