Pub. 55 2014-2015 Issue 1

21 2014 FALL when a ROFR is exercised, the seller is contractually obligated to a new, unknown buyer who was not party to the contract negotiation. In this situation, the seller could open themselves up to claims and liabilities from the new buyer if the spirit of the representatives and warranties are not understood. The Industry Risks In addition to the specific buyer and seller risks, this trend presents the follow- ing industry risks: • Enhances Manufacturer Control: Buyers will be hesitant to invest time and money on an acquisition if they are concerned the manufacturer will exercise the ROFR. As such, more and more buyers will insist that the manufac- turer be brought into the buy/sell process early on, before a purchase agreement is signed. As we are all aware, once the manufacturer knows a dealership is for sale, the world knows it’s for sale. If the manufacturer is brought into the sale process in the early stages, they will exert greater control over the process and ultimately help shape the sale. • Reduces Buyer Competition and Blue Sky Values: Fewer buyers will be in- terested in participating in a competitive sale process if the ROFR becomes stan- dard. With less competition, blue sky values will come under pressure. Since most manufacturers have little concern over the blue sky value a seller receives, the manufacturer’s influence will likely reduce blue sky values. Buyers will be anointed by the manufacturer and sell- ers will have little bargaining power on price. • Creates an Uneven Playing Field: When manufacturers pick the buyer, they are creating an unfair franchise system. Unlike a new point, in which every dealer has the opportunity to apply and compete, with a ROFR, the manu- facturer picks who they want without disclosure of their reasoning. With a ROFR, the manufacturer is in effect picking favorites, particularly if they also finance the acquisition with their captive finance company. This kind of manufacturer favoritism is precisely what the franchise laws were meant to disallow. The goal of franchise laws is to protect each dealer’s franchise and to ensure the playing field is fair – ROFRs are not fair. There are some ways dealers can try to protect themselves against a ROFR being exercised in a buy/sell: • Have YourDucks in aRow: Buyers and sellers should submit all buy/sell paper- work to the manufacturer in a complete and timely fashion. This will limit the time the manufacturer has to identify a replacement buyer (usually the manufac- turer has a certain number of days once the full buy/sell package is submitted to exercise their ROFR). • Put inPlace a Structuring Fee: Buyers can put in place a structuring fee that is unique to the buyer, which would be paid to the buyer if the manufacturer exercises its right of first refusal. The structuring fee has the effect of increasing the price the manufacturer’s replacement buyer would have to pay for the acquisition and can make the acquisition uneconomical. • Require a Contemporaneous Close on the sale of Real Estate and Other Franchises: Buyers and Sellers can require that all transactions associated with the sale of a single dealership, close contemporaneously as a condi- tion to closing. If the transactions do not close contemporaneously, the seller is not obligated to complete the sale. This requirement makes it more dif- ficult for the manufacturer to exercise their ROFR when real estate and other franchises are involved in a transaction, as the seller can choose not to sell to the replacement buyer and the manufacturer does not have a ROFR on the real estate or the other franchises. Even if dealers take these steps, a manu- facturer can usually find a way to exercise their right of first refusal, in jurisdictions that allow them. Today, only very high priced transactions are ROFR proof. When prices are very high, manufactur- ers are not confident they can easily find a replacement buyer. However, like the cy- clical nature of car sales, the current buy/ sell cycle will also run its course. Even- tually, blue sky prices will come down at which point manufacturers may exert even greater control of the buy/sell process. To avoid this situation, it is imperative that more states follow Texas’ lead and disallow a manufacturer’s right of first re- fusal. Ultimately, the ROFR reduces blue sky values and allows the manufacturer to exert too much control over the buy/sell market.  Erin Kerrigan is Managing Director of Kerrigan Advisors, which she founded in 2014. Kerrigan Advisors is a national buy/sell advisory firm focused on providing a limited number of sellers, a high level of client service. Prior to founding Kerrigan Advisors, Ms. Kerrigan headed Presidio Automotive. During her time at Presidio, the firm represented dealer clients in numerous large, multi- million dollar transactions. Prior to Presidio, she was a Senior Vice President at AutoStar, a subsidiary of iStar Financial (NYSE: SFI), where she led transaction origination. Early in her career, she was dealer operator of her family’s dealership, which she sold in 2006. She began her post-graduate career as an investment banker for Piper Jaffray. Ms. Kerrigan is a recognized industry expert on dealership valuation, real estate and buy/sells, and is a frequent speaker at leading auto retail events and conferences, including NADA (#1 speaker in 2012), American Institute of Certified Public Accountants (AICPA), National Association of Dealer Counsel (NADC), Auto Team America’s Buy/Sell Summit and DrivingSales’ President’s Club. She has also been a key note speaker for events hosted by AmericanHonda Motor Company, Audi of America, Bank of America, US Trust, Ohio Automobile Dealer Association, Colorado Automobile Dealer Association, and SunTrust Bank and has also led webinars for NADA and Automotive News. Her expertise is also featured in a monthly column she writes for Dealer Magazine. Ms. Kerrigan earned her undergraduate degree from Northwestern University and her Masters in Business Administration from The UCLA Anderson School of Management. She lives in Newport Beach, California with her husband, Ryan Kerrigan, and their three children.