Pub. 56 2015-2016 Issue 4

26 But there are other barriers as well. Dealerships require sizeable investments; millions of dollars are needed to fund working capital, inventory financing, and investment in fa- cilities and other property. In addition, most capital lenders, especially when dealing with smaller dealerships, require some form of personal guarantees for these investments. And, while financial assistance is sometimes available from manufacturers, this additional incentive is at the discretion of the manufacturer providing it, and is guided by opaque processes and decisions invisible to the dealer. 28 Moreover, these investments in fixed property, inventory, and unique, often single-use facilities have very high capital costs. The fact that dealers are contractually obligated to invest in these facilities makes it difficult for them to exit without leaving behind significant stranded assets. A further barrier to exit is inherent in the design of the retail relationship. We noted elsewhere that dealers fre- quently operate single product stores carrying only the merchandise of one manufacturer. As such, dealers have no ability to switch products or brands and cannot source independently. This makes it virtually impossible for a dealer to terminate a relationship with a manufacturer, because the dealer would find that it no longer had any products to sell. This is one of the few, if not the only, retail businesses where the merchant has little control over what products will be stocked, when they arrive, how they will be initially priced, and what the terms of payment for that merchandise will be. And this outcome is exacerbated by the facility requirements that most manufacturers impose on their dealers. These requirements, which often can cost several million dollars to meet, typically result in single- purpose facilities that cannot easily be converted to meet another manufacturer’s requirements. For example, it would be enormously expensive for a Honda dealer to convert its Honda compliant facility to meet the facility requirements of Chevrolet. Finally, selling a dealership is also a process fraught with delays and contractual obligations demanded by manu- facturers. One simply cannot sell a dealership to anyone; there is an extensive vetting process, and the new buyer must provide significant capital and meet other require- ments established by the manufacturer. This process can be time-consuming, and delaying a transaction inherently increases the probability that a sale will fail to be consum- mated and that the existing dealer will be stranded without a qualified buyer.  NADA RESPONSE — CONTINUED FROM PAGE 25 28 In this way, these incentives are yet another example of the paucity of information to which dealers have access in making business decisions.