Name Your Dealership Successor

Most franchised dealer sales and service agreements have provisions for naming a successor in the event of death or incapacity of the dealer. Some states have laws that protect the right to name a family member or long-term employee. If you have not yet named a successor, you should start the process immediately.

If a dealer should die or become incapacitated, who will take over control of the dealership? A dealer should answer this for legal and business reasons.

From a legal standpoint, the dealership’s franchisor and its lenders are vitally interested. The franchisor wants to know who will be in charge and who has authority to order vehicles and make decisions in a wide variety of situations.

The dealership’s lenders want to know who will ensure that the company will continue operating profitably to provide the means of repaying loans.

From a business standpoint, the decision about who will control the dealership is just as vital.

Every franchised dealership has a team of managers and employees that makes the company work. In the event of the death or incapacity of the dealer, it will be difficult enough working through the various challenges, but doing so without the team knowing who to look to for leadership and guidance will add to the burdens.

Each franchisor’s form agreement differs in its successorship provisions, but there is a theme: During the life of the dealer, a successor can be nominated. The qualifications for approval vary from dealer franchise to dealer agreement, but most agreements provide a process by which successors will be considered and placed on the successor addendum.

When a successor is not named while the dealer is alive, generally there is a different situation. Then, the franchise agreement leaves the process for approval of a successor up to the discretion of the manufacturer.

Unfortunately, a clock is running during negotiations over whether the successor will be accepted. Franchise agreements generally provide a time period within which a new dealer must be designated.

Even though there may be no set deadline, the dealership’s lenders are going to be skittish if it is unclear who will take over, as will the dealership’s managers and employees.

State franchise laws vary from those that regulate the successorship process (whether before or after the death of a dealer), to those that regulate the process only during the life of a dealer, to those that provide no regulation at all. 

For those states that do, the general purpose is to protect the right of a dealer to name a family member or a long-term employee.

But even in those states that provide these protections, the process of having a successor recognized by the franchisor can be time-consuming because of the need to apply for approval and to work through the questions and concerns that may come up. 

While the dealer is active, the dealership can take the time to work through the process. Otherwise, the dealership lacks the luxury of time.

There may be estate issues as to who really owns the equity in the dealership. The nominee may wind up in lengthy negotiations over qualifications.

A dealer should name a successor during his or her life. This is a key part of protecting the estate of a dealer in the event of death or incapacity. The dealer can work to have the successor approved.

Once the nominee is added to the successor addendum, the dealer can be confident that if something happens, the dealership is ready to move forward under the control of the successor.

The naming of a successor is important in protecting one of the critical assets of your estate – your dealership. 

The alternative is not attractive. If a successor is not named during the dealer’s life,  the result can be lengthy negotiations, scrambling to meet qualifications and bending to the demands of the franchisor, while managers and employees are wondering whether they need a more stable assurance of continued employment.

Have you named a successor? If not, what are you waiting for?

Michael Charapp is a lawyer who represents auto dealers. Based in McLean, VA, he is at (703) 564-0220 or [email protected].