What's an Olds franchise worth?

Impending buyouts spark $2 billion tug-of-war What's an Oldsmobile franchise worth - and how tough will the negotiations become between GM and the 2,835 Olds dealers facing burial of their 103-year-old brand?

Those questions, and more, frame the massive bargaining process now getting underway in a close-out that could cost GM up to $2 billion or more, depending on variable values for real estate, lost profits and leasehold improvements.

With Olds dealers asked to withhold public comment as negotiating discussions get underway, many say privately they're cautiously optimistic about the outcome.

William J. Lovejoy, GM's North American group sales vice president, says cash payments to Olds dealers would "go beyond contractual obligations under the dealer agreement and state franchise laws."

Most Olds franchisees are voicing a wait-and-see attitude. The 63 remaining exclusive Olds dealers, many of whom recently upgraded their facilities to comply with "GM 2000," express concerns about how much of their investments and blue sky expectations would be recouped.

"I like Lovejoy a lot, and was reliably told he fought the executive decision to scuttle Olds," says a Midwest dealer with two Oldsmobile facilities. "But bean counters are bean counters."

Among stand-alone dealers who have invested in seven-figure facilities projects are Sammy Reagan in Omaha, NE and Chris Haydocy in Columbus, OH. They were outspoken after the Olds termination announcement by GM President and CEO G. Richard Wagoner.

Newly named to the Olds national dealer council and an enthusiast for the restyled 2002-model Bravada, Mr. Reagan laments that the "one egg in my basket got cracked but I'm hopeful we can get another franchise for this store from GM or somebody."

Standing in his new $1.9 million dealership building, after paying $700,000 in 1997 for the Olds franchise rights, Mr. Haydocy wondered how viable the franchise would be over a proposed four-year phase-out.

Several industry analysts, notably Sheldon Sandler, of Princeton, NJ, say Mr. Wagoner's announcement stripped Olds of any franchise or blue-sky value.

A veteran dealer accountant advocating hard-line negotiations between Olds dealers and GM is Carl Woodward of Bloomington, IL. He reminds his clients that GM North American President Ronald L. Zarrella promised GM dealers in a 1995 letter that "GM absolutely commits to deal fairly and equitably with each of its dealers."

Mr. Zarrella, at a GM top management meeting deciding the fate of Olds, made the motion to kill the historic brand. Mr. Woodward says that's not surprising because of Mr. Zarrella's role in the ill-fated initiative to buy 10% of GM's metro-market dealers.

In a letter to dealers, Mr. Lovejoy says GM will re-purchase all Olds vehicles regardless of model year, not merely those of the current model year; remove and buy back all signage; re-buy unused and undamaged parts, and buy back essential tools but let dealers retain tools exclusively designed for Olds products.

Dealers should not sign a GM letter or form indicating they are willing to "voluntarily" terminate their Olds franchise, advises Don E. Ray of George B. Jones & Co., a dealership CPA firm in Memphis, TN.

"If you voluntarily terminate your franchise, you may waive your right to receive certain benefits and compensation under your state's franchise law," says Mr. Ray.

Do nothing with such a letter or form "unless and until what you are signing has been reviewed by your legal counsel," he says.

Mr. Woodward spells out 10 areas for dealers and their CFOs and attorneys to concentrate on in negotiations with GM reps. They are:

1. Repurchase all new vehicles at dealer out-of-pocket costs, along with reimbursing dealers for holding costs in the interim period (between Dec. 12 and vehicles' sale or business liquidation), including interest and interim lost profits.

2. Reimburse dealers and their customers who own used Oldsmobiles for diminished value of their used Oldsmobiles.

3. Repurchase Olds parts that the dealer wishes to return at current replacement cost and not require extreme restrictions on what can be returned.

4. Buy back all Olds-related equipment, signs and tools at "reasonable value."

5. Reimburse for leasehold improvements done for Oldsmobile.

6. Compensate for Olds goodwill-franchise value-blue sky paid in last few years.

7. Reimburse for present value of future lost profits due to losing the dealer's main franchise, if it be Olds, or for losing an incremental franchise. The present value of the lost profits from an incremental franchise is much larger than almost all dealers believe, says Mr. Woodward.

8. Reimburse for reduced profits or losses in the interim period.

9. Reimburse for reduced value and/or lack of needed use of dealership real estate.

10. Compensate for the lost opportunity when GM would not allow dealers to add additional non-GM franchise in the last few years.

Ironically, Mr. Wagoner finalized the obituary notice for Olds during the reign of a longtime Olds dealer as NADA chairman, Harold B. Wells of Whiteville, NC.

Mr. Wells, who sells four other GM brands and all Chrysler Group brands, and NADA's GM industry relations team, met with Mr. Lovejoy and other senior GM officials to address dealer concerns.

NADA, in the wake of the meeting, established a special e-mail address [email protected] - and toll-free fax number - 800-446-0573 - for dealers to air their views. GM set up its own call center - 866-221-1175 - for the same purpose.

An NADA task force expressed "deep distress" over GM's Olds decision.

"Many Olds dealers got their start selling Olds vehicles," their statement declares. "A large number of dealers and their employees today depend on the brand for their livelihood."

The prospect of suits by Olds dealer whose compensation offers are deemed insufficient has been raised by the fact that many state franchise laws, most of which have been amended on the 1990s to reflect the GM and Ford buyout attempts, specify terms for reimbursement in franchise terminations.

The statutes also provide recourse to administrative agencies or courts for offers below real-market values.

Ward's Dealer Business obtained a copy of GM's Oldsmobile's transition financial assistance package (TFAP) - the automaker's proposed method to compensate Oldsmobile dealers when the division folds.

The compensation package is based on a dealer's best annual new retail unit sales in either calendar year 1998, 1999 or 2000. It includes an additional payment based on the percent of the dealer's new retail sales during 2000.

An additional facilities assistance sum of $400 per unit also is calculated by using the best sales year in either 1998, 1999, or 2000.

The package is structured to better compensate dealers whose main business relies on Olds sales, opposed to multi-franchise dealers with minimal Olds sales. For example, a single-point Olds dealer would receive $2,400 per vehicle sold in his or her best year since 1998, while a multi-franchise dealer with Olds sales of 10% or less would receive $1,500 per vehicle sold.

In hopes of maintaining dealer and consumer orders for new Oldsmobile models, GM enhanced the incentive package at year-end and increased the new-vehicle warranty to five years or 60,000 miles from the industry norm of three years and 36,000 miles.

As dealers across the country voiced doubts as to how salable the newly "orphaned" Olds models would be, incentives ranging up to $2,000 were offered to consumers, plus $400 to salespersons for each new vehicle sold and $100 to sales managers.

GM sent vouchers to every owner of an Oldsmobile dating back to the '96-model year. The voucher is good for $1,500 on purchase of a new Olds unit.

GMAC rushed out a subvented lease program for new Oldsmobiles. The unique zero down/zero interest/zero payments for one year offer for "qualified" low-risk lessees was renewed on four-year contracts.

"Olds and GM expect Olds to last a lot longer than consumers or dealers," says Geoff Pohanka, president of the seven-dealership Pohanka Automotive Group in Marlow Heights, MD. "But I'm afraid customers will react more negatively to what they perceive is a dying line."

Mr. Pohanka has two Olds franchises. He's one of Olds dealers reviewing their future new-model orders.

Reid Trickett, owner of Trickett Oldsmobile, Madison, TN, cancelled orders for 16 new vehicles after the phase-out announcement.

"It was a death notice," he says. "How can we promote such a product for two or three years down the road?"

By one estimate, the first package of incentives could cost GM $350 million on 140,000 sales in 2001. This cost would rise if even costlier incentives were needed on new Olds vehicles in 2002 and 2003.

Olds sold 289,172 vehicles in 2000, off nearly18% from the year before.

Buick dealers around the country are pressing General Motors to transfer at least some Oldsmobile vehicles to the Buick lineup.

"That's what they're saying," says a GM spokesman.

At the top of dealers' wish list are the all-new '02 Bravada and the Silhouette minivan, which got a 2001 facelift.

Another GM spokesman was unoptimistic about the dealers' requests.

"The reason we decided to get rid of Olds was because its products weren't successful in the marketplace," he says.

Buick's relatively slim lineup currently consists of four cars - the Park Avenue, LaSabre, Century and Regal.

All dealers want more product, but the situation at Buick may be more grave. Buick and GMC are considered as the most likely candidates to be sent out to pasture if GM decides to clean house again.

The second GM spokesman waves that off.

""Buick is one of our more profitable divisions," he says. "And GMC is part of Pontiac"