6 Ways to Protect Dealerships

Put each dealership in a separate corporation or LLC

Each dealership that stands on its own should be its own entity. So should each piece of real estate you own. So should each affiliated company, whether it is a separate body shop, towing firm or supply company. Just as compartments below the waterline can be sealed off to keep the ship from sinking, seal off your dealership legally to minimize the impact on your remaining businesses in case of manufacturer troubles.

Don't be penny wise and pound foolish

I have heard the arguments that using separate corporations or LLCs for each dealership may increase costs. There are more books to keep, more accountant fees, higher computer costs. Weigh those against the risk that the failure of one dealership will drag down the rest of your businesses.

Put yourself in control of your financial strength

Some dealers argue that putting all their businesses in one corporation enhances their financial strength. Control the extent to which you put your businesses at risk. All businesses in one corporation will be automatically liable for the debts of a failing business. But if your companies are separate entities, you always can choose to have one or more cross-guarantee or cross-collateralize the debts of another. Make that your choice, not the result of poor corporate planning.

Review cross-company liabilities

If you have committed all your businesses to provide cross-company guarantees and collateralization for each other, is that still necessary? Can you get away with a cross-guarantee by one or two of your businesses rather than by all of your businesses? If not now because of the tight credit markets, perhaps you can as credit loosens and finance sources compete for your business in the future.

If you have excess funds or if you have personal assets in your company, get them out

When there is trouble looming, it may already be too late. Distributing assets to yourself in the face of a potential dealership bankruptcy could lead to claw-back by a bankruptcy court of distributions to yourself or to your family for a year (or even two years in some circumstances) prior to the dealership's filing for bankruptcy. Stay ahead of trouble.

Personally guarantee only as a last resort

It's painful to lose one of your businesses. It's excruciating to lose all of them. Losing your businesses and your personal assets is a catastrophe. I know, sometimes you can't avoid providing a personal guarantee. If you must, just make sure the reward is worth the risk.