Counting down to 2013: Opportunities and risks pending the removal of the right of transfer of dealership businesses

Updated July 2011

On 1 June 2013, the distribution of new vehicles will no longer be governed by the existing motor vehicle block exemption, which was introduced in 2002 (2002 Block Exemption), In future, distribution will be covered by a general block exemption applicable to the distribution of all manner of goods and services, from electrical equipment to groceries. 

This change will have a number of important implications for motor dealers. One of the main implications is that motor dealers will lose the automatic right to transfer their dealerships to another member of the same dealer network, without requiring the consent of the vehicle manufacturer.

Implications post 1 June 2013

The abolition of the automatic right of transfer will enable individual vehicle manufacturers to refuse arbitrarily to permit the transfer of a dealership to an existing member of the dealer network. This will apply even where the proposed purchaser clearly meets the manufacturer’s standards.

The removal of this automatic right may have a significant impact upon the short and medium term plans of dealers, both in terms of arrangements for an eventual sale and also the willingness of dealers to undertake significant investment in their business.

Certain manufacturers have already started to outline specific sale/transfer policies in advance of the change in 2013.

One such example is that the dealer wishing to sell will be required to give advance notice to the manufacturer, who would then attempt to locate two willing purchasers of the business. The purpose of this mechanism is to attempt to preserve some degree of market value in the dealership business being sold (although, of course, it is contingent on the manufacturer identifying or approving two willing purchasers, which may be an uncertain and cumbersome process).

The outgoing dealer would then decide whether or not to accept one of these offers or retain the dealership, even if a higher price could be obtained from a suitable third party (assuming the manufacturer is unwilling to approve that third party). This example, while sometimes found in other types of franchised business models, is likely to have a detrimental effect upon the ultimate price received by the outgoing dealer. It is also likely that different manufacturers will approach the issue of dealership transfers in different ways, meaning that multi-brand dealers may be faced with differing procedures and requirements for each brand that they operate.

The uncertainty regarding the ability to receive a full market value on the sale of a dealership business may also encourage short-termism and discourage significant investment in the dealership business by those considering a sale.

Opportunities prior to 1 June 2013

The current ability to transfer a dealership business to a member of the same dealer network does offer an incentive for those wishing to exit to take advantage of the existing flexibility during the next two years. Similarly, those dealers looking to take advantage of consolidation opportunities in the marketplace may wish to do so prior to the expiry of the 2002 Block Exemption.

While there is a risk that any manufacturer who is not in favour of the transaction may give a notice of termination to the purchasing dealer, any such termination prior to the expiry of the 2002 Block Exemption would need to be objectively justified. Thereafter (when the protections from termination currently enjoyed by dealers are weakened), it would still require positive action on the part of the manufacturer to change the status quo.

In any event, a dealer wishing to exit and transfer its business will need to keep its manufacturer informed and (even prior to 1 June 2013) comply with any notification requirements in its dealer and repairer agreements.

What steps should a dealer considering a sale take at this stage?

As it is less than two years until the expiry of the 2002 Block Exemption, it is important that any dealer who is considering taking advantage of the more flexible sale conditions takes early action. This will ensure that their sale value is maximised and liability to tax on the sale proceeds is kept to a minimum. Important early steps include:

Reviewing the shareholding structure of the dealership

Any dealership that is operated by way of a limited company should carefully consider its shareholding structure as this will have a significant impact upon how much tax the shareholders pay following an exit.

If a shareholder qualifies for Entrepreneurs Relief, they will be liable to tax on the value of their gain on an exit at the rate of 10% (for the first £10m of lifetime gains). This contrasts with the position where Entrepreneurs Relief does not apply, when higher rate taxpayers will be taxed at the rate of 28%.

There are a number of strict qualifying conditions for Entrepreneurs Relief to apply. The key points to note are that each shareholder is required to hold at least 5% of the voting shares, be an employee or director of the dealership and to have held such shares for at least one year.

The existing shareholding structure of the dealership should be considered and any shareholders who do not qualify should be carefully assessed to ascertain if there are ways in which the position could be improved and tax liability reduced.

This also may apply if the intention is to introduce new shareholders (whether employees, investors or family members of the proprietors). In view of the one year qualifying period during which the shares have to have been held prior to a sale, early planning is essential as it may be too late to rectify the position once the sale process has begun.

If any equity in the business is given to employees or family members, we would always recommend that the dealership’s constitution be updated. This is to ensure that it contains adequate protection for the majority shareholders and that a sale cannot be frustrated.

Structure of the dealership business

If the business is a multi-brand dealership or operates from a number of sites, consideration should be given as to whether a sale of the whole dealership business would be most appropriate or, alternatively, whether a sale of the separate parts may realise more value than the whole.

If this is the case, the manner in which the dealership business is structured will have an impact upon (i) how easily different parts of the business can be sold and (ii) the tax liability as a result.

Whilst what is appropriate will depend upon the precise circumstances of the dealership itself, consideration should be given to splitting the various business streams into separate subsidiary companies. This allows for an easier transfer of assets and is likely to minimise tax liabilities.

Open discussions with the dealership’s bankers

Depending upon the banking facilities of the dealership business and the structure, the consent of the dealership’s bankers may be required to any sale. This may require approval of the various credit committees within the bank. It follows that discussions should, ideally, be opened with the dealership’s bankers at an early stage to ascertain their requirements and prevent any delays arising as a result.

What is the period remaining on the manufacturer contract?

For dealers operating on a fixed term manufacturer contract which is nearing an end, consideration should be given to approaching the manufacturer for this to be renewed or extended. For obvious reasons, care would need to be taken as to how this is handled. The longer the remaining period on the manufacturer agreement, the greater security this will offer to a potential purchaser, which may positively impact upon the price it is willing to pay.

Other issues affecting the security of the ongoing business

Where the dealership is dependent upon services provided by third parties, the greater security that is in place governing these arrangements the better. Examples include (i) where dealership premises are leased, ensuring that there is an appropriate term remaining on the lease and (ii) ensuring that any dealer management software that is critical for the ongoing business is properly owned or licensed (and, for the prospective purchaser, in the case of any licensed software or other intellectual property and contracts, that the costs/fees involved in securing their transfer/renewal from any licensor etc are properly factored in).

Legal compliance

Any compliance issues discovered by the buyer during the due diligence process may lead to a reduction in the purchase price or the buyer retaining some of the monies. Many such issues, if identified early enough, can be easily and cost effectively remedied in advance.

We would therefore recommend that dealerships considering an exit undertake a legal audit of the key risks that they face in order to identify any such matters at an early stage. We have seen this save significant value for sellers during subsequent sale processes.

Given the set timeline for the expiry of the 2002 Block Exemption, it is important that those dealers considering an exit in the medium term reconsider their strategy in the light of the proposed changes. Where an exit prior to June 2013 is a viable option, it is important that the issues identified above be progressed at an early stage to maximise the value of an exit.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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