NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided.
The big day has come. You’re selling your dealership in an asset sale. Everyone involved has gathered for the closing – attorneys, accountants, the dealer principals, flooring lenders and others involved in the process. A call has come in that the DMV is on its way to issue the new dealer’s license. Everything seems to be going smoothly. Then your business manager pulls you aside and asks you about a computer software maintenance agreement you signed some years ago. The new dealer has agreed to take over your computer lease, but nothing was said about the separate software maintenance agreement. You have your attorney look at the agreement and are told that the agreement runs for the next fifteen years with a hefty monthly fee, plus yearly increases every year. Not only that, but you have personally guaranteed the agreement by signing on a line for your individual signature. A phone call is made to the computer company and you are told that they will not let you off the hook. They want the entire fifteen years of payments. The new dealer does not want to take over a fifteen year contract. What do you do now?
Unfortunately, this closing day picture is not beyond belief. A computer vendor’s intractable position in one case almost blew the entire deal. If a buy-sell agreement is properly drafted and the parties are diligent in handling the dealership’s contracts and leases, many problems can be avoided, and there won’t be any surprises on the day of closing.
An automobile dealership is normally a party to many different types of contracts. Examples are equipment leases, equipment installment sale purchases, computer leases, software maintenance agreements, and many other agreements dealing with such things as uniform supplies and laundering, heating and air conditioning maintenance, communication systems, gardening, lighting maintenance, and other types of agreements for services or goods provided to the dealership.
Some of your contracts are probably signed by you, especially the larger ones. Others may have been signed by a manager with or without your approval. Many of these agreements will have the length of time of the agreement buried in the fine print. You didn’t know that it was a five year agreement. Many contracts also have buried in the fine print an automatic renewal clause i.e., if you don’t give notice before the end of the term, the agreement renews for another five years. How do you handle all of these contracts in the buy-sell agreement? As the parties become involved in negotiating the deal, the selling dealer should review all of the dealership’s existing agreements. This is not always as easy as you might think. It seems that many dealers have difficulty identifying and locating all of the dealership contracts and sometimes are not sure exactly what agreements they do have. Copies of the agreements which the selling dealer desires the buyer to assume should be given to the buyer so the parties can negotiate which contracts the buyer will assume.
When the buy-sell agreement is prepared, it should contain a provision which references an exhibit to the agreement listing all the contracts the buyer will assume. The agreement should also state that the seller will assign the contracts to the buyer and that the buyer will assume all of the seller’s obligations under the contracts, and that further the vendor’s consent will be obtained prior to the closing of the deal. Another important issue to cover in the agreement, particularly from the buyer’s perspective, is to make sure any equipment under lease or contract is not paid for twice. In other words, if you are buying the fixed assets at a price determined by an appraisal or at a price upon which the buyer and seller have agreed, you should not pay for the full value of that asset if there is money owing on it either under a contract or a lease. How this issue is handled must be negotiated by the parties on a case by case basis. If there is only one payment left on a computer lease, the lease will be handled differently than if there are four years left on a five year lease.
Once the buy-sell agreement is signed, you should begin the process of obtaining the vendor’s consent to the change as soon as possible. The documents providing the assignment by seller, assumption by the buyer, and consent of the vendor should be prepared and signed by the seller and buyer immediately. It will state that it is effective on the closing date. Once signed, the document should be sent to the various vendors for their agreement and release of the seller. Sometimes the vendors require that their own form be used. Once all of the vendor consents are obtained, the documents are held by one of the parties and will be used at the closing.
When the dealer is a party to contracts which can be cancelled on short notice, there is usually no need to assign the contract and the selling dealer can simply cancel the contract by giving the appropriate notice before the closing.
Vendors are usually willing to work with the parties in a buy-sell, even when the seller has a long term contract. But discussions should begin early to ensure that there are no last minute problems when the big day comes.
This article was written in 1996.