Mind the mainframe when making the deal
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 ins and outs of handling the dealership computer system in a buy-sell often rank low on the to-do lists of buyers, sellers, and their advisors. Computers are sometimes overlooked entirely in the rush to seal the deal, at least until one of the parties is jostled by a post-closing surprise. Consider some examples:
• A seller lets the buyer take over the computer, perfectly content with a buy-sell agreement that merely provides for the buyer to assume the computer lease. After the deal closes, the seller seeks to access the computer for data helpful in collecting some of his remaining receivables, only to learn that the buyer not only refuses to let the seller anywhere near the computers, but has okayed the deletion of all computer files containing the seller’s receivables and warranty claims.
• Another seller breathes a sigh of relief once the buy-sell is signed, thinking nothing of the clause that gives the buyer the right to pick and choose the equipment leases and long-term supply contracts to be assumed by the buyer. When the seller informs the computer vendor that the buyer will not be assuming the computer (in order to go with another brand), the vendor not only quotes an astronomical early lease termination figure, but also demands the buyer pay off a 15-year noncancelable software license and maintenance agreement.
• In another deal, after reviewing the seller’s financials, the buyer elects to assume the seller’s computer system; after all, the numbers on the lease and related agreements were well below average. The buy-sell is drafted to provide that the buyer will assume all computer agreements and take all further action necessary to cause the computer vendor to release the seller from liability. When the computer company is informed of the buy-sell, it promptly advises the parties that assumption of the computer lease is acceptable, but that the software license and maintenance agreements must be signed anew by the buyer, at a substantially higher cost. The buyer is forced to choose between capitulation to what is seen as computer company highway robbery, or loss of the entire buy-sell; the seller is unsympathetic and demands the deal close as agreed.
Fortunately, these and most other computer problems in buy-sells can be avoided by some relatively painless pre-planning and agreement drafting. And, as we discovered from top computer vendors at the 1996 NADA convention, many vendors are sensitive to these issues and seem willing to consider honoring what they perceive as reasonable dealer requests. The trick is to frame those requests at a time and in a manner that will maximize your leverage.
As a preliminary step, recognize that agreements with computer vendors are among the most stringent contracts dealers are asked to sign. These agreements cover matters such as software licenses, software maintenance, equipment maintenance, and equipment leasing. The terms of these agreements drive much of the planning required to successfully integrate computer issues into a buy-sell. Competitive pressure appears to give computer company marketing departments some flexibility in waiving the terms of these agreements, but, legally, oral assurances like these carry little weight. In light of the strong language in the computer agreements, signing a buy-sell on the assumption that you will have the cooperation of the computer vendor is a serious mistake.
Buy-Sell Pre-Planning When Choosing a Computer System; Canceling Computer Contracts if the Buyer Won’t Assume. Almost always, agreements with computer vendors are for some term of years, during which time the agreements are non-cancelable. What dealer wouldn’t welcome a computer company’s sales pitch that guaranteed that all computer leases and contracts would be cancelled if the dealership were sold to a buyer who would not assume? Unfortunately, none of the vendors interviewed maintain formal programs that offer this type of protection; computer companies frequently point out that they cannot control the amounts owing under the equipment lease because of its assignment to a leasing company. Nevertheless, when buying or leasing a large computer system, consider asking the vendor for a clause that would at least allow early termination of the license and maintenance agreements with the vendor if the dealership is sold to a buyer who refuses to assume. Computer companies would not suffer by honoring such a request since these contracts purport to be for future service requirements and software access, and, unlike equipment leases, are not for the financing of previously received goods or services.
Getting Computer Companies to Allow Buyers to Assume Computer Leases and Contracts. The dealer’s right to assign computer leases and agreements to a buyer in a buy-sell or otherwise is often severely limited, and sometimes eliminated entirely, by tough antiassignment clauses. Again, at the time of buying a computer system, it would be wise to negotiate for a right to assign all computer leases and agreements to a reasonably creditworthy buyer in a buy-sell. For those already facing a buy-sell, take heart; from discussions with vendors, vendor marketing departments seem willing to pull the necessary strings to allow assumption regardless of strict language to the contrary in their agreements. But call the vendor and get written confirmation of such a position well in advance of signing any buy-sell to maximize your leverage. At the very least, such approval must be made a condition to closing the buy-sell.
Ensuring That the Seller Is Relieved of Liability Upon the Buyer’s Assumption of Computer Contracts. Our interviews with the vendors also reveal that vendors, if asked in advance, will generally be willing to completely release the seller from liability under the computer contracts if a financially sound buyer assumes them. Again, getting this commitment confirmed in writing from the vendor before signing the buy-sell is extremely important to maintain the strength of your position.
Ensuring A Smooth Transition of Data Processing. Requirements Where The Buyer Assumes the Computer System. For years now, many dealers have maintained 100% computerized record keeping systems for all accounts receivable and similar intangible assets. In most asset buy-sells, sellers generally retain all of their accounts receivable and warranty, incentive, and holdback receivables. To collect and manage those assets, sellers need their computerized records together with computer capabilities allowing application of payments and the generation of bills, statements, reports, and the like. Since dealership computer systems are still generally based on proprietary designs, the seller will need more than a tape or disk containing his data; he will need access to the computer itself.
The key to the access dilemma is to ensure the buy-sell adequately spells out a reasonable agreement between the parties. It is entirely reasonable to allow the seller limited use of and access to the computer system following the buy-sell, and virtually all computer companies have some method of allowing this to happen.
The buy-sell should, at a minimum, address the issues of who, besides the seller, will have access to the seller’s data, and how access control will be enforced, e.g., password protection; whether the buyer’s personnel will be authorized to assist the seller with the computer without charge to the seller, and, if so, for how many hours per month; how many months may the seller continue to access and store data on the system, and what happens to the data once the time limit has run (e.g., the data will be offloaded to tape and delivered to the seller); and who will be responsible for added computer company charges associated with the seller access and use.
Note that some vendors charge a monthly service fee for setting up and maintaining a “seller’s company” on the system, even if that company only contains a few accounts; others say that as long as heavy use of the system by the seller trails off within six months, no extra charge will be imposed.
Conclusion. Given the size of the asset and its central role in most every department and operation of the dealership, it is well worth pausing to consider buy-sell issues when buying a computer, and computer issues when embarking upon a buy-sell.
This article was written in 1996.