A new point in your area after closing buy-sell

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.  

A decision from the California New Motor Vehicle Board shows the importance of flushing out information regarding a new point or points in a dealer’s relevant market area before the close of your buy-sell agreement.

In the ruling, the board said the factory was not obligated to inform a prospective buyer that it was considered in establishing a new point in the dealership’s relevant market area before the closing of the buy-sell agreement.

In this case the dealer purchased a dealership and after the deal closed, found out that the factory was considering establishment of another dealership of the same line make in the dealer’s relevant market area. It subsequently turned out that the open point was established by the factory. The dealer claimed that the factory personnel had recommended the establishment of the open point before he closed the buy-sell, but that this fact was concealed from him in violation of the factory’s duties to him.

The New Motor Vehicle Board ruled against the dealer and in favor of the factory. The decision stated that there is no fiduciary relationship between the factory and a dealer or prospective dealer and that the factory had not acted improperly in failing to disclose the recommendation to the purchasing dealer. The decision emphasized the fact that there are many levels of management approval that are necessary before an open point is established, and even the establishment of an open point does not necessarily mean that a dealer will be placed there.

Whether there will be other points added in a dealer’s relevant market area is usually an important factor in a decision to purchase a dealership. If a buyer has concerns that this might happen, the buyer would be well advised to have the factory represent in writing that there have been no recommendations to add a point in the dealer’s area and that there have been and are not presently any ongoing discussions or communications regarding adding a point in the dealer’s relevant market area. Such a request would not appear to be unreasonable in view of the large investment made in purchasing a dealership.

This article was written in 1995.