You Can’t Have a Succession Plan Without Reinsurance
My father bought his first dealership in 1971, when he was in his early 30s and I was 10. After several years away at college, I rejoined the family business and, at 22, bought my first store and became the youngest General Motors dealer ever franchised. We continued to grow throughout the ’80s and into the early ’90s, when tragedy struck. I lost my father in 1993, to his third heart attack, when he was only 56 years old.
If you don’t own at least one reinsurance company, then you don’t have an efficient succession plan.
No one is ever truly prepared for the loss of a parent. Unfortunately, for us, that was true in more ways than one. Dad had no estate plan. He didn’t even have the right type of insurance. We had to borrow money from banks and drain the dealerships’ operating cash to pay his estate taxes.
Our group survived Dad’s passing and would grow to 10 stores and 14 brands by the time I sold it in 1998. Shortly thereafter, I embarked on my second career in dealer consulting. And if I have learned anything in my 48 years in the car business, it’s that transfer of ownership is always fraught with challenges.
You need a succession plan — everyone knows that. But too few dealers realize how critical it is to fund that plan with pre- (or “efficient”) tax dollars. That’s where reinsurance comes in. If you don’t own at least one reinsurance company, then you don’t have an efficient succession plan. Here are three reasons:
1. Dealerships Cost Money.
The single most important component of succession planning is ownership. It takes real wealth to be approved as a dealer, buy a dealership, and own it outright. I’m talking working capital as well as net worth. If you plan to get there with after-tax dollars, it’s going to take a long, long time to get that done. And you may not have enough time to accomplish it successfully.
When you own a reinsurance company, two things happen:
- You can become your own lender. Most reinsurance providers allow you can take loans out from your reinsurance companies’ earned premiums with no tax consequences, and a few providers allow you to do the same with unearned premiums. And rather than pay interest to a bank — again, depending on the provider — your own reinsurance company can earn the interest.
- You can take dividends. You may also choose to take dividends from your reinsurance company, and it’s still a good decision: You will be taxed at long-term capital gains or qualified dividend tax rates, which are normally half of ordinary income tax rates.
As a result, stock purchases in the dealership and succession planning can happen a lot faster.
2. Reinsurance Keeps Family — and Talent — Close.
Reinsurance companies are not for the dealer’s benefit alone. We very commonly help dealers start additional reinsurance companies for their family members and key dealership managers. If you want your children to stay in the business, reinsurance is a way to give them an ownership stake early in their careers while you maintain full ownership of the dealership itself.
The same goes for your most valued employees. Turnover is a concern at every level. Giving your talented and productive GM and other key managers ownership in a reinsurance company will make them far less likely to listen to other offers. They will be too busy watching their personal wealth grow along with their paychecks.
The effect can be felt throughout the dealership. The rank-and-file feel confident knowing the dealer is smart enough to take their destiny in their own hands and the business is much more secure.
3. Reinsurance is a Lasting Gift.
When we are talking to dealers about succession and retirement planning, we ask three questions: What is your long-term vision for the business? Whom do you want to succeed you? How much time do we have to work with? That’s really all we need to know.
Unfortunately, there is no way to plan for a dealer’s untimely death. I have seen it happen too many times, and it is always devastating.
But those dealers who leave behind reinsurance companies have essentially handed their surviving family members a priceless gift: a financial asset, separate from the dealership, they can use to pay all kinds of expenses — including estate taxes — and to stay in business.
Very rarely is the family surprised to learn the dealer owned a reinsurance company. But, over and over again, I find they are shocked at how easy it is to get their hands on that money and go about the business of settling the dealer’s estate and moving on — with the dealerships and with their lives.
I would have given anything to have that type of security when my father passed. I feel fortunate to have played a key role in the successful transfer of ownership and succession plans for so many of my dealer clients over the past two decades. I hope you will take my advice to heart and give this matter your attention.
Graye Wolfe is senior managing director for the Western U.S. for Portfolio, a national provider of reinsurance programs and F&I products, the founder of Performance Improvement Concepts, and a graduate of Northwood University and the NADA Dealer Candidate Academy.