As franchise dealers enter the New Year, they face at least two significant challenges:

• To sell more cars
• To increase profits on those sales

The decision by franchise dealers to enter the buy here, pay here business can help dealers accomplish both of these goals.

Buy here, pay here makes sense to the franchise dealer for the following reasons:

1. As a CPA who specializes in the automotive industry, I see franchise dealers struggling to earn a profit equal to 2% of sales. By contrast, successful buy here, pay here dealers over the last few years have routinely earned 7 to 10 times that amount!
2. Although our domestic economy will likely improve in 2004, the ability to increase subprime sales will be a challenge. Consider that 1.8 million bankruptcies (a record) are forecast this year! This indicates that the credit-impaired segment of our economy continues to grow at unprecedented rates despite the overall economic improvement. The heavy consumer debt load and unemployment are primary causes. Consumer debt hit a record $1.98 trillion in October 2003, according to figures from the Federal Reserve. That debt--which includes credit cards and car loans--translates to approximately $18,700 per household. At the same time, government reports indicate the nation's savings rate dropped to just 2% of after-tax income. Simply put, many Americans today lack financial capacity. The nation's credit card debt currently stands at $735 billion, or nearly $7,000 per house-hold as Americans learn to live with high levels of consumer debt.
3. A dealer consultant recently estimated that last year dealers aver-aged about 30 sales for every 300 applications, and that in 2004 they likely will need 450 applications to generate the same level of subprime sales. The reason: signs point to continued tightness in subprime auto lending, forcing many of these deals into the buy here, pay here segment. Franchise dealers who want to meet this challenge must provide customers with a buy here, pay here financing alternative or lose them to independent dealers who will!
4. Also consider the synergy created between buy here, pay here and franchise operations such as:
   • Trade-ins can be recycled into retail sales versus wholesale dispositions at losses.
   • Credit turndowns can be converted into desirable subprime customers.

   Both of these possibilities increase sales and generate profits. Diversification from manufacturer control allows franchise dealers to serve a broader segment of the auto industry more profitably.

Franchise dealers are encouraged to proceed with caution, however. Buy here, pay here operations are quite different from those of a new car dealership. Subprime portfolios often do not perform like new car deals. As a result, buy here, pay here dealers experience much greater default rates, and self-finance deals require a large cash investment. Capital requirements are therefore greater for self-finance operations. These factors must be understood and addressed when entering the business.

New car dealers who are considering buy here, pay here are encouraged to visit booth # 3975 at the NADA convention in Las Vegas on January 31 - February 3, 2004. This booth will offer the latest information on industry developments, capital sources, and the latest technologies to improve profits and cash flow. Those unable to attend NADA, may wish to visit the NABD award winning website at www.bhphinfo.com.

This year will offer unprecedented subprime profit opportunities for dealers who understand and properly manage the risks associated with buy here, pay here operations. Franchise dealers who recognize and pursue this opportunity will prosper.

Kenneth Shilson, CPA, is managing partner of Shilson, Goldberg, &- Associates, L.L.P., a CPA firm in Houston, Texas, 713-290-8171, which provides accounting and tax services nationally to the used car industry. Comments or questions can be directed to him at his Website: www.kenshilson.com or e-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Mr. Shilson is a founder of the NABD.