Why Auto Dealers Fail, But You Don’t Need To

“It’s failure that gives you the proper perspective on success.” —Ellen DeGeneres

Where to begin with quotes on success and failure? Ellen’s is only one of countless good ones. And they all say that if you haven’t failed while trying to achieve something, then you haven’t really succeeded. But failure also means that something actually wasn’t done right. Most probably, it was in the form of a faux pas or miscalculated risk.

While you can’t control every aspect of your auto dealership business because life is unpredictable and you can’t fight with, say, an economic crisis, there are preventive steps that you can take. Most of all, you can learn from your peers’ mistakes and avoid their pitfalls.

The following are some of the most common reasons why auto dealers file for bankruptcy. While they all boil down to finances, the problems stem from different fields of the dealership’s operation. Knowing them can give the ability to smell trouble from afar—and avoid it.

Problems with mortgage loans

One of the frequent reasons for bankruptcy is mortgage loans. Many auto dealers choose to own their showroom and office space, which can be a sound business decision. However, in some cases they go for big mortgage loans,which may not be the wisest step at that point of their business development.

With time, the loans mature but the real estate value declines. As a result, some lenders may not want to or be able to renew the mortgage loan. In this situation, auto dealers might be given weeks to complete a foreclosure and face a notice of default. In such cases, they are not able to restructure their mortgage debt, which can lead them to bankruptcy.

Another common reason for auto dealership failure is internal fraud due to mismanagement or employee theft. These include financial schemes and plots, which in some cases can lead also to litigation by third parties if their interests are harmed. They inevitably alter the financial behavior of the dealership and can lead to huge losses, both financial and in terms of customer and partner trust. Eventually, they can also push the dealership out of business.

The simplest way to avoid this is to stay out of mortgage debt that is disproportionate with the current volume of your business. Success comes to those who embrace risk, but who can also make sound choices about how much risk is too much.

Internal fraud

Naturally, employee dishonesty is not something you can fully control, but it’s important not to tolerate such cases. Regular monitoring, internal checks, and thorough consultation with management and financial specialists are all prerequisites for avoiding problematic situations with staff.

Legal prosecution

A third common situation that leads to dealership bankruptcies is litigation. There can be various reasons for legal action against your auto dealership—even ones that you might not know of or consider, such as claims on your surety bond for failure to comply with state regulations.

Naturally, the safest course of action in such cases is to seek a settlement. Still, a lawsuit against your dealership is almost always very costly and, if lost, can lead to financial devastation, on top of hurting your business reputation and status.

The best advice is to follow the rules to stay out of legal trouble. And if a litigation comes out of the blue, swallow your pride and try to find a consensus before things get too serious. Needless to say, it’s crucial for your auto dealership to have sound financial discipline and to make reasonable investments in inventory, real estate, and staff. The same approach is needed in your management practices, as well as in customer and partner relations, in order to avoid claims, lawsuits, and embezzlement that can all potentially lead to bankruptcy.

Naturally, auto dealer bankruptcies don’t happen every day. When you follow good managerial and financial practices and get proper surety bonding and insurance, you have much higher chance to succeed and grow without obstacles.

Todd Bryant is the President and Founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping auto dealers get bonded and start their business. Visit www.bryantsuretybonds.com to learn more.

Todd Bryant

1 Comment

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    Jeff March 18, 2015

    Great article, Todd! From what I know, high mortgage loans seem to be the biggest issue for most dealers.


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