CommentaryFeb 8th, 2023

Dealership Risk


If you are a dealer, when you get up and place your feet on the floor in the morning, you put your assets on the line, expecting a return or profit.

It’s called “risk.”

How you craft and hone your business practices and transact business daily, is what makes you different. Let’s talk about your daily risk because they are certainly “present,” even if you don’t think about them or see them.

Risk is the degree of hazard you are willing to tolerate. How you handle risk determines your potential exposure to losses.

There are three (3) kinds of risk:

Preventable risk:

These are risks that are controllable and should be able to be avoided or eliminated completely.

External risk:

These arise from events outside your dealership and beyond your control.

Strategic risk:

This is where your entrepreneurial spirit comes into play. A strategic risk is a venture which you embrace, in anticipation of a profit, with your taking on certain duties or responsibilities in order to accomplish your business plan. Said differently, this is a risk for you to earn profits and/or market share.

You can control 2 of the 3 risk categories.

For this article, let’s consider preventable risk where you can prevent problems at the store.

What I see in my consulting business is dealerships could do a much better job handling customer complaints and disgruntled employees.

How would you rate these the risk of upset customers and unhappy employees?

  1. Minor
  2. Moderate
  3. Major
  4. Severe
  5. Catastrophic
Most dealers consider these as “minor” risks.

My experience is different. To me, they can be “severe” or even “catastrophic” and should be treated as such. Let me explain.

I’ve seen class action lawsuits against a dealership start with 2 women chatting in church. Unsatisfied and unhappy customers go to regulators, who end up finding problems and setting fines. Recently, these penalties range from $800,000 up to $27 million, including forced store closings.

Unhappy customers can easily head over to the Motor Vehicle Dealer Board, who can vote to shut down the dealership resulting from 1 single complaint. If or when this happens, you risk the loss of your franchise. Inside the Sales and Service Agreements, most OEMs have clauses that indicate if a dealership closes for a (set) consecutive number of days, it is a clear default under the contract.

What’s the “blue sky” value of your dealership today, and is that risk really worth taking?

“It won’t happen to me” isn’t a business plan any more than if you are using “hope” to accomplish a goal. The “wait and see” approach is also reactive and lacks organizational structure.

Being proactive is key.

Consider installing more controls and monitoring mechanisms based on how you feel each identified risk corresponds to the 1-5 scale listed above. Triage the risks according to the most severe first.

Assessing and controlling risk is a continuous process. (Insert attached graphic.)

Outside of customer and employee problems, dealerships experience large risks in these 2 preventable areas, which we will use for illustration purposes:

Unintentional advertising issues:

Most dealers have mistakes on their websites. When was the last time you mystery-shopped your own website for advertising violations? Do you have a way to accomplish this?

When customers feel “jerked around” by your advertising, they get upset. When they get upset, they go to lawyers and regulators. When lawyers and regulators get involved, they will inspect your business practices, including your website is absolutely low-hanging fruit for them.

Here are two (2) biggest mistakes:

1. In your state, county, or city, are you allowed to have a “processing fee” or a “doc fee?” Which one? Does your disclaimer have the correct nomenclature? One or the other is provided by code, and you want to ensure you are using that terminology.

2. Do you have an asterisk (or equivalent) to tie your “sales price” to your disclaimer? If not, how is a consumer supposed to know that taxes, tags, and licensing fees are in addition to the sales price? Without the notation, federal advertising laws would dictate those fees are considered included in your sales price.

While these 2 may appear nitpicky, they create potential class action exposure for your dealership and further regulatory concerns.

Digital risk:

1. How tight are your infrastructure and your IT policies? There’s a dealer in northern Virginia facing a class action lawsuit right now over a large data breach.

2. The new Gramm Leach Bliley Act (GLBA) rules and regulations are onerous and require a concerted effort to be in compliance. Have you started your work here? The January 10, 2022 deadline has passed, and June 9, 2023, is coming up fast. (This topic is explained in another article.)

As examples of preventable risk, a lack of forethought here makes your dealership vulnerable.

These types of uncertainties can manifest themselves into real problems and potentially destabilize your dealership. 

Consider a risk mitigation plan which covers these issues (and more) to ensure the continuity of your business and smooth daily operations. Risk mitigation is part of a robust governance, risk, and compliance (GRC) program. 

Done well, this should contribute to the growth, profitability, and sustainability of the dealership.

A dealership franchise owner for thirty years, Tom is now the Lead Consultant & Founder of Better Vantage Point, providing Dealer Dispute, Compliance and Risk Mitigation Solutions.

Tom also spearheads Tuck The Octopus which helps dealerships proactively manage governance, risk and compliance which has a direct impact on the customer experience.

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